Investors brace for demonetisation effect on Q3 earnings
Mumbai: The initial impact of demonetisation on earnings will be visible this week as companies start reporting their December quarter earnings.
Consumer-centric companies are expected to be the worst hit as people cut spending because of a cash crunch.
A surge in commodity prices will, however, aid companies such as Hindalco Ltd and Hindustan Zinc Ltd. A low base in the year-earlier quarter will also aid earnings growth for some companies, while higher treasury income and the low base of last year may boost banks’ profits, even though lenders are bracing for slower credit growth in the months ahead.
For the full fiscal 2017, bank earnings are pegged to decline among the most as analysts have cut Bankex earnings per share (EPS) estimates by 12.9% since demonetisation, as Mint reported on Thursday.
Earnings for the third quarter of the current fiscal year are set to trickle in from 10 January, when private lender IndusInd Bank Ltd details its earnings.
Kotak Institutional Equities expects net income of the Sensex companies to be little changed year-on-year (y-o-y) and decline 2.3% sequentially in the December quarter.
It estimated Sensex’s FY17 and FY18 earnings per share (EPS) at Rs1,420 and Rs1,729, respectively, while its Nifty EPS estimates for FY17 and FY18 are Rs430 and Rs521, respectively.
According to Bloomberg consensus estimates, EPS for Sensex and Nifty for FY17 was seen at Rs1,431.5 and Rs440.15, respectively.
“We expect y-o-y decline in the net income of automobile, consumer products, real estate and telecom sectors, partly due to the negative impact of demonetisation on sales volumes,” Kotak analysts Sanjeev Prasad, Sunita Baldawa and Anindya Bhowmik said in a note on 5 January.
Kotak, however, expects a 23% net income growth for its coverage universe of 200 firms because of low profits or losses posted by firms such as Bharat Heavy Electricals Ltd, Bank of Baroda, State Bank of India and state-run fuel retailers in the quarter ended December 2015.
“At the very outset, we note that estimating the earnings impact of the demonetisation event is an ambitious exercise at the very least and daunting at worst,” Rohit Chordia, Anand Shah and Abhas Gupta, analysts at Kotak Institutional Equities, said in a 3 January note.
ICICIdirect.com, the retail broking arm of ICICI Securities Ltd, expects average revenue of Sensex firms to grow 2.1% y-o-y, while net profit is expected to grow 12%.
“Our expectation of muted sales growth can be attributed to a decline in auto, FMCG (fast-moving consumer goods) and consumer discretionary sales. The strong earnings growth can be attributed to robust performance of ONGC due to extraordinary loss in base quarter along with higher realisation & lower operational cost in the current quarter,” ICICI analyst Pankaj Pandey said in a note on 6 January.
Edelweiss Financial Services Ltd expects Nifty firms to report revenue and net profit growth of 8% y-o-y and 18% y-o-y, respectively.
Edelweiss’s Nifty EPS estimates are at Rs453 and Rs540 for FY17 and FY18, respectively.
“With regards to demonetisation, the impact will be fairly severe on consumption companies and within them, on staples and two wheelers. Domestic investment companies, however, are unlikely to be impacted much by the demonetisation move. With regards to export sectors, namely IT and pharma, Q3FY17 is likely to be another sluggish quarter with high-single to mid-double digit growth,” Edelweiss analyst Prateek Parekh said in a note on 6 January.
Parekh’s view is shared by other brokerages too who forecast a modest revenue performance by IT firms in the December quarter as cross currency headwinds add to the usual seasonal weakness. In a note on 2 January, Emkay Global Financial Services said it expects a 0.6-2.7% quarter-on-quarter constant currency revenue growth amongst the big companies with HCL Technologies Ltd leading growth.
According to Kotak, earnings growth for the banking sector is likely to be strong because of a low base. Net interest income growth of 9% y-o-y will outpace loan growth of 3% because of lower interest reversals, and excess low-cost liquidity.
Kotak expects the quarter to be a dismal one for consumer products companies as it expects the aggregate revenue and profit for its consumer universe, excluding Nestle India Ltd and ITC Ltd, to decline by 0.2% and 5-6%, respectively.
Edelweiss expects strong growth for metal producers after prices hit their lowest point in past seven years during the same quarter a year before.
For information technology companies, brokerages expect a modest revenue performance in the December quarter as cross-currency headwinds add to the usual seasonal weakness.
In a note on 2 January, Emkay Global Financial Services said it expects a 0.6-2.7% quarter-on-quarter constant currency revenue growth amongst the top tech companies, with HCL Technologies Ltd leading the growth.
Telecom firms will face the brunt of not only demonetisation but also Reliance Jio Infocomm Ltd’s free services, which have been extended to 31 March.
In a 5 January report, ICICI Securities said it expects mobile revenues to decline around 6% on a quarter-on-quarter basis each for Bharti Airtel Ltd and Idea Cellular Ltd, led by the drop in both voice and data services revenue.