Double-digit earnings growth for Nifty companies in Q3; base effect in play

Combined net profit of Nifty50 firms estimated to grow by 15.4%

Led by a strong show by private sector lenders, oil marketing companies, automakers and metal producers, Nifty 50 companies are expected to report double-digit growth in earnings for the second consecutive quarter (October-December 2017). Base effect is also in play in this quarter as revenues and profits were adversely affected by demonetisation during the corresponding quarter last fiscal year. This is especially true for auto, cement, and consumer goods.

The combined net profit of Nifty 50 companies is estimated to grow by 15.4 per cent on year-on-year basis during the third quarter of FY18 against 16.4 per cent yoy growth in earnings during the corresponding period last fiscal and 12.2 per cent yoy growth during the second quarter of current fiscal. The combined net sales of index companies are likely to grow by 15.3 per cent y-o-y during the quarter, a sharp improvement from 9.4 per cent y-o-y growth in topline during the third quarter of last fiscal and 11.5 per cent y-o-y growth during the second quarter of current fiscal.

The corporate earnings are however likely to be polarised with bulk of the incremental growth in profits and revenue coming from a handful of companies across four sectors – energy, private sector lenders, metal and mining companies and auto makers. Excluding these sectors, the net profit is likely to decline by 0.4 per cent y-o-y for rest of the index companies while their topline growth is likely to be far muted at 4.5 per cent y-o-y during the quarter.

On the revenue side, nearly 60 per cent of the incremental growth in revenues is likely to be driven by four crude oil and marketing companies that are part of the index - Indian Oil, Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) and Reliance Industries.

“We expect double-digit growth in the net income of automobiles (volume growth on a low base and margin improvement), cement, consumer products (low base, cost-saving initiatives, operating leverage and GST-led savings), energy (significant adventitious gains for OMCs due to rise in crude prices), industrials, metals & mining (higher realizations) and NBFCs (festive demand pickup in auto and consumer durables) sectors,” writes Sanjeev Prasad of Kotak Institutional Equity in his report on earnings estimates for the third quarter of FY18.

Dhananjay Sinha of Emkay Global see December 2017 quarter earnings as a progression towards cyclical recovery driven by fiscal expansion, demand boost from lower GST rates, recovery demonetisation shock and a shift from unorganised to the organised space. “The gradually improving scenario is also reflecting in the revival of credit growth to 11 per cent (especially for private banks), and rise in consumption demand manifesting in higher volume growth for FMCG, Automobile and Media (ad spends) sectors,” he writes in his report.

The analysis is based on October-December 2017 quarter (Q3FY18) earnings estimates by equity brokerages including Kotak Securities, Edelweiss Securities, Motilal Oswal, Emkay Global, HDFC Securities and Sharekhan and ICICI Securities. For banks and non-banking financial firms, net sales are gross interest income net of interest expenses, while for others it’s total income from sales & goods and services (net of indirect taxes). Profits for current quarter is estimated by brokerages and may exclude exceptional gains & losses.

At the company level, analysts are banking on sharp turnaround in the earnings of Tata Motors, Tata Steel and Oil & Natural Gas Corporation (ONGC) while Housing Development Finance Corporation (HDFC) is likely to big jump in earnings thanks to one-time profit from part-sale of its stake in HDFC Life Insurance Company.

In all, nearly three-fourth of the incremental growth in earnings is accounted for five companies — Tata Motors, HDFC, ONGC, Indian Oil and Tata Steel. These companies together are expected to account for 73.6 per cent of the incremental growth in net profit during the third quarter

Other index companies likely to report high-double digit growth in earnings during the quarter include Hindalco Industries, Bajaj Finance, Larsen & Toubro, Zee Entertainment, Bosch and Eicher Motors among others.

At the other extreme, it is likely to be another bad quarter for corporate India top exporters with both technology and pharma companies likely to report year-on-year decline in net profit during the quarter. For example, street expects Tata Consultancy Services to report 5.3 per cent yoy decline in net profit (on average) during the third quarter while Infosys net profit is likely to decline by 4.2 per cent y-o-y during the quarter. In pharmaceuticals, Sun Pharma earnings is expected to decline by 41.4 per cent y-o-y while Lupin is expected to report 34 per cent y-o-y fall in its earnings during the quarter.

Other likely laggards during the quarter include Bharti Airtel, ICICI Bank and Ultratech Cement among others.