BackJune quarter earnings to remain depressed on lockdown impact
Analysts will closely monitor management commentary on recovery path from covid-induced turmoilThe profitability of most consumer firms are likely to decline due to supply chain disruptions
PremiumMUMBAI : Corporate earnings in the June quarter are expected to stay depressed with companies bearing the full impact of two months of lockdown that dented business activity, worsening the already-weak earnings trajectory.
Analysts and investors are likely to closely monitor management commentary on the recovery path from the turmoil caused by covid-19. Extended lockdown in several metros, rise in unemployment and wage cuts have weakened consumer sentiment, hurting consumption demand.
Sales and profitability of most consumer companies will decline because of disruptions in manufacturing and supply chain, according to analysts. However, lower input cost and operating expense may offer some relief to an otherwise sharper earnings before interest, taxes, depreciation, and amortization (Ebitda) margin decline in the quarter. Automobiles, metals and mining, construction materials, oil, gas, and consumable fuels may suffer steep declines in earnings, while companies in discretionary consumption sectors are also likely to get impacted due to the hit on household incomes.
Sales, Ebitda, and net profit of Nifty companies will decline 30%, 17%, and 40%, respectively in the June quarter, said Gautam Duggad, head of research at Motilal Oswal Financial Services. For companies under the brokerage firm’s coverage, sales, Ebitda, and net profit are estimated to be down 31%, 24% and 52%, respectively in the first quarter of FY21. Duggad expects the pharmaceuticals sector to outperform in Q1FY21 given its essential nature while the IT sector may also deliver relatively robust numbers.
IT major Tata Consultancy Services, which has already announced its June quarter results, missed the dollar revenue estimate but the management said that the worst impact of covid-19 is behind even as some variables such as pricing and working capital cycles warrant a close watch.
“Key trends to watch out in June quarter will be market share gains for the large organized sector because of stress in the small unorganized segment. For BFSI, it will be important to watch commentary on the moratorium trends under moratorium 2.0," said Duggad.
Analysts at Kotak Institutional Equities expect net profit of Sensex companiesto drop 19% year-on-year (y-o-y) and that of Nifty firms to decline 30% y-o-y. It estimates earnings per share (EPS) of Sensex at ₹1,568 for FY2021 and ₹2,045 for FY22 and of the Nifty at ₹447 for FY21 and ₹618 for FY22. “We expect net profits of under coverage universe to decline 46% y-o-y (decline 61% y-o-y excluding banks/diversified financials) in Q1FY21 as economic activity declined sharply due to the outbreak and subsequent lockdown for a good part of the quarter. We expect a large y-o-y decline in net income of several sectors," it said.
With cost and capex rationalization as priority, Edelweiss Securities Ltd believes that the 20% consensus earnings compound annual growth rate for next two years is prone to downgrades. “Domestic-oriented names (consumption and investment) and financials are more susceptible to earnings risk than export-oriented ones. Also, in FY21, there could be supply disruptions as well apart demand weakness," it said.
Analysts expect the second half of the fiscal to show sequential and gradual revival. However, the severity of lockdowns, re-emergence of covid cases, government policy actions to drive demand and potential extension of moratorium by RBI are factors that have significant bearing on the pace of recovery in corporate earnings.
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