Q4 preview: March quarter estimates show earnings growth losing steam

Nifty50 firms' combined net profit expected to grow by 10.9% YoY, lower than Dec qtr's 11.5%

The trend of steady improvement in corporate earnings growth seems to be losing steam, with the combined net profit of India’s top 50 companies, which are part of the NSE Nifty50 index, estimated to grow by 10.9 per cent year-on-year (YoY) during the January-March 2018 quarter, down from the 11.5 per cent YoY growth clocked in the third quarter and 40.5 per cent growth during the year-ago quarter. 

The combined net sales of these 50 index companies are estimated to grow by 12.1 per cent during the fourth quarter (Q4) of FY18, again lower than the 13.8 per cent YoY growth during the quarter ended December 2017 and 15 per cent growth witnessed during Q4FY17 (See adjoining chart).

With this, India’s top listed companies are estimated to report 8.1 per cent YoY growth in their combined net profit for FY18, the lowest in the last three years. The combined earnings for the Nifty50 companies were up 13.2 per cent during FY17. However, their top line growth, at 12.2 per cent in FY18, is expected to be the best since FY14, when index companies’ combined net sales were up 13 per cent on a YoY basis.

Excluding financials, energy, metal, and mining companies, the combined net profit of the rest of the Nifty firms is expected to grow by 4.2 per cent YoY for Q4FY18, slightly up from the 4 per cent growth clocked in the December quarter and 0.5 per cent increase seen in the year-ago period. The sample companies’ combined net sales are expected to grow by 10.7 per cent YoY, better than the December quarter’s 9.6 per cent and the March 2017 quarter’s 3.2 per cent YoY growth.

The analysis is based on January-March 2018 quarter (Q4FY18) earnings estimates by equity brokerages, including Kotak Institutional Equities (KIE), Edelweiss Securities, Emkay Global, and Elara Capital. For banks and non-banking financial companies (NBFCs), net sales reflect their gross revenues net of interest expenses, while for others, it is total income from sales & goods and services (net of indirect taxes).

Analysts attribute the slowdown in the pace of earnings to the emergence of margin pressure due to higher commodity prices, continued poor show by export-oriented sectors such as information technology (IT) services and pharmaceuticals, and also the decline in private sector investments hitting the growth of capital goods sector.

“The positive impact of demand recovery and a favourable base effect is seen fading in Q4FY18 despite continued strength in demand conditions. This is largely because of higher tax burden and emergence of margin pressures, indicating that pricing power across sectors is still to gain further traction,” says Dhananjay Sinha, head research, Emkay Global Financial Services. Sales growth for Emkay’s universe of companies (ex-financials and oil & gas) is expected to moderate to 9 per cent YoY in the March quarter of FY18, from 11.3 per cent YoY increase in the quarter ended December 2017, while net profit (adjusted for exceptional gains and losses) is estimated to grow by 4.2 per cent YoY, against a growth of 14.6 per cent in preceding quarter. 

KIE expects Nifty50 companies’ net profit to grow by 4 per cent YoY, while combined earnings for all companies tracked by KIE are estimated to grow by 7 per cent YoY in Q4FY18. “We expect strong growth in the net profit of automobiles, consumer products, industrials, metals and mining, and NBFCs,” writes KIE’s Sanjeev Prasad, in his earnings estimates for the March quarter. 

A deeper look at the estimates show that 96 per cent of the incremental growth in Nifty companies’ combined net profit for the March quarter is expected to come from just five firms – State Bank of India (28 per cent), Indian Oil Corporation (24.8 per cent), Coal India (18.1 per cent), Oil and Natural Gas Corporation (14.3 per cent), and GAIL (India) 10.8 per cent, all of which are from the public sector. 

At the other extreme, ICICI Bank, Axis Bank, Vedanta, Tata Steel, and Bharti Airtel are expected to be the biggest laggards with a sharp dip in net profits. Bharti Airtel, India’s largest telecom operator, is expected to report its first quarterly loss in nearly 60 quarters, indicating the continued stress in the sector.

In all, 15 Nifty companies are likely to report a YoY decline in net profit, while 25 are expected to report double-digit growth in earnings and the rest (10 companies) are expected to report a single-digit increase in their earnings. 

Not surprisingly, some brokerages are concerned about the quality of earnings growth, with most of the incremental growth coming from commodity producers such as energy companies.  “While overall earnings are improving, the quality leaves much to be desired as commodities account for little over 80 per cent of the profit growth,” say Prateek Parekh and Akshay Gattani of Edelweiss Securities in their report on earnings estimates for the March quarter.

A lower-than-expected earnings growth in Q4 is likely to result in earnings downgrade for the index companies. “FY18 estimated earnings growth of our universe/Nifty will be 4 per cent and 7 per cent, respectively, implying 300 basis points downgrade of FY18 estimated earnings itself. This is the seventh consecutive year of EPS downgrades and sub-10 per cent growth,” writes Edelweiss’ Parekh. 

According to analysts, the key factor to watch out for in the forthcoming quarter would be banks’ asset quality, corporate capex outlook, global trade conflicts, its impact on Indian companies, and bond yield trajectory.