A recent report by Kotak Institutional Equities (KIE) projects a drop in the earnings of 30 Sensex firms in the first quarter (April-June 2016). KIE believes that this group will see profits shrink by two per cent year-on-year. However, year-on-year gains of about four per cent in revenues is expected. If this low earnings pattern is part of a broader market trend, it could be a dampener for sentiment. (The quarter-on-quarter or Q-o-Q projections are for bigger declines, of about six per cent Q-o-Q).
Assuming the KIE estimates are near-accurate, the beatings take place in four sectors. Telecom, energy, banking and automobiles will see double-digit profit declines year-on-year. KIE expects other sectors to produce marginal earning per share gains overall. Note that profitability in April-June 2015 was weak so, there is no base effect. Telecom is struggling for many reasons and it will continue to struggle until there is a huge shakeout and some sector consolidation. There is no way that all telecom service providers can bid for spectrum at these base rates, roll out networks, service debt and make reasonable profits.
Banking will continue to see higher non-performing asset (NPA) declarations and a pattern of rising stressed loans for the whole of this financial year. Public sector banks have deep rooted problems. Reform and recapitalisations will be necessary before the sector turns around. The optimists hope that bad news equals good news on the basis that it is better to know the real situation.
The automobile sector releases monthly sales numbers. Those show overall growth of 2.4 per cent year-on-year for the quarter, which is depressing. Tractors have done well. The hope is that a good monsoon and the 7th Pay Commission bonanza will boost sales.
Energy businesses are essentially hostage to international fuel prices since most are importers. Energy firms suffered from sharp spikes in crude and gas prices during first quarter, 2016-17. This is not because crude prices were very high as such. But, the January-March 2016 period has seen crude dropping to multi-year lows. The Brexit might trigger a serious downturn in fuel prices all over again. If it does, there could be a cyclical rebound for energy in July-September 2016. Analysts betting on that factor, may choose to ignore a blip during April-June 2016.
Pharma, Infrastructure, Utilities (meaning the power segment), and consumer products are expected to be major growth areas. A recovery in utilities and infra should, in itself, lead to price gains since these are depressed segments. Also, it can be assumed that a bounce in utilities and infra will be a leading indicator that signals an industrial recovery later in the fiscal. Apart from energy, there are other industries where changes in global expectations wrought by Brexit could mean that the market ignores the actual earnings of April-June 2016. Markets are forward looking. Investors pay attention to historical data because the history indicates likely future patterns of growth and profitability. But, a one-off event like the Brexit alters the perspective for firms with global exposure, especially exposure to the UK and the EU.
Exporters and forex earners will have an interesting time. So, will companies intending to raise cash abroad. The dollar has already hardened and it could harden some more through the next six months. This should boost the rupee earnings of corporates with dollar revenues. However, both the euro and the pound have weakened and that will have the reverse effect. In addition, if the global economy does head lower, exports demand in general will be affected. This could be a drag on the entire economy. Exports have been down for six quarters in a row and the Brexit will have some negative effect.
The author is a technical and equity analyst
Assuming the KIE estimates are near-accurate, the beatings take place in four sectors. Telecom, energy, banking and automobiles will see double-digit profit declines year-on-year. KIE expects other sectors to produce marginal earning per share gains overall. Note that profitability in April-June 2015 was weak so, there is no base effect. Telecom is struggling for many reasons and it will continue to struggle until there is a huge shakeout and some sector consolidation. There is no way that all telecom service providers can bid for spectrum at these base rates, roll out networks, service debt and make reasonable profits.
Banking will continue to see higher non-performing asset (NPA) declarations and a pattern of rising stressed loans for the whole of this financial year. Public sector banks have deep rooted problems. Reform and recapitalisations will be necessary before the sector turns around. The optimists hope that bad news equals good news on the basis that it is better to know the real situation.
The automobile sector releases monthly sales numbers. Those show overall growth of 2.4 per cent year-on-year for the quarter, which is depressing. Tractors have done well. The hope is that a good monsoon and the 7th Pay Commission bonanza will boost sales.
Energy businesses are essentially hostage to international fuel prices since most are importers. Energy firms suffered from sharp spikes in crude and gas prices during first quarter, 2016-17. This is not because crude prices were very high as such. But, the January-March 2016 period has seen crude dropping to multi-year lows. The Brexit might trigger a serious downturn in fuel prices all over again. If it does, there could be a cyclical rebound for energy in July-September 2016. Analysts betting on that factor, may choose to ignore a blip during April-June 2016.
Pharma, Infrastructure, Utilities (meaning the power segment), and consumer products are expected to be major growth areas. A recovery in utilities and infra should, in itself, lead to price gains since these are depressed segments. Also, it can be assumed that a bounce in utilities and infra will be a leading indicator that signals an industrial recovery later in the fiscal. Apart from energy, there are other industries where changes in global expectations wrought by Brexit could mean that the market ignores the actual earnings of April-June 2016. Markets are forward looking. Investors pay attention to historical data because the history indicates likely future patterns of growth and profitability. But, a one-off event like the Brexit alters the perspective for firms with global exposure, especially exposure to the UK and the EU.
Exporters and forex earners will have an interesting time. So, will companies intending to raise cash abroad. The dollar has already hardened and it could harden some more through the next six months. This should boost the rupee earnings of corporates with dollar revenues. However, both the euro and the pound have weakened and that will have the reverse effect. In addition, if the global economy does head lower, exports demand in general will be affected. This could be a drag on the entire economy. Exports have been down for six quarters in a row and the Brexit will have some negative effect.
The author is a technical and equity analyst