Signs of recovery in corporate earnings are missing once again leaving market investors worried. As earnings kick-start on Tuesday, analysts expect the three months ended 30 June to be a soft quarter with moderation in growth across sectors. Headwinds such as weak global demand,crisis in non-banking financial companies (NBFCs) and scaling-back of government spending are deepening the slowdown. Easing of interest rates and commodity prices are the only saving grace, they said.
Sectors such as auto, agriculture, metals, oil and gas and NBFCs and housing finance companies (HFCs) are likely to show muted performance in the June quarter.
The auto sector was impacted by widespread decline in sales volume while the oil and gas sector may show the impact of the absence of inventory gains in the June quarter.
Consumption demand has been slowing for quite some time, though Q1FY20 is likely to be significantly weak for information technology (IT) companies as profit is likely to grow marginally compared to the double-digit spurt in FY19. Wage hikes, high attrition, visa costs and a strong rupee are expected to keep margins under pressure, which is estimated to fall 60-200 basis points (bps) for the top five IT companies. In the year so far, the rupee has strengthened 2% against the dollar.
“What stands out is the slowdown’s breadth with even IT and industrial companies, which had posted mid-teen profit growth in FY19, likely to report a mere 4% and 10% profit growth, respectively, in Q1FY20. Cement, select banks and pharma remain few spots where profit growth is likely to hold up at reasonable levels," said Shiv Diwan, co-head - institutional equities, Edelweiss Securities Ltd.
Q1FY20 is likely to be a soft quarter with the profit of Nifty companies growing a mere 7%, he said.
“What stands out is the sharp moderation in topline growth to just 3% compared to 18% in FY19 and 7% in Q4FY19. Excluding commodities, topline growth is likely to be the lowest in a decade, reflected in high frequency indicators as well," Diwan said.
However, crude oil prices fell 2.69% in the April-June quarter and this may bring some relief to the struggling consumption sector.
Full benefits of lower crude prices will reflect in the gross margins of consumption companies only in the next quarter, analysts said.
Amid a challenging environment, analysts believe earnings downgrade risks exist for Nifty with consensus earnings per share (EPS) for FY20 and FY21 at ₹608 and ₹718 respectively.
Kotak Institutional Equities estimates Nifty EPS for FY20 and FY21 at ₹614 and ₹725, respectively. The brokerage firm expects net income of Sensex to grow 13.2% year-on-year while that of Nifty to increase 1.3% annually.
It expects robust annual growth in the net income of banks due to stable operating performance, construction materials led by higher realization and capital goods driven by uptick in order execution from a low year-earlier base.
Analysts are looking forward to the monsoon, which is critical to boost growth in the next quarter, as the economic environment remains uncertain due to a slowdown, sustained rural distress and poor visibility on capex recovery.
“Monsoon has seen a sharp pick up in the past fortnight, however, the probability of it being normal still remains uncertain. However, we would watch out for spatial distribution and trends in the prices of key agricultural products in coming season," said analysts at Prabhudas Lilladher.