Slowdown blues: Q2 Nifty50 earnings may decline despite corporate tax cut

Combined net profit of Nifty50 companies expected to fall 3.4%

The July-September 2019 period could be one of the worst quarters for corporate earnings in recent years if the estimates by leading brokerages on Dalal Street are anything to go by. Gains from the corporate tax cut last month are likely to be offset by lower sales volume and revenue contraction in key sectors such as automobiles, energy, metals, and mining.

The combined net profit of the Nifty50 companies is estimated to decline by 3.4 per cent year-on-year (YoY) during the second quarter, its worst showing in the last three years with the exception of the December 2018 quarter, when a one-time loss by Tata Motors had pulled down the index's earnings by 22.6 per cent.

The biggest negative surprise is expected on the revenue side, with the index companies’ combined net sales estimated to decline by 1.4 per cent YoY — the first contraction in at least 13 quarters (see adjoining charts).

The Nifty50 companies excluding banks and financials and oil and gas firms are likely to do even worse with a 10.1 per cent YoY decline in combined net profit during Q2 FY20 — their worst show in at least 13 quarters after adjusting Tata Motors’ numbers in Q3 FY19. The combined net sales of these companies are estimated to decline by 2.4 per cent YoY during the September quarter — their first contraction in top line in at least 13 quarters.

Analysts don’t see any immediate gains to corporate India from the slew of economic and fiscal measures announced by the Union government last month. “As some of these steps are structural in nature and will play out in the long term, there is no visible improvement in demand or sentiment on the ground,” write Amnish Aggarwal and Amulya Channa of Prabhudas Lilladher in their earnings estimate for the second quarter.  

“Investment- and consumption-related high-frequency indicators suggest that the economy has significantly slowed in the last six-nine months. Overall weakness in consumer demand and lower realisation for commodities may lead to earnings downgrades for the Nifty50 companies. We will revise our current Nifty50 target of 13,100 post Q2FY20 earnings season,” write Dhirendra Tiwari and Pankaj Chhaochharia of Antique Stock Broking in their earnings estimate report for the quarter. The brokerage house expects earnings to contract by 2.1 per cent YoY and profit to fall 12.8 per cent for the companies excluding financial firms.

The analysis is based on the July-September 2019 earnings estimates by equity brokerages including Edelweiss Securities, Kotak Institutional Equities, Prabhudas Lilladher, Elara Capital, Antique Stock Broking and Narnolia Financial Advisors.

 For banks and non-banking financial companies (NBFCs), net sales are gross revenues net of interest expenses, while for others it’s total income from sales of goods and services (net of indirect taxes).

Net sales and net profit after tax for the current quarter are based on brokerage estimates and may exclude exceptional gains and losses.

The estimates suggest that automobiles and metal producers are likely to be the biggest laggards with contraction in revenues and profits, while retail lenders, including private sector banks and NBFCs, and pharmaceutical majors are expected to be earnings leaders with strong double-digit expansion in net sales or net interest income and net profit.

In comparison, fast-moving consumer goods companies such as ITC, Hindustan Unilever and Britannia Industries and software services exporters such as Tata Consultancy Services and Infosys could be somewhere in the middle with mid-single digit growth in top line and bottom line during the second quarter.

The analysis by some brokerages is focused on the changes in the profit before tax (PBT) as the cut in corporate tax rate last month makes it tough to compare profit after tax on a year-on-year basis.  

Kotak Institutional Equities (KIE) also expects earnings contraction in the second quarter. “We expect profit before tax (PBT) for the KIE coverage universe to decline by 4.6 per cent YoY in 2QFY20, led by a YoY decline in PBT in automobiles, metals & mining and telecommunication services,” write Sanjeev Prasad, Sunita Baldawa and Anindya Bhowmik of KIE on their earnings estimates for the second quarter.

According to KIE, the net profit/earnings numbers for Q2FY20 are not comparable with Q1FY20 and Q2FY19 due to the tax cut last month and resultant tax reversals pertaining to higher taxes paid in the first quarter of the current fiscal year. This is likely to inflate the earnings in the second quarter.

The brokerage estimates 0.3 per cent YoY decline in sales, and 5.9 per cent decline in profit before taxes for its coverage universe in the second quarter.

Among individual index companies, Sun Pharma and State Bank of India are likely to top the earnings growth chart during the quarter, thanks to a low base last year. They are likely to be followed by UltraTech Cement (gains from sharp rise in cement prices after the general elections), Adani Ports, IndusInd Bank, and Axis Bank.

In contrast, Bharti Airtel, YES Bank, and Tata Motors are likely to be the biggest laggards and expected to report net losses during the quarter. Other companies expected to report a contraction in net profit during the quarter include Tata Steel, JSW Steel, Maruti Suzuki, Mahindra & Mahindra, Hindalco Industries, Oil and Natural Gas Corporation, Vedanta, Hero MotoCorp, and Indian Oil.