More beats than misses so far, but June quarter earnings flatter to deceive
There are more beats than misses in the June-quarter earnings of large Indian companies declared so far, but they may be flattering to deceive. A Mint analysis of 38 BSE-100 companies shows that 23 of them have exceeded consensus Bloomberg estimates.
Similarly, 14 out of the 23 Nifty-50 firms that have released their earnings have bettered street expectations.
“There may be more beats than misses at the net profit level, but other income, adventitious gains and lower costs seem to be the saviour in many cases, while volume and revenue growth has been generally disappointing, with cement and consumer companies disappointing significantly,” said Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities Ltd.
Maruti Suzuki India Ltd’s quarterly profit rose 23%, thanks largely to a doubling of income from activities other than core business operations. Similarly, for cement maker Ambuja Cements Ltd, a Rs.117.2 crore income from investments contributed to the net profit of Rs.400 crore. Revenue, however, rose by a mere 2% to Rs.2,541.2 crore.
While revenue growth may be depressed because inflation has come down, the real worry is that volume growth remains elusive.
Hindustan Unilever Ltd’s volume growth in the June quarter was 4%, the same as the March quarter.
In value terms, sales grew by 2.9%, compared with 3.4% in the previous quarter. Similarly, Dabur India Ltd’s volume growth was just 4.1%, below analyst expectations of 5-7%.
In any case, as Kotak’s Prasad asked, “How did one expect rural demand to pick up in the June quarter, which was the peak of summer across India? With large parts of India facing a water crisis, how would demand for consumer goods pick up in the first place?”
With hardly any signs of earnings acceleration, Indian markets are looking expensive, Bank of America-Merrill Lynch (BoFA-ML) warned on Tuesday.
“Bloomberg forecasts now suggest Nifty PAT (profit after tax) will grow 17.1% in FY17, down from 20% forecast in January, but these numbers have been continuously downgraded,” BoFA-ML analysts Sanjay Mookim and Anand Kumar said in a note.
The concerns on valuation really bothered analysts.
“Our base case, earnings will again disappoint in this year. In that context, current valuations are definitely rich,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.
“We did not see any uptick in volumes, which is a key worry,” Chhaochharia said, pointing to the June-quarter earnings.
Chhaochharia said he expects Nifty profits to grow by 10% in fiscal 2016, adding that while analysts expected Nifty profits to grow by 3% in the June quarter, they expected an around 17% profit growth for the pack for full year—suggesting a disconnect.
“We will see earnings uptick this year, but not as much as (the) street expects. Maybe FY18 is when we will see concrete recovery,” he said.
“If we see policy stance changing towards a reflationary one and economic growth continued its path, may be the number will look better earlier,” Chhaochharia added.
Some were not so pessimistic, but did say that caution was in the air, even as on an overall basis, earnings looked good.
“In terms of earnings that are reported, they do indicate some signs of improvement. These numbers also need to be looked in the light of the fact that the accounting standards have changed from this quarter,” said Gaurav Dua, head of research at Sharekhan Ltd.
Dua pointed out that the management commentary was the key thing to watch out for and suggests cautious optimism. Most of the consumer-facing firms are expecting a much better business environment in the second half of the year, Dua said.
“That’s when they think the salary hike of government employees and impact of better monsoon would reflect a in rise in rural demand,” Dua added.
While certain sectors fared better than expected, IT was one of the worst casualties as all large software exporters reported poor earnings.
On the other hand, “there are clearly certain sectors that have done better than market expectations, like some retail-focused private banks, which displayed a steady growth in advances, and their asset quality too, is firmly under control”, said Ajay Bodke, CEO and chief portfolio manager (portfolio management services) at Prabhudas Lilladher Pvt. Ltd.
The promise of a better second half is one reason why the pace of earnings downgrades is slowing down, and that too at a fast pace.
“In the last couple of months, downgrades have been mild. This compares with huge downgrades in the last five-six quarters. The intensity of downgrades is mild,” said Dua.
“One should start seeing upgrades post-harvests,” Bodke added.