BackIndian firms’ quarterly earnings to rise, but at a slower pace
Estimates of net profit growth in the second quarter for the 30 Sensex firms range from 8-10%, based on brokerage estimates
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Revenues and earnings of Indian companies are expected to rise marginally in the second quarter of fiscal year 2015 (Q2 FY15), with analysts expecting the recovery to be more broad-based than in the recent quarters.
Estimates of net profit growth for the 30 Sensex companies in Q2 of FY15 range from 8-10%, based on brokerage estimates released ahead of the earnings season, which kicks off later this week.
In a note dated 7 October, domestic brokerage house Kotak Institutional Equities said it expects net profits of Sensex companies to increase 10.1% year-on-year (y-o-y). According to Citigroup, the net profit for these companies is expected to rise 8% in the quarter ended September.
“2QFY15 earnings will mirror the India big picture: reasonable, marginally lower than the previous quarter, but lagging the market’s mood and moves," Citigroup analysts Aditya Narain and Jitender Tokas said in their note dated 2 October. The analysts, however, added that there is a “further broadening in mix".
“India’s big earnings skew— FX (forex) sensitives and domestic defensives—seems over. An 8-15% earnings range across (FX, defensives, and global/domestic cyclicals) and a sharply reduced growth gap between large and mid caps...suggests better balanced and less risky earnings ahead," added the report from Citigroup.
Kotak Institutional Equities adds that the automobiles, banking, consumer, pharmaceutical and technology sectors will report an increase in net profit, while the energy and utilities sectors will report a decline.
Asia’s third largest economy clocked sub-5% growth in the previous two fiscal years, which, in turn, put pressure on corporate earnings growth. However, growth picked up to 5.7% in Q1 of FY15. This, along with other indicators such as improving vehicle sales, have hinted at a mild recovery in demand.
The equity markets, which have gained 24% so far this calendar year, seem to have built in the prospects of improved corporate earnings resulting from a pickup in the economy. The Sensex is now trading at 16.8 one-year forward price-to-earnings multiple, against the five-year average of 15.8, leading some analysts to comment that the Indian equity markets are looking overvalued.
On 1 October, Credit Suisse Private Banking and Wealth Management downgraded Indian equities, citing rich valuations, slowing earnings upgrade momentum, a softer-than-expected industrial recovery and a significant supply of new shares in the primary markets and private placements.
Earnings from consumption-driven companies, particularly auto firms, may see an improvement during the quarter. A revival in volume growth, muted raw material costs and a stable currency may result in a strong quarter for auto firms. Auto sales have risen 4.46% in the first five months of FY15 after declining for nine months in a row, according to data from lobby group Society of Indian Automobile Manufacturers.
Automobiles will report “leading growth", said a 1 October note from domestic brokerage house Antique Stock Broking Ltd. Earnings growth in the sector will be led by Eicher Motors Ltd, Hero MotoCorp Ltd and Maruti Suzuki India Ltd, among others, added the brokerage house.
According to Deven Choksey, managing director and chief executive officer of KR Choksey Shares and Securities Pvt. Ltd, consumption-driven companies might do better as the festive season had started in Q2, with autos stealing the show.
“We will not see any dramatic change in earnings recovery. Economic growth is picking up, but not as much, and also improvement in infrastructure activities will be seen in second half of the year," said Choksey while commenting on the broader earnings picture.
Deutsche Bank expects Q2 to remain a steady one for banks. It said the key highlights for banks would be slower loan growth, stable margins and muted fee income, even though treasury-related earnings may be higher. It also expects cases of debt restructuring to decline, but adds that there may not be much improvement in slippages yet and credit costs will remain high.
Deutsche Bank expects earnings growth at more than 19% for private lenders, over 27% for state-owned banks and more than 8% for non-banking financial companies.
HSBC Securities and Capital Markets (India) Pvt. Ltd expects the capital goods sector (ex-Bharat Heavy Electricals Ltd) to report 3% y-o-y earnings growth during Q2, driven by 5% sales growth and 12% Ebitda (earnings before interest, tax, depreciation and amortization) growth.
“Industry players suggest strong optimism on business outlook (citing improved project clearances) as the new government has started making positive noise. We expect early signs of such changes to be reflected in improving execution (top-line growth) and operating leverage-led margin expansion," HSBC analysts Ashutosh Narkar and Shrinidhi Karlekar said in a note dated 7 October.
The top five Indian information technology (IT) services providers—Tata Consultancy Services Ltd (TCS), Infosys Ltd, Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd—are expected to post stable dollar revenue growth in the seasonally strong September quarter, following a rise in demand from the US and continental Europe that jointly account for over 60% of the revenue of most IT firms.
Sector leader TCS is forecast to post revenue growth of 5.6-7.7%—the highest among the top software exporters, according to Bloomberg estimates. Analysts, on average, expect the firm to report volume growth of 5-5.5% and net profit growth of 4.9-8.8% in the September quarter.
Infosys, the country’s second largest software exporter that will kick-start the results season on 10 October, is expected to post a 2.5-4.4% dollar revenue growth in the September quarter over the year-ago period, according to Bloomberg estimates. The company is also expected to maintain its full-year revenue guidance of 7-9%.
For the pharmaceutical sector, Ebitda margins are expected to remain strong across the sector, with Sun Pharmaceutical Industries Ltd likely to cross 50% due to the full-quarter impact of price increases at Taro Pharmaceutical Industries Ltd, said Kotak Institutional Equities.
“...export-focused sectors may still do better than domestic ones in terms of volume growth," said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services Ltd.
Meanwhile, sectors such as metals and mining may report subdued earnings due to seasonal weakness in mining and construction activities during the monsoon season. Oil and gas firms are also expected to report weak earnings.
Kotak Institutional Securities Ltd said it expects Oil and Natural Gas Corp. Ltd and Oil India Ltd to report a y-o-y decline in Ebitda, led by lower net crude oil realizations and lower production volumes, and state-run oil marketing companies may report losses reflecting net under-recoveries of ₹ 4,300 crore, subdued refining margins and losses related to inventory and forex movements.
Crisil Research expects Indian firms to report a revenue growth of 9-10% y-o-y in September quarter, lower than the 13% growth in the June quarter, due to slower growth in export-oriented sectors and the continued weak performance of investment-linked sectors. This forecast is based on an analysis of 600 firms, excluding financial services and oil firms, representing 71% of the overall market capitalization of Indian companies. The S&P BSE 500 index, which represents 95% of India’s total market cap, gained 3.9% in the quarter.
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