Q4 results preview: Metals, banks may lead profit growth of Nifty firms

Double-digit growth for Nifty 50 firms; software, consumer, auto to remain laggards in Q4

The polarisation of corporate earnings, which became more pronounced in both the September and December 2016 quarters, is likely to continue during the January-March 2017 quarter. A handful of companies are expected to account for most of the incremental growth in net profit, even as the combined net profit of Nifty 50 firms is estimated to grow in high double digits in the fourth quarter (Q4), largely due to a good showing by metal companies and public sector banks. In comparison, export-intensive and domestic manufacturers are likely to report muted revenue and profit growth due to cross-currency headwinds, higher raw material cost and some lag effect of demonetisation. 

Five index companies — Tata Steel, Bank of Baroda, Dr Reddy’s, State Bank of India and ICICI Bank — are expected to account for 120 per cent of the incremental profit growth. In comparison, 21 index companies (out of 50) — the highest in six quarters — are likely to report a year-on-year (YoY) decline in net profit during the quarter, with Tata Motors, Axis Bank, Bharti Airtel, Tata Power and ACC expected to be the biggest laggards. The combined net profit of the Nifty 50 companies is estimated to grow by 15.3 per cent YoY during Q4, against 6.4 per cent growth during the corresponding quarter a year ago, and 18.7 per cent growth in the December 2016 quarter. 

The combined net sales are estimated to grow by 15.4 per cent YoY – best in the past three years, compared to one per cent decline a year ago and seven per cent growth during the third quarter of the current financial year (FY18).

At Rs 82,660 crore, the combined net profit of index companies is likely to be the highest in the past 12 quarters but lower than the earlier high reported in the March 2014 quarter. 

The combined revenue at Rs 7.52 lakh crore is, however, expected to be the highest in the past four years.

As a result, Nifty companies are likely to end FY17 with earnings growth of 14.9 per cent, the best in three years and a sharp jump from 3.9 per cent YoY growth last fiscal. Revenue growth at 5.7 per cent is also expected to be the highest in three years.

However, brokerages expect a washout quarter for software exporters, consumer companies and domestic manufacturers such as Tata Consultancy Services, Infosys, HCL Technologies, Asian Paints, Hindustan Unilever, Sun Pharma, Lupin, ACC and Ambuja Cement, with poor revenue and profit growth.

The analysis is based on the January-March 2017 quarter (Q4FY17) earnings estimates by stock brokerages, including Kotak Securities, Edelweiss Securities, IIFL, Antique Stock Broking, ICICI Direct and Systematix. For banks and non-banking financial firms, net sales are gross revenues net of interest expenses, while for others, it’s total income from sales and goods, and services, net of indirect taxes. Profits are reported net profit and may exclude exceptional gains and losses, as estimated by brokerages.

“Earnings improvement will be concentrated in commodities, with the sector likely to account for 75 per cent of all top line growth for our universe. Excluding these, top line growth is likely to be six per cent, similar to the past two years’ average. The impact of demonetisation, though fading, is still likely to impact domestic consumption companies, where growth is likely to be in mid-single digits,” said Edelweiss Capital analysts, led by Prateek Parekh.

Kotak Institutional Equity expects a muted growth if banks and financials are excluded. “For our coverage universe, we expect strong 32 per cent YoY growth in net income, led by the banking sector, which will likely report strong earnings growth due to the low base arising from the asset quality review exercise in Q4FY16,” say Kotak analysts, led by Sanjeev Prasad.

The Kotak analysts add, “Excluding banks, we expect 8.8 per cent YoY growth in net income. We expect YoY decline in the net income of automakers (weak demand environment, raw materials headwinds and increase in discounts), downstream energy (lower refining margins, muted growth in volumes and adventitious losses due to recent correction in crude prices), telecom (continuation of Reliance Jio’s free offerings) and utilities (weak generation) sectors.”

“Overall, if expectations are met, then the FY17 net profit growth is likely to be around seven per cent for the Nifty, which, though in single digits, is still a welcome change from the flat growth seen over the past four years. Top line for the coverage universe is set to rise by about 12 per cent, while Ebitda (earnings before interest, depreciation and tax) margins (ex-financials) is likely to rise by 70 basis points to 19.8 per cent,” writes Antique Stock Broking analysts, led by Dhirendra Tiwari.