September quarter earnings seen slipping on costly oil, weak rupee
Automobiles and banks may post subdued results in the second quarter but IT and pharma are likely to gain from a weak rupee
he risk of earnings downgrades looms large over the oil and gas, and banking sectors, given that a weak rupee and costly crude oil will impact corporate recovery. Except companies earning in dollars, few sectors are likely to remain unscathed in the current turmoil.
On Monday, the rupee closed at 74.07 against the dollar, while Brent crude traded at $82.97 per barrel.
“The green shoots are starting to fade. Earnings downgrades are not going to disappear,” said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd, adding that while consensus Nifty net profit growth estimate for FY19 was around 25%, it will now be 8-10%.
Kotak Institutional Equities has cut its FY19 net profit growth estimate for the Nifty from 20% to 17%, said managing director and co-head Sanjeev Prasad. For oil and gas com- panies, earnings will depend on the kind of fuel pricing that the government allows them, he added.
“There is a chance that not only the downstream companies, but also companies like ONGC, OIL and GAIL (India) Ltd may have to bear some portion of under-recoveries like the old times.”
“For banking, it is about what is the level of provisions for bad loans that banks are comfortable with. If the provisions are higher, it would impact their profits,” said Prasad, adding the automobile sector may also suffer downgrades if volumes don’t pick up in the festive season.
So far, the signs are not very good. Given the state of non-banking finance companies (NBFCS), they might not push loans for autos.
Edelweiss Securities Ltd estimates Nifty companies will post year-on-year net profit growth of 6% in the September quarter, compared to 8% in the June quarter. It said that even if its numbers are met, the first half net profit growth is likely to be 7%, much lower than the full-year FY19 EPS consensus growth of 23%. “Thus, earnings downgrades post-quarterly results season are likely.”
For the September quarter, corporate earnings may be skewed in favour of exporters thanks to the sliding rupee, while companies importing raw material or depend on crude oil are likely to take a hit on the margins. Key casualties will be oil marketing companies, paint makers and cement manufacturers.
The rupee eroded 5.55% in the September quarter to close at 72.49 per dollar, while Brent crude surged 4.13% to close at 82.72 per barrel.
Kotak Institutional Equities expect net profit of BSE-30 Sensex to increase 2.3% and net sales 20.7% year-on-year. Edelweiss expects a tepid September quarter with yearon-year profit growth for its coverage universe likely to rise by 3% and for coverage ex-commodities and corporate banks to contract 1%—a sharp cut from 15%/13% growth in the June quarter.
Automobile companies are expected to see a weak quarter due to the delayed festive season. The performance of banks is unlikely to be impressive due to high loan-loss provisions as well as mark-to-market losses on investment portfolios. Following the concerns of a liquidity crunch in the NBFC sector, investors’ focus will be on the liability side. Further, the revenue pressure on telcos may not ease anytime soon due to the intense competition.
On the positive side, export-oriented companies in the IT and pharmaceuticals sectors will benefit from a falling rupee. Companies in the consumer products sector are likely to post decent volume growth aided by robust rural and urban demand. Since many have raised prices following a rise in raw material cost, profitability will be broadly intact. However, a handful of strong results may not be enough to make up for subdued financial performance of the lossmaking sectors. Therefore, hopes of a earnings revival are fading.
Firms in consumer products sector may post decent volume growth aided by robust demand
Currency concerns: For the September quarter, corporate earnings may be skewed in the favour of exporters, thanks to the sliding rupee.