GST, rupee impact seen impacting June quarter results
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Mumbai: June quarter earnings growth of Indian companies is likely to slow because of uncertainty surrounding the implementation of goods and services tax (GST) and the impact of a stronger home currency on exporters.
The Indian rupee has strengthened 5.16% against the dollar since January and may hurt the exports realization of Indian companies. Implementation of GST has also caused major disruption in many sectors.
As the 1 July implementation of GST approached, there were reports of liquidation of inventory by dealers and supply-chain disruptions in various sectors—developments that may hurt earnings and revenue growth of companies. GST, one of the biggest tax reforms since independence, subsumes more than a dozen state and central levies into one tax, economically unifying 29 states for the first time. The slower earnings growth may dent the stock rally. The BSE’s benchmark Sensex and National Stock Exchange’s Nifty have gained 17.8% and 18.1%, respectively, year-to-date.
Deutsche Bank expects June quarter earnings to decline 6% from a year earlier for Nifty firms. “The 6% forecast decline in earnings may be exaggerated by the large annual inventory adjustments at oil marketing companies (OMCs) due to (a) sharp decline in global oil prices. Excluding energy, Nifty earnings are expected to rise by 4% year-on-year (YoY),” Abhay Laijawala, head of research at Deutsche Bank, wrote in a 5 July report.
It expects aggregate revenue to grow 7% and earnings before interest, taxes, depreciation and amortization (Ebitda) to decline 3%. The report also said that the annual growth momentum appears muted and macro indicators suggest a sequential stabilization in growth momentum.
“Demand environment seems to have normalised further, post demonetization drag seen in December quarter last year. Domestic liquidity and the interest rate environment have turned growth supportive. The base effect for year-on-year earnings growth comparisons is likely to stay adverse for another quarter, which increases the risk to existing YoY consensus earnings forecasts of 22% for FY18,” it said.
According to ICICI Securities Ltd, June quarter earnings and possibly the next quarter is likely to be a non-event as the economy gears up for the GST challenge. It said GST uncertainty headwinds, which is largely a one-off event, could be seen even during Q2FY17 and doesn’t change the structural story of strong domestic consumption-led growth and is expected to be a key long-term driver of the economy and earnings growth. The brokerage expects Sensex earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 18.4% in FY17-19. ICICI Securities sees average revenue and net profit of Sensex firms (excluding SBI and Tata Motors) growing 3.6% and 4.1% year-on-year, respectively.
Morgan Stanley expects de-stocking and price discounts ahead of GST rollout, lagged impact of higher commodity prices leading to higher costs, inventory losses due to lower oil prices for state-run oil firms and revenue weakness for technology due to rupee appreciation to impact quarterly earnings.
Analysts at Morgan Stanley see revenue and profit growth of 8% and 4%, respectively in the quarter ended 30 June for Sensex companies. "Growth is in a U-shaped recovery, driven by domestic and global factors. We expect earnings revision breadth to improve in the next few months. We expect Sensex earnings growth of 18% in FY18 and 24% YoY in FY19," it said in a 7 July report authored by equity strategists Ridham Desai and Sheela Rathi.
Edelweiss Securities Ltd said that management commentary post the quarterly earnings is likely to remain muted due to GST and lingering effects of demonetization but there could be some optimism in housing finance, cement and auto companies. "While we do expect the rest of the year to be better, likely subdued Q1 show will weigh on our 20% earnings growth forecast for FY18. Our FY17, FY18, FY19 Nifty earnings per share (EPS) forecasts are Rs450, Rs540 and Rs640, respectively," it said in a 5 July report. It added earnings downgrades are likely given that full year EPS growth estimates still imply 18-20% growth in FY18.
Kotak Institutional Equities estimates EPS of Sensex companies at Rs1,470 and Rs1,833 for FY18 and FY19, respectively. Its EPS estimates for Nifty companies are Rs478 for FY18 and Rs586 for FY19. "We expect the net income of Sensex companies to be flat on annual basis. But we foresee 8% annual decline in net income for our coverage universe including automobiles, downstream energy, pharmaceuticals and telecom," it said.
Deutsche Bank expects industrials, financials and staples will lead earnings growth while energy, telecom and healthcare will lag in the June quarter. Energy, telecom and healthcare are expected to report Q1 earnings declines of 27%, 25% and 21%, respectively while industrials, financials and consumer staples may report earnings growth of 16%, 8% and 6%, respectively.
Pankaj Pandey, research head at ICICI Securities, said in a 7 July report that among Sensex members, auto, power, oil and gas and packaged consumer goods companies are likely to be among top five performing sectors based on profit growth. "Export-based sectors like healthcare and technology sectors would be the underperformers in terms of performance based on net profit decline," Pandey added.
According to Morgan Stanley analysts, Tata Steel Ltd, Dr Reddy’s Laboratories Ltd and Tata Motors Ltd will likely see the fastest profit growth, while Bharti Airtel Ltd, Sun Pharmaceutical Industries Ltd and Lupin Ltd could be the laggards.