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India’s top 50 listed firms, which comprise the benchmark NSE Nifty50 index, are expected to report a mild recovery in earnings during the July-September 2017 quarter, driven by a relatively good show by banks and commodity producers.
However, domestic manufacturers and information technology (IT) exporters are likely to continue in the slow lane due to a combination of the disruption due to the goods and services tax (GST), poor demand, and rise in input costs.
The combined net profit of Nifty50 companies is expected to grow by 7.4 per cent on a year-on-year (YoY) basis during the second quarter (Q2) of FY18, against 1.8 per cent decline during the June 2017 quarter and 8.5 per cent growth during the corresponding period a year ago.
However, if banks, financials, and oil and gas are excluded, the combined net profit of Nifty companies is expected to decline by 1.6 per cent YoY during the quarter, against three per cent growth in the June 2017 quarter and 8.2 per cent growth in Q2 of the last fiscal year.
The analysis is based on the July-September 2017 quarter (Q2 FY18) earnings estimates by equity brokerages, including ICICI Securities, Edelweiss Securities, and Kotak Securities.
“The story for the September 2017 quarter remains the same as that of the past three quarters. Banks and commodity producers are likely to be the only large sectors reporting profit growth owing to base effects. Excluding these, the profit is likely to contract by nine per cent YoY (for Edelweiss universe), the same as in the past two quarters. The weakness is fairly broad-based and is a function of weak demand as well as rise in input costs,” Edelweiss Securities’ Prateek Parekh and Akshay Gattani said in their earnings estimates report for Q2.
Combined net sales are likely to grow by 15 per cent YoY during Q2, up from 10.4 per cent YoY growth during the first quarter and 3.9 per cent growth during the corresponding quarter a year ago. For banks and non-banking financial firms, net sales are gross revenues net of interest expenses, while for others it is total income from sales of goods and services (net of indirect taxes). The estimated profit for the quarter may exclude exceptional gains and losses.
Kotak Institutional Equities expects some earnings recovery for consumer companies, led by post-GST restocking and the early onset of the festive season. “We model 5.7 per cent YoY growth in net profits of our coverage universe, led by strong growth in energy (higher refining margins), industrials, and metals and mining (higher realisations) sectors, despite drag from automobiles (margin compression due to high input costs), pharmaceuticals and telecom,” wrote Kotak Institutional Equities’ Sanjeev Prasad in his report.
Among individual companies, State Bank of India (SBI) is expected to top the earnings growth chart due to a sharp turnaround in its earnings after a disastrous show last year. Brokerages expect SBI to report a net profit of Rs 1,832 crore in the current quarter, against adjusted net profit of Rs 21 crore a year ago. Similarly, Axis Bank’s net profit is likely to quadruple during the quarter on a YoY basis due to a low base last year. Besides financials, commodity producers such as Tata Steel, Vedanta, Hindustan Petroleum, and Coal India are slated to post robust growth. For example, Tata Steel’s net loss is likely to fall by two-thirds in the current quarter, thanks to a rise in global steel prices. Non-ferrous metals and crude oil major Vedanta’s net profit is also likely to more than double during the quarter due to a better show by zinc and aluminium divisions.
In all, 31 index companies are expected to report a rise in net profit during the quarter, while 19 companies are expected to report a decline in their earnings during the quarter.
Brokerages expect another tough quarter for IT exporters, with Tata Consultancy Services and Infosys reporting a decline in net profit and flat- to- low single-digit growth in their revenue. Wipro and HCL Technologies are expected to do marginally better, with low single-digit growth in net sales and net profit during the quarter.
Consumer goods companies such as ITC and Hindustan Unilever are expected to report low single-digit growth in net profit and earnings. Meanwhile, equity investors’ focus has now shifted to the second half of the fiscal year. “Higher government spending and an increasing focus of states and the central government to revive the ailing rural economy have somewhat improved the demand in rural areas. We believe, with fiscal expansion, rise in commodity prices, gradual recovery from the GST dislocations and fading of the demonetisation impact, domestic growth is likely to improve during the second half of the current fiscal year,” wrote Dhananjay Sinha of Emkay Global Financial Services, in his earnings report.
