Q2 earnings might have little to cheer due to high input costs, rupee fall

Net profit of Nifty 50 companies, excluding energy and financials, estimated to inch up by 2.9% vs 11.2% in Q1

Equity investors should brace for more downgrades in the September 2018 quarterly earnings season, which kicks off this week. 

Most brokerages expect a sharp slowdown in profits and top line growth for the country’s top listed companies, thanks to rising input costs and a sharp depreciation in the rupee during the second quarter of the current financial year. The combined net profit of the Nifty 50 companies excluding energy and financial firms is estimated to inch up by 2.9 per cent year-on-year (YoY) against 11.2 per cent growth during the April-June 2018 quarter. Top line growth is expected to slow to 10.1 per cent YoY during the second quarter, the lowest in the last six quarters.

Index companies as a whole are likely to do a tad better due to benefits of higher crude oil prices in the bottom line of oil and gas companies. 

The combined net profit of the Nifty 50 companies (including energy and financials) is expected to grow by 5.2 per cent during the second quarter, but down from 5.9 per cent growth in the first quarter and 6.2 per cent growth a year ago.

Index companies’ combined net sales are likely to grow by 25.5 per cent YoY, led by oil companies, which are likely to report 49 per cent YoY jump in their top line during the quarter. Analysts expect stronger headwinds for manufacturers and domestic market-driven companies. The combined earnings of the Nifty companies excluding energy, financials, metal & mining companies and IT exporters are likely to decline by 14.2 per cent during the quarter, their worst showing in at least three-and-a-half years. The analysis is based on July-September 2018 quarter (Q2 FY19) earnings estimates by equity brokerages including Kotak Institutional Equities, Edelweiss Securities, Motilal Oswal Securities and Emkay Global Financial Services. 

For banks and non-banking financial firms, net sales are gross revenues net of interest expenses, also called net interest income, while for others it’s total income from sale of goods and services (net of indirect taxes). Estimates were available for 48 of the 50 Nifty companies. No estimates were available for Bajaj Finserv and JSW Steel, and they are not part of the analysis.

“We expect a tepid Q2 FY19, with YoY profit growth for our coverage universe likely to rise by 3 per cent and for coverage ex-commodities and corporate banks to contract 1 per cent — a sharp cut from 15 per cent and 13 per cent growth, respectively, during Q1 FY19,” write Prateek Parekh and Padmavati Udecha of Edelweiss Securities in their earnings estimate for the second quarter.

They attribute this weakness to rising base and higher input prices and interest expenses rising ahead of the growth cycle. “Barring information technology (IT), retail banks and non-banking financial companies, almost all sectors are likely to witness a slowdown in profit growth,” they say.

For Emkay Global, the second quarter heralds the return of margin pressure, resulting in a continuation of earnings downgrades. “Margin pressure, emanating from rising input costs and the sharp depreciation of the rupee, has emerged as the top concern for most sectors ahead of the Q2 FY19 results season. This appears to be affecting sectors such as auto, cement, telecom, and building materials more adversely than the others,” Dhananjay Sinha of Emkay Global says in his firm’s earnings estimate for the second quarter.

Kotak Institutional Equities expects a flat quarter (no earnings growth) for its universe of companies. 

“We expect strong growth in the net income of consumer companies, technology, upstream energy. It would be a weak quarter for automobiles, banks and telecom,” write analysts led by Sanjeev Prasad on their earnings estimates for the second quarter.

At the company level, corporate earnings are likely to remain polarised, with big commodity companies such as Coal India (660 per cent YoY growth), Tata Steel (105.5 per cent), Oil and Natural Gas Corporation (39.3 per cent), Indian Oil (30 per cent) and Reliance Industries (11.7 per cent), accounting for bulk of the incremental growth in index earnings during the quarter.

Together these five commodity majors are expected to account for 178 per cent of the index companies’ incremental growth in earnings as other companies are expected to see a decline in profits.

Tech major Tata Consultancy Services (TCS) is likely to be an outlier with estimated 25 per cent YoY growth in earnings, and will be the third biggest earnings contributor in the quarter in value terms.

At the other end of the spectrum, Tata Motors, Bharti Airtel, ICICI Bank, State Bank of India and Vedanta are expected to be the biggest laggards, together negating the gains scored by commodity companies and IT services exporters.