Coronavirus outbreak seen dragging down Q4 earnings
3 min read 12 Apr 2020, 11:49 PM ISTThe quarter is likely to be a near complete washout for many companies, say analystsAll segments faced the brunt of the covid-19-induced lockdown in varying magnitudes
PremiumMUMBAI : Corporate earnings for the fourth quarter of FY20 are expected to decline as the slowing economy was further hit by weak business activity following the covid-19 outbreak and the subsequent nationwide lockdown.
The quarter is likely to be a near complete washout for many companies, with automobiles, construction material, metals, mining, oil, and gas and consumable fuels expected to be worst hit in the three months ended March, said analysts.
Channel checks by analysts indicated that the overall consumption trend continued to be weak with the trajectory until mid-March broadly similar to the December quarter. All segments faced the brunt of the covid-19-induced lockdown in varying magnitudes, as discretionary spending was hit harder and sales coming to a grinding halt for a few.
The performance of the BSE-30 index is expected to be better than the Nifty-50 index as downstream companies, such as Bharat Petroleum Corp. Ltd, Indian Oil Corp. Ltd and Tata Motors, which are a part of the Nifty-50 Index, but not part of the BSE-30 Index, will report a sharp decline in year-on-year (y-o-y) net profit, according to Kotak Institutional Equities.
Kotak Institutional Equities estimates earnings per share (EPS) for Sensex of ₹1,698 for FY20 and ₹1,926 for FY21 and for the Nifty at ₹519 for FY20 and ₹589 for FY21.
“December (quarter) 2016 (demonetization), June 2017 (goods and services tax) and now March 2020 (covid-19 lockdown)—this is the third time in the past 14 quarters when quarterly forecasts should ideally carry no meaning. Calling out higher consumer off-take in some categories and collapse of offtake in others is easy, qualitatively. Forecasting the impact on primary sales on account of the lockdown in the last week of the quarter is way, way tougher," said the brokerage firm.
The impact of the lockdown on Q4 earnings may be limited to certain sectors, according to Amit Shah, head, India equity research, BNP Paribas India. “Overall earnings will be muted, wherein some sectors, such as IT, banks, and non-banking financial companies (NBFCs), will see minimal impact, while sectors such as auto, consumer discretionary and energy could see a higher impact. No sector will materially benefit as demand destruction has been across the board," he said.
However, not all concur. Fast moving consumer goods, pharma and grocery retail may report better results as they have benefitted from continuity of operations as well as stocking up by people before lockdown, said Atul Bhole, fund manager, DSP Investment Managers.
For technology companies, tier-1 IT firms are expected to grow 0.3% quarter-on-quarter versus 1% in Q3 and 6.5% y-o-y in constant currency terms, says Nomura. It sees a 40-100 basis points (bps) impact of cross currency on tier-1 IT and 30-40bps impact on tier-2 IT stocks. The rupee had depreciated 5.51% against the dollar in January-March.
Low crude prices and raw material costs, including metals, may impact margins of few companies positively. Furthermore, low media intensity and strict control of overhead costs may also benefit margins of companies. “Autos will benefit from lower raw materials and cheap crude prices but not in Q4 and this should be more for the first half of FY21 earnings. Energy companies would see a push and pull wherein in upstream companies see earnings decline while refining companies see some off-setting on account of cheaper crude," said Shah.
Crude prices slipped 65.55% while key metals like aluminium, copper and zinc were down 16-19% in March quarter.
Shah expects earnings (barring financials) to decline in the range of 10-20% for sectors for FY21 if there is no material second wave of covid-19 and the lockdown is relaxed gradually from early May.
“In case of financials from a sensitivity perspective, a 150bps decline in credit offtake and a 25bps increase in credit cost could impact private bank earnings by 8% and NBFC earnings by 12%, in FY21," he said.
