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Home / Companies / Company-results /  September quarter corporate earnings may disappoint

Mumbai: The coming raft of corporate earnings is likely to disappoint investors again, continuing a streak that has now lasted more than two years. Analysts, however, expect earnings growth to pick up pace in the second half of the fiscal year.

The somewhat rosy expectation is underpinned by the anticipated surge in demand for goods during the coming festival season, reduction in interest rates and the government’s plan to kick-start the investment cycle.

Stock analysts and economists are hopeful that economic growth will strengthen after Reserve Bank of India governor Raghuram Rajan slashed interest rates by a more-than-expected 0.5 percentage point on 29 September, the increase in purchases by consumers linked to the ongoing Hindu festival season, lower oil prices and the government’s plan to raise spending on railways and roads to revive the investment cycle.

Expectations for profits and revenues of top Indian companies for the just-ended September quarter are, however, muted.

“While second-quarter results will be more or less in line with first-quarter results, I would think demand would pick up in the second half of this financial year," said Deven Choksey, group managing director, KR Choksey Investment Managers Pvt. Ltd.

To be sure, despite relatively strong gross domestic product (GDP) growth data for the economy (it grew 7% for the June quarter according to a new but controversial method of measuring economic activity), other indicators have remained volatile, telling a story of an inconsistent and patchy improvement in demand. For instance, the Purchasing Managers’ Index for the manufacturing sector fell to a seven-month low in September, capacity utilization fell back to a near 70% level in the June quarter from 74% in the previous three months, and credit growth has remained below 10%.

This suggests that ground conditions in the economy remain weak, reflecting on corporate earnings.

“It is going to be a very similar earnings story to the previous (June) quarter. Top-line is likely to disappoint across sectors, including the defensives, as demand is yet to see a meaningful pick up," said Saurabh Mukherjea, chief executive of institutional equities at Ambit Capital. “Lower input costs will be the saving grace, and this should help the Sensex post an EPS (earnings per share) growth of 3% in the September quarter. Our FY16 Sensex EPS growth stands at 8-9%."

Aggregate profit growth of Sensex companies is likely to be in the lower single digits as well, according to Gaurav Dua, head of research at Sharekhan Ltd.

Sensex companies posted an aggregate 4.48% rise in net profit from a year ago in the quarter ended September 2014, while sales rose 2.47% in the period, data compiled by Capitaline showed. For the quarter ended 30 June 2015, net profit rose a mere 1.69% from a year before, while sales dipped 4.07%.

Sales growth is likely to remain sluggish in the September quarter as well.

“Volume growth across sectors, barring a few expectations, will see moderate growth. However, average realizations at some of the commodity-driven sectors are likely to decline on an annual comparison basis, as inflation came off and cost benefits are passed through to an extent," said Dua of Sharekhan.

Wholesale prices declined for the 10th straight month in August, pressured by falling fuel costs. The Wholesale Price Index fell an annual 4.95% in August compared with a 4.05% slide in July. Consumer price inflation slowed to 3.66% in August from 3.78% in the preceding month.

“In terms of consumer demand, rural demand will be seen moderating further, but there are signs of urban demand stabilizing and picking up from here, driven by declining interest rates and inflation, and a steady job market," added Dua.

The silver lining, however, would be better margins, helped by sliding commodity prices in recent times—a trend that was visible in earnings for the quarter ended 30 June as well.

Brent crude fell 25.8% in the September quarter and closed the quarter at $48.37 a barrel. LME copper shed 10.05% over the period while LME aluminium declined 5.1%. China hot-rolled coil steel declined 13.3%.

“Margin expansion will continue to happen not only in the September quarter, but also over next two years, because of the softening of raw material costs and lag effect, and because of operating leverage, driven by higher utilization rates," said Dua of Sharekhan.

A broader recovery in earnings, however, will have to wait till the second half of the current fiscal year.

“Our analyst team thinks growth could rebound in the second half of this year, helped by consumer (staples and discretionary), financials, healthcare and capital goods sectors," Barclays Capital had said in a note on 28 August.

“On a top-down basis, we note that our forecasts are underpinned by an expectation of better fiscal policy in terms of higher capital expenditure by the government and also an improvement in consumption as lower oil prices trickle down to consumers," Barclays Capital added.

Among individual sectors, the information technology (IT) sector is among the few likely to post a robust performance.

In a 30 September note, Credit Suisse said the September quarter is likely to be a strong quarter for most Indian IT firms because of seasonal strength and favourable moves in the key currencies (rupee, euro and pound against the dollar).

“We believe that the demand environment remains stable and this quarter’s underlying growth trends may reflect that," Credit Suisse analysts Anantha Narayan and Nitin Jain said.

For the telecom sector, Bank of America-Merrill Lynch (BofA-ML) said in a note on 30 September that it expects the September quarter numbers for Bharti Airtel Ltd and Idea Cellular Ltd to be impacted by seasonality, leading to sequential declines in total minutes of usage and cellular revenue.

“India cellular margins are expected to decline q-o-q (quarter-on-quarter), given weak revenues (high fixed-cost model) and higher network opex. We expect the seasonal impact to be more pronounced on Idea, given its higher exposure to rural areas (where customers spent less in 2Q), which may lead to downside risk to consensus," BofA-ML analysts Sachin Salgaonkar and Karan Parmanandka said in the note.

Dua of Sharekhan expects private banks to post profit growth in high double digits. For public sector banks, he expects a mixed performance, depending on the kind of provisioning that is required against bad assets.

For drug makers, momentum is expected to pick up from the second half of the current fiscal year, according to BofA-ML. The brokerage expects the sector’s growth momentum to remain moderate, with sales, Ebitda (earnings before interest, tax, depreciation and amortization) and PAT (profit after tax) of pharmaceutical firms (ex-Sun Pharmaceutical Industries Ltd/Cipla Ltd) seen growing at 13%, 14% and 8%, respectively, in the quarter.

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