Markets gear up for quarterly earnings

For the quarterly results this time around, it is likely to be a challenging September for Indian companies.

Oct 09, 2019 01:10 IST India Infoline News Service

Quarterly Results
The Jun-19 quarter was one of the most challenging quarters for Indian companies in recent times. A lot has happened since then. GDP growth for the June quarter came in at just 5% and the RBI downgraded the full year GDP growth projection to 6.1%. RBI has also projected September quarter GDP growth at 5.3%, putting pressure on quarterly numbers.

Growth is one side of the problem. A host of sectors (with a significant weightage on the Nifty) have been under pressure from the domestic and the international environment.
  • Banks and financials are seeing asset quality pressures coming from sectors like NBFCs, realty, metals, infrastructure.
  • Metal stocks are facing negative headwinds from the slowdown in China and the tepid trade war resolution.
  • Monthly auto numbers are consistently 30-40% lower on a YOY basis and plant shutdowns could actually hit top-line this quarter.
  • Infrastructure stocks could come under pressure due to weak core sector growth and leverage troubles at the NHAI.
  • Consumer staples and consumer discretionary are facing consumption pressures, although the tax impact may offer some respite.
  • Finally, IT could still see sustenance of a solid trend, but if the global growth shrinks by 60-70 bps, then tech spending is likely to take a hit.
It is in this overall background that the quarterly results are likely to be announced.

How the Q1 results panned out in the June quarter?
If you look at the 4,000 plus companies that reported results for the June quarter, the overall sales revenues were up around 4.3% on a yoy basis. However, on a qoq basis, the sales revenues were actually down by 3.1%. On a yoy basis, the gross profits of all companies fell by 3.1%, even as net profits were up by 5%, clearly indicating that the boost came from outside core operations. The bigger concern would be the sharp 15% rise in interest costs, attributed to the higher cost of funds post the IL&FS crisis.

In terms of outlook at a macro level, the consumption slowdown will be the driving factor combined with weak capital cycle. However, one needs to really look at the impact of companies shifting to the new 22% tax bracket and the investments proposed for the 15% tax bracket announced by the finance minister and its impact on capital formation.

Six major cues for the September-19 quarter
Some of the key cues for the September quarter could be:
  1. The tax cuts announced by the finance minister for the corporates are expected to reduce the effective rate of tax substantially. For example, companies in the private banking, large NBFC, auto and FMCG space are already paying close to 30% effective rate. This is expected to come down to 24% post the tax cut announced.
  2. Thematically, erratic monsoons, weak festive demand and the ongoing trade war could impact September quarter earnings. Agrochemical companies are likely to take a hit on delayed and erratic rainfall, although the export oriented units should be less vulnerable. Auto demand was weak despite festive demand, although two wheelers may be redeemed by export performance.
  3. Financials and banks could have a mixed quarter. The banking and financials could see a dichotomy with the “winner takes it all” formula favouring strong players. Asset stress commentary is expected to be high for PSU banks and vulnerable private banks. NBFCs will be up against weak growth due to stress in autos and realty.
  4. Cement, metals and infrastructure are expected to be under pressure in this quarter. Dip in metal prices on the LME and risk of weak demand from China could keep the pressure on. Cement companies are likely to see better realizations but on weaker volumes as infrastructure spending slows down.
  5. Consumption stocks are likely to remain under pressure due to weak festive spending and liquidity crunch. FMCG companies may benefit from lower taxes and lower input costs but this is likely to be offset by discounts and pass backs to customers. The net impact could be muted; at best.
  6. IT and pharma will obviously be less susceptible to domestic pressures. For IT companies, new deals could slowdown due to weak global spending. But strong dollar index could be a positive. Pharma could continue to remain under pressure due to stiff competition in the US. Further, FDA issues are also back with the recent Aurobindo episode and growth will remain muted.
In a nutshell, it is likely to be a challenging September for Indian companies. With a sharp GDP downgrade and negative core sector growth; that was only to be expected.

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