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No meaningful recovery in earnings growth in Q3: Prasad Koparkar, Crisil

“In Q3, margin pressure continues to intensify and we do not see that ending.”

ET Now|
Jan 11, 2018, 03.31 PM IST
Prasad Koparkar-Crisil
Our overall estimate actually is that Q4 numbers will look very good and possibly better than what we see in Q3.
In an interview with ET Now, Prasad Koparkar, Senior Director, Crisil, says while commodities and consumption driven sectors are doing well, on an overall basis, the margin for Q3 will fall between 120 and 140 bps compared to a year ago.

Edited excerpts:

Can you tell us first about the earning season? Do you expect sales growth to pick up?
Yes, suddenly. After a very long time we are looking at still not touching double digit but going close to it. Our estimate is that if you look at all the key sectors the overall growth will be close to about 8.5% to 9%. In the first half, we were closer to about 7% and last full year we were really struggling at about 6-6.5%.

You are pointing out towards a higher sales growth but don’t you think it is just happening because of the base effect of demonetisation?
Partly yes, but I would not really say that. If I was looking at the sectors based on which we have generated this report and this accounts for a very large -- probably 60% of the market cap, we have not covered banking and oil and gas. In all the other sectors, compared to Q3 last year, which was the demonetisation period, growth on a YoY basis was 8% last year. It really got impacted in Q4 where it fell to about 6.5%. So, while in some specific sectors like motorcycles, there was a very big impact or may be part of the FMCG where there was an impact, I would say the real effect is going to play out between part of Q3 and also Q4.

Our overall estimate actually is that Q4 numbers will look very good and possibly better than what we see in Q3 and for a full year basis, we are likely to see close to about 8% to 9% growth. You have to keep that in the context of inflation. If inflation now is only about 4% to 5%, after almost five years, the revenue growth will exceed inflation by a very meaningful margin. It is a big positive for overall corporate sector performance.

On account of the fact that we have the big IT earning TCS coming out today, what is the expectation from this sector because there are so many factors that influence -- be it the cross-currency movement, global headwinds as well as outlook on digital management commentary -- something that investors definitely hinge on all of these factors. What are you expecting from the IT space as a whole? Do you think that we are likely to see another quarter of underperformance?
Yes, indeed! Both in terms of top line as well as margin, we are again going to get disappointed. We really do not see pricing pressure easing in IT sector and as you rightly said, there are other headwinds in terms of potential cost and visa related restrictions. We are probably not seeing the end of the tunnel somewhere just about flattish kind of profit is what we are looking at and margins will also continue to be under pressure till the prices revise.

So, while volume growth is okay, I would not say it is improving. There is still some time before we see an uptick and that is true for both IT and pharma.

What is the outlook on pharma and capital goods? The overall order intake is very crucial for some of these companies and reports have been coming in that we are seeing an uptick in the overall intake and that could really boost Q3 earnings prospects. What is the outlook for these two spaces?
Let me first cover pharma. The domestic part of pharma is doing decently. We expect anywhere between 9% and 11% revenue growth. The problem really has been on the export front. The kind of consolidation of the buyers that we have seen in the US and the resultant pricing pressure is what the sector is really struggling with.

After a very long period of time, we are going to see possibly marginally negative growth on overall basis in the pharma sector which is very shocking and surprising. On a margin front as well, we see that margins on pharma are down by close to 400 bps. There are not too many of those Para IV exclusivities filings which are going to happen in this quarter. There is not much benefit and unless that happens and some of the larger companies are really seeing pressure both in terms of revenue growth as well as margins, we remain bearish on pharma.

Coming to capital goods, some traction can be seen in the order book but it is restricted to specific sectors. Clearly, there is a movement in road and construction sector. There is some movement in parts of power transmission sector, but if you look at the broader industrial or thermal power or oil and gas, it is still struggling. Similarly, West Asia order books are still not very good. Overall, on a revenue basis, while order books have started improving, if you look at the Q3, revenue growth is likely to remain mostly flat, rising not more than 1% or 2%.

What is that you want to leave our viewers with? What is your expectation from the third quarter earning season? Is it going to be the year of rebound? The quarter where you are going to see earnings headcounts coming back? Job growth and margins going up?
The first thing which is very striking is that the top line growth at least is returning to a decent level, maybe close to 8-9% in some sectors. Commodity sectors are going to do well, largely driven by pricing but also some uptick, for example in steel, cement and aluminium.

Similarly, consumption driven sectors like auto are clearly seeing an improvement. Organised retail is also seeing an improvement. When it comes to industrial as well as export driven sectors, the top line is going to disappoint. On an overall basis, we believe that margin for Q3 will fall between 120 and 140 bps compared to a year ago. This is actually sharper than what we have seen in Q2.

In Q2, we saw margin fall of about close to 100 bps or 90 bps. So margin pressure continues to get intensified and we do not see that ending. Overall, we are still not seeing any meaningful recovery in earning growth as yet.

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