Q3 re­sults un­likely to pro­vide in­vestors much to cheer about

The De­cem­ber quar­ter may be tepid over­all, though a weaker ru­pee and softer com­mod­ity prices could help some sec­tors

Mint Asia ST - - Inside - BNY ASRIN S ULTANA

he De­cem­ber quar­ter may turn out to be yet an­other for­get­table one for In­dian in­vestors as com­mod­ity down­turn, liq­uid­ity crunch and de­clin­ing govern­ment spend­ing com­bine to de­press earn­ings growth.

Ac­cord­ing to an­a­lysts, growth in the Oc­to­ber-de­cem­ber quar­ter is likely to be tepid over­all, though a weaker ru­pee and softer com­mod­ity prices could help some sec­tors. Oil and gas com­pa­nies are ex­pected to suf­fer in­ven­tory losses, while banks gain from lower pro­vi­sions.

“We are ex­pect­ing a rel­a­tively tepid quar­ter in Q3, ex­ac­er­bated by oil mar­ket­ing com­pa­nies’ (OMCS) in­ven­tory losses and weak­ness in auto sales data,” said Gau­tam Dug­gad, head of re­search, in­sti­tu­tional eq­ui­ties, at Moti­lal Oswal Se­cu­ri­ties Ltd. “We are build­ing in 13% sales and 8% profit growth for Nifty. For Sensex, we are build­ing in 14% and 23% sales and profit growth. Dif­fer­ence in Nifty and Sensex profit growth is ow­ing to OMCS’ pres­ence in Nifty.”

Global cycli­cals such as met­als and oil and gas—the driv­ers of earn­ings growth over the DIS­MAL RE­PORT CARD Com­pa­nies will re­port a tepid rise in net sales and profit for the De­cem­ber quar­ter, project bro­ker­ages. last few quar­ters—are look­ing jaded, given the cor­rec­tion in com­mod­ity prices, the bro­ker­age has said. In the three months ended 31 De­cem­ber, crude prices fell 35%.

Con­cern over the re­cent de­cline in com­mod­ity prices—which rose 12.86% from Jan­uary till Oc­to­ber, but fell 18.47% over­all in 2018—found re­flec­tion else­where too.

Ko­tak In­sti­tu­tional Eq­ui­ties ex­pects profit of Sensex com­pa­nies to rise 16% dur­ing the quar­ter while that of Nifty com­pa­nies to de­cline 3%, with the dif­fer­ence largely due to the pres­ence of down­stream oil com­pa­nies in the Nifty in­dex but not in the BSE in­dex.

How­ever, fall­ing crude prices are seen to ben­e­fit sec­tors such as aviation and paint, which gain from cheaper raw ma­te­rial.

“With re­gards to crude, while some ben­e­fits may be ac­crued this quar­ter and higher im­pact of it will be felt in the fourth quar­ter. Air­lines and some of the con­sumer dis­cre­tionary com­pa­nies such as paints should be big gain­ers,” said Gau­tam Shroff, head of sales for in­sti­tu­tional trad­ing at Edel­weiss Se­cu­ri­ties Ltd.

Shroff ex­pects De­cem­ber quar­ter growth to be tepid, with an­nual profit of the bro­ker­age house’s cover­age uni­verse de­clin­ing 1% and re­main­ing flat, ex­clud­ing com­modi­ties and cor­po­rate banks.

“This weak­ness is at­trib­ut­able to the fad­ing low-base tail­wind, liq­uid­ity tight­ness and slow­down in govern­ment capex. For Nifty, we es­ti­mate 3% profit growth in the quar­ter and is prone to sig­nif­i­cant down­grades,” he added.

Oth­ers agree. Vinod Karki, vice pres­i­dent (strat­egy) at ICICI Se­cu­ri­ties Ltd, said the im­pact of crude and ru­pee would be vis­i­ble over the com­ing quar­ters as it would be pos­i­tive for com­pa­nies with crude deriva­tives and im­ports as raw ma­te­rial such as paints and air­lines.

“How­ever, a stronger lo­cal cur­rency will act as a head­wind for ex­port-ori­ented sec­tors,” he added.

The ru­pee weak­ened the most among Asian cur­ren­cies in eight years, down 8.46% in 2018, hit­ting a record low of 74.48 against the green­back on 11 Oc­to­ber.

A weak ru­pee typ­i­cally helps ex­port-ori­ented sec­tors such as tech­nol­ogy and phar­ma­ceu­ti­cals.

Financials are ex­pected to drive third quar­ter earn­ings, with cor­po­rate banks lead­ing from the front.

State-run banks are also likely to de­liver a bet­ter per­for­mance, aided by trea­sury marked-to-mar­ket gains and im­prov­ing as­set qual­ity trends, say an­a­lysts.

“The bank­ing sec­tor will be a key sec­tor to watch as it should see healthy credit growth and solid trea­sury gains. While banks will see solid trea­sury gains, OMCS will wit­ness huge in­ven­tory losses, which will pull down the earn­ings growth. On the back of poor per­for­mance of OMCS, Nifty 50 com­pa­nies’ earn­ings growth is likely to be around 5%, while ex­clud­ing OMCS, the earn­ings growth is likely to be around 17%,” said Naveen Kulka­rni, head of re­search at Re­liance Se­cu­ri­ties.

Ac­cord­ing to him, key fac­tors to watch will be credit growth, slip­pages and com­men­tary on pric­ing power in the bank­ing sec­tor. De­mand sce­nario for FMCG firms and the im­pact of pric­ing ac­tions they ini­ti­ated would also be closely watched, he added.

Earn­ings revival is crit­i­cal for the mar­kets at this junc­ture as eq­ui­ties are likely to be volatile due to po­lit­i­cal un­cer­tainty, the NBFC cri­sis and fluc­tu­at­ing forex. How­ever, an­a­lysts said FY20 will re­main chal­leng­ing from an earn­ings growth per­spec­tive.

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