Will corporate earnings disappoint once again?

With rising commodity prices and lingering effects of demonetisation, earnings prospects for most companies for the March quarter are anything but rosy


Graphic: Sarvesh Kumar Sharma/Mint
Graphic: Sarvesh Kumar Sharma/Mint

Mumbai: The quarterly earnings season that begins this week will determine whether Indian stocks that have rallied to record highs last week will be able to sustain the gains.

Inflows from foreign and domestic investors have been driving up stocks but they may easily retreat if earnings disappoint. With rising commodity prices and the lingering effects of demonetization, earnings prospects for most companies are anything but rosy, analysts say.

Companies, excluding banks and commodities suppliers, are likely to be weighed down by margin pressure as raw material costs have surged from a year earlier, they said.

Margins of members of the Nifty index are estimated to narrow by as much as 116 basis points in the three months ended 31 March because of rising input costs, Edelweiss Securities Ltd said in a note released on 7 April. A basis point is one-hundredth of a percentage point.

Infosys Ltd, Bajaj Capital Ltd and Reliance Power Ltd are scheduled to report their fourth quarter earnings on 13 April. 

Analysts expect quarterly earnings growth to be driven by banks and metals companies. Banks’ profit growth in the March quarter is likely to be boosted mostly as a result of a favourable base effect. They had reported weak earnings in the year-ago period because of higher provisions following the Reserve Bank of India’s asset quality review. For metals companies, higher commodity prices are expected to support earnings growth.

“Excluding banks and commodities, profits are likely to contract by 9%, similar to last quarter’s contraction and significantly lower than the 10% plus profit growth seen in FY15, FY16 and H1FY17. The slowdown in profit will be more pronounced in consumption sectors and cement,” Edelweiss said in the 7 April note. 

The brokerage expects FY17 Nifty earnings per share (EPS) to grow 10%, a marked improvement over the past two years, with Nifty EPS expected at Rs455, Rs555 and Rs660 at the end of FY17, FY18 and FY19, respectively. 

The brokerage expects Nifty firms to report revenue, operating profit and net profit growth of 15%, 8% and 14%, respectively, in the March quarter. 

Analysts are worried that the lingering effects of demonetization are still likely to impact companies that are dependent on domestic consumption. 

Recovery of volume growth is likely to be one of the key concerns in the March quarter earnings, Sanjay Mookim, India equity strategist, Bank of America Merrill Lynch (BofA-ML), said on Thursday. 

BofA-ML expects earnings growth to improve from sub-5% in FY17 to 12% in FY18 and 15% in FY19. Indian markets have touched record highs in March and April after Prime Minister Narendra Modi’s Bharatiya Janata Party won the crucial Uttar Pradesh assembly elections. The Sensex and Nifty rose 11% and 12%, respectively in the March quarter and if earnings fail to deliver, the rally may lose steam.

The net income of Sensex companies is likely to grow 9% on an annual basis and 15.3% quarter-on-quarter, Kotak Institutional Equities said in a report dated 7 April.

Excluding banks, the brokerage expects an 8.8% year-on-year growth in net income. Weak demand environment, rising raw material costs and increase in discounts may result in an annual decline in net income for automobile firms, while downstream energy firms may be hurt because of lower refining margins, muted growth in volume and the recent decline in global crude oil prices.

Kotak estimates Sensex FY18 EPS at Rs1,682 and FY19 EPS at Rs1,972. Its Nifty EPS estimates for FY18 and FY19 are Rs520 and Rs608, respectively. 

Gautam Duggad, head of research at Motilal Oswal Securities Ltd, said the March quarter may see margin contraction of 50 basis points for firms under the brokerage’s coverage, excluding financials. “We are expecting 23% earnings growth for our universe and 22% CAGR over FY17-19. Expectations for our Motilal Oswal universe net profit growth is 28% and largely led by three sectors—PSU banks, metals, oil and gas. Rest of the universe may decline by 5%,” he said. 

Rakesh Tarway, head of research at Reliance Securities, expects 10% profit growth in the March quarter, reflecting similar trends in the first nine months of the fiscal year. He, however, said commodity prices will have a marginal impact on profitability as firms in many industries like tyres, autos and packaged consumer goods have raised prices. “Also, commodity prices have now started stabilizing, which will further insulate margin erosion,” he added. 

According to Deutsche Bank, Sensex firms are expected to post a 9.1% profit growth in the fourth quarter. “Excluding banks, Sensex net profit growth is likely to be at 5.4%. Autos are likely to be the biggest drag on Sensex growth, as our analyst has factored in a one-time impact of the BS-III vehicle ban,” it said in a note dated 7 April. 

In the current fiscal year, CRISIL Ratings expects corporate revenue to grow at around 8% on a year-on-year basis. “Revival in sectors such as construction equipment, EPC (on improving order book); metals (especially non-ferrous) and sugar—on better prices, are expected to aid the improvement,” the rating agency said on 3 April.

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