Q2 Earnings preview: GST hiccups over; Jul-Sep quarter to be better than Q1

In the rup-up to companies reporting their earnings for the July-September quarter of 2017-18, Vinod Nair writes how this quarter might have been for India Inc vis-a-vis the previous quarter The corporate results for the September quarter (Q2FY18) are expected to be better than those in the June quarter (Q1FY18), which was a disaster, given that it saw a bigger earnings de-growth than anticipated. 

A start to the financial year with a disruptive first quarter was expected to an extent, especially amid de-stocking before the implementation of the goods and services tax (GST) rollout and the after-effects of the government’s move late last year to demonetise high-value currency notes. The Sensex and Nifty profit after tax (PAT) growth for Q1 was -6.5% and -9.0%, respectively, against -1% and -5.5% anticipated.

Now, given a low base effect, the September quarter is likely to be better than the previous one. De-stocking has largely been completed and economic activities have started picking up. So, on a quarter-on-quarter basis, we can expect 5% to 7% growth in PAT for the main indices. 

On the economic front, a few positive signs are an uptick in wholesale inflation, PMI and industrial growth as measured by IIP. So, the organised sectors are likely to be better off, but the economy is still broadly under stress due to a slowdown in exports and unorganised sectors. That will continue to impact economic growth in the next quarter or two. On a year-on-year basis, earnings growth will be subdued and the risk for further downgrade in earnings is still on. In spite of the slowdown, market expects 3% and 9% YoY growth in PAT for the Sensex and Nifty, respectively. Since the start of FY18, the markets have cut their earnings forecast by 5-7%.

Market are is still hopeful, assuming that a large portion of the detrimental domestic factors are discounted and earnings will revive soon. Other than the core industries, some sectors that support the markets include finance, metals, mining, infra, defence and chemical. Markets expect improved financial for banks, given the restructuring from NPA problems, reduced interest cost and improvement in consumer financing. 

At the same time, government spending and a change in policy procedure is benefiting infra and defence sectors. And, as the global economy improves, especially those of the US, Europe and China, sectors like metals & mining and chemical are also doing well due to an increase in commodity prices and procurement within and outside India. However, the worst-performing sectors for Q2 will most likely be health care, telecom, real estate, cement and IT.

The author is Head of Research at Geojit Financial Service. The views expressed are his own