BackDecember quarter earnings report cards likely to be lacklustre
Weak local demand, headwinds from unfavourable currency movements seen affecting earnings
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Mumbai: Indian companies are likely to report lacklustre earnings in the December quarter, as the domestic demand remained weak and export-focused industries faced headwinds from unfavourable currency movements.
Economic growth in Asia’s third-largest economy is yet to pick up pace. The country’s gross domestic product (GDP) expanded 5.3% in the three months ended 30 September, slower than the 5.7% pace in the preceding June quarter. The dollar strengthened against most major currencies during the quarter. The dollar index, which measures US currency’s strength against major currencies, rose 5% in the October-December period. The rupee fell 2% against the dollar during the quarter.
Kotak Securities Ltd expects net income of the 30 members of BSE’s benchmark Sensex to remain flat on a year-on-year basis, which would be the weakest growth seen in five quarters.
Excluding banks and energy companies, the earnings growth for Sensex companies may turn negative, showed estimates put out by Kotak Securities.
For the September quarter, net profit of the 30 Sensex companies grew 3.72% while sales grew at a mere 0.67% from a year earlier, according to Bloomberg data.
“For Q3 results, the street expectations have already been pruned down post lacklustre Q2 results. Moreover, the quarterly performance is expected to get impacted by sharp movement of dollar against major currencies (cross currency movements) in case of exporting companies like IT services," said Gaurav Dua, head of research at Sharekhan Ltd. The sharp drop in commodity prices could result in some companies making provisions to mark down the value of inventory, especially in case of raw materials linked to crude oil and its derivatives, said Dua.
Brent crude tumbled 48% in 2014, the most since the financial crisis in 2008 because of fears of a supply glut and weak economic conditions in Europe and China.
“Going ahead, we expect the earnings growth to move up to high single-digit growth rates in FY2016," said Dua.
Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd, also expects muted earnings growth but doesn’t rule out a few disappointments. “It would take 3-4 quarters for earnings to show significant recovery," said Sanghavi.
The IT services sector would report a seasonally soft December quarter, further dampened by cross-currency headwinds, say analysts.
“Given a seasonally weak quarter and severe cross-currency headwinds, USD revenues of top-tier Indian vendors are hit by a double whammy in the December quarter," Deutsche Bank analyst Aniruddha Bhosale said in a note on 2 January.
“We expect Infosys to be affected the least and TCS the most by the adverse currency movements," Bhosale said, adding that Tech Mahindra Ltd continues to gain share, and he expects it to deliver US dollar revenue growth of 3.8% on a quarter-on-quarter basis, significantly higher than peers at 0.4-1.2% quarter-on-quarter.
Deutsche Bank AG expects Infosys Ltd to deliver 1.2% quarter-on-quarter dollar revenue growth in the December quarter.
It expects Tata Consultancy Services Ltd (TCS) to deliver 0.8% quarter-on-quarter dollar revenue growth in the quarter.
Drug makers are also set to report muted earnings, barring a few companies. Currency headwinds, particularly the fall in the Russian rouble, may hurt some firms. In a 5 January note, Credit Suisse Group AG said it expects muted third quarter earnings from the pharmaceutical sector, with the exception of Cadila Healthcare Ltd and Cipla Ltd where EPS growth should be around 50% on a year-on-year basis.
Credit Suisse analysts Anubhav Aggarwal and Chunky Shah expect a weak quarter for Glenmark Pharmaceuticals Ltd due to the 30% rouble depreciation against the rupee, and no meaningful approvals in the US. The impact of rouble depreciation would be visible for Dr. Reddy’s Laboratories Ltd, even though it has hedged 30% of its net exposure to the rouble at 1.7.
Banks may outperform during the quarter due to higher contribution from treasury income, noted Kotak Securities. The brokerage expects banks to report earnings growth of 28% on a year-on-year basis, with state-owned banks likely to report 40% year-on-year growth.
A drop in bond yields during the quarter is likely to benefit banks with large portfolios of government securities.
The benchmark 10-year bond yield fell 65 basis points to 7.85% in the October-December quarter as inflation cooled leading to expectations the Reserve Bank of India (RBI) will cut interest rates in early 2015.
One basis point is one-hundredth of a percentage point.
Earnings weakness will likely persist for consumer-driven sectors.
Kotak Securities expects auto companies to report a muted quarter with a revenue and profit growth of 5% and 2%, respectively, for firms under its coverage universe.
Bajaj Auto Ltd and Mahindra and Mahindra Ltd are likely to report a sharp decline in earnings while Hero MotoCorp Ltd and Maruti Suzuki India Ltd are likely to report strong earnings growth in the large-cap space, according to Kotak Securities.
Edelweiss Securities Ltd expects its consumer goods universe to register revenue and profit growth of 11.8% and 10.2% from a year earlier, respectively.
“Delayed winters in Q3FY15 contributed to the slight moderation in sales growth. Bigger benefits of low commodity prices will reflect in Q4FY15. The gap in urban/rural growth continues to shrink for most companies," Edelweiss analysts said in a note on earnings expectations for consumer goods sector on 6 January.
Edelweiss expects ITC Ltd’s cigarette sales volume to decline 7-8% on a year-on-year basis because of price hikes and sees delayed winters hitting winter portfolio of companies like Emami Ltd and Dabur Ltd. It expects Hindustan Unilever Ltd to register around 6% year-on-year growth in volumes.
For industrials, Kotak Securities expects the overall sector earnings and order inflow/backlog position to remain lacklustre and management commentary to remain cautiously optimistic.
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