Mumbai: An earnings recovery may continue to elude Indian companies in the December quarter, with analysts predicting weak sales growth, citing muted demand, tight liquidity and political disruption. However, cost control measures are expected to lead to an uptick in margins, while profits could be held up by the corporate tax cuts announced in September.

The overall demand scenario remains muted and various stimulus measures have failed to show impact, market analysts said. The financial sector is likely to fare better than others in the earnings season that kicks off on Friday with Infosys Ltd declaring its quarterly numbers.

Rural growth is likely to remain weak in Q3 as the impact of floods in the early part of the quarter and liquidity concerns affected volumes of consumer companies. Protests against the new citizenship law too are expected to hurt sales.

“Q3 will also show impact of CAA protests-led economic disruptions. Tight liquidity, prolonged impact of demonetization and goods and services tax are a drag, although rising crop prices and good rabi sowing revive hope of a rural demand revival towards the fag end of Q4FY20. Fiscal situation remains alarming with poor tax collections, we watch out for budget with strong possibility of fiscal deficit moving beyond 4% (budget estimate 3.3%)," analysts at Prabhudas Lilladher said in a report.

The brokerage expects Q3 sales to grow 0.5%, and profit before tax (PBT) growth at 13% driven by banks (due to excess provisions made in the base quarter), automobiles (due to a low base), agriculture (good monsoons) and cement (strong pricing). However, excluding banking, financial services and insurance (BFSI) companies, sales and PBT are expected to grow by only 0.1% and 1.3%, respectively. Sales and PBT growth excluding oil and gas are expected to be 5.1% and 13.6%, respectively, it said.

According to Deepak Jasani, retail research head at HDFC Securities, the consumption slowdown, slow private capex and sluggish government spend will mark the overall performance of companies in the quarter. “The consumption slowdown could continue to impact the revenue growth of consumer-facing companies. Rural consumption could start to revive from Q4 onwards based on kharif output and rabi expectations. Urban consumption, however, could remain impacted for a few weeks by the social protests and sluggish capital market sentiments," he said.

Jasani expects Q3 sales growth to be flat to +/-2% year-on-year and PBT higher by high single digit to low double digits.

Gautam Duggad, head of research-institutional equities at Motilal Oswal Financial Services Ltd, expects Nifty PBT and profit after tax (PAT) to increase 2% and 8%, respectively year-on-year. Excluding financials, he expects Nifty PBT/PAT to decline 6%/2% year-on-year.

“Our FY20 Nifty EPS (earnings per share) estimate has been stable at 532. We now build in EPS growth of 10% for FY20. We expect Nifty profit decline of 2% ex-BFSI in FY20," Duggad said. “It will be more of the same with financials driving the quarter and commodities dragging it. Corporate commentary on the underlying demand scenario and any sequential improvement post government announcements will be the key monitorables."

Kotak Institutional Equities estimates profits of BSE Sensex companies to grow 23% year-on-year and those of Nifty firms to increase 21%. It expects EPS of Sensex at 1,746 for FY20 and 2,200 for FY21; it expects the figures for Nifty at 532 for FY20 and 680 for FY21. Kotak said net profits of the banking and diversified financials sector will be led by recovery from some large corporate non-performing loan accounts and lower tax rates.

However, Mihir Vora, director and chief investment officer at Max Life Insurance, said he expects earnings to grow 15-20% in the December quarter, primarily driven by lower tax rates, lower provisioning requirements for banks and reduced losses in telecom companies.

In the quarter, the rupee weakened 1.05% and crude prices were up 6.61%. Rahul Singh, chief investment officer-equities at Tata AMC, said December quarter earnings are unlikely to be encouraging, but margins of consumption companies may show a slight improvement as they might have cut spending.

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