BackQ1 earnings set to hit multi-year lows; guidance on pace of recovery critical
Automobile, metal and mining, construction materials, oil, gas & consumable fuels companies may suffer steep fall in earnings while domestic discretionary consumption sectors are expected to be laggards
PremiumNEW DELHI: Indian businesses will see earnings hit multi-year lows in April-June, as the quarter bore the full brunt of the pandemic-induced lockdown with little economic activity.
But more than the earnings, analysts and investors will focus on management commentaries on the pace of recovery, given that extended lockdown in metros, job losses, and pay cuts have weakened consumer sentiment and hurt consumption.
According to analysts, sales and profitability of most consumer companies will decline due to disruptions in manufacturing and supply chain. However, lower input cost and operating expense may offer some relief to an otherwise sharper decline in the EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in the quarter. Automobile, metal and mining, construction materials, oil, gas & consumable fuels companies may suffer steep fall in earnings while domestic discretionary consumption sectors are expected to be laggards as household incomes witnessed cuts.
Gautam Duggad, head of research, Motilal Oswal Financial Services, sees sales, EBITDA and net profits declining 30%, 17% and 40%, respectively in April-June. For companies under the brokerage firm’s coverage, sales, EBITDA and net profit are estimated to fall 31%, 24% and 52%, respectively in the first quarter of FY21.
Duggad expects pharmaceuticals sector to outperform in Q1FY20 given the essential nature of the sector, and IT sector to likely deliver relatively healthier numbers.
IT major Tata Consultancy Services which has already announced its June quarter results missed dollar revenue estimates but the company's management said the worst of the covid-19 impact 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 large organized sector owing to stress in small unorganized segment. For BFSI, it will be important to watch commentary on the moratorium trends under moratorium 2.0. Trends in collection efficiency (banks have highlighted improving collection trends over May-Jun’20) as the economy starts to recover would be an important metric to assess the banking system’s health in the near term. And lastly, the guidance on asset quality ratios and credit cost for FY21 are important monitorable," he said.
Analysts at Kotak Institutional Equities expect net profits of Sensex constituents to decline 19% year-on-year (YoY) and that of the Nifty members to decline 30% YoY. The brokerage firm estimates earnings per share (EPS) of Sensex at ₹1,568 for FY2021 and ₹2,045 for FY 2022 and of the Nifty at ₹447 for FY2021 and ₹618 for FY2022. "We expect net profits of under coverage universe to decline 46% YoY (decline 61% YoY excluding banks/diversified financials) in Q1FY21 as economic activity declined sharply due to the covid-19 outbreak and subsequent lockdown for a good part of the quarter. We expect large YoY decline in net income of several sectors," it said.
According to field studies and channels checks, the initial hype of pantry loading saw a surge in demand for essential items along with groceries while non-essential such as hair-oil, skin-care and personal-care saw lower demand. As rural areas were less hit, reporting stable demand, along with slower recovery in wholesale, trade analysts expect companies to focus on rural distribution and village coverage. Better rabi output had positive impact on rural sales, even as a few states were affected due to cyclone.
As cost and capex rationalisation remain priority for companies, Edelweiss Securities Ltd believes the 20% consensus earnings compound annual growth rate (CAGR) 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…Global liquidity has helped a sharp bounce in markets despite earnings downgrades. Nifty is now trading at 21 times one year forward EPS. This makes us a little cautious on overall market levels," it said.
Markets expect second half of the fiscal to show sequential and gradual revival. However, the severity of lockdowns, re-emergence of covid cases, government policies to drive demand and the potential extension of moratorium by the Reserve Bank of India are among the factors which will have significant bearing on pace of recovery in corporate earnings.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
