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Earnings

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Analysts expect contraction in profits for India’s earnings

Earnings risks continue to be tilted to the downside because of the slowing economy.

Bloomberg|
Updated: Oct 09, 2019, 07.56 PM IST
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By Ishika Mookerjee and Abhishek Vishnoi

For Indian equity investors looking for an uptick in earnings growth, the wait has got longer.

A slowdown in domestic growth and the lingering shadow banking crisis mean the September-quarter results season that kicks off Thursday will be similar to one seen over several quarters in recent years -- tepid and patchy.

Analysts expect to see a contraction in profits across most industries, with Edelweiss Securities forecasting sales growth for the stocks it tracks to be the lowest in a decade. The series of steps taken by the government to revive growth, including the $20 billion tax cut for companies, are too recent to reflect in the quarterly report cards, although analysts have since raised their estimates for 12-month forward earnings.

“Overall, we expect a soft quarter and earnings revival could still take some time,” Edelweiss Securities analysts Prateek Parekh and Padmavati Udecha wrote in a note on Oct. 7. The brokerage’s forecast for sales growth excludes banks and commodities-related companies.

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NSE Nifty 50 Index earnings for the year to March will shrink by about 4 per cent from a year earlier, according to Edelweiss and Motilal Oswal Securities.

Software exporters and industrial companies’ earnings growth likely fell below 5 per cent, retail banks, oil refiners and consumer discretionary firms may post profit expansion topping 25 per cent, Edelweiss’ Parekh and Udecha wrote.

Earnings risks continue to be tilted to the downside because of the slowing economy, uneven asset quality patterns seen in financial-services companies and depressed commodity prices, according to Motilal Oswal.

“At this point, tax rate cuts will largely limit the downgrades rather than driving big upgrades on the earnings front,” the brokerage said in a recent note.

Here’s what brokerages expect from the earnings season that gets underway Thursday with results from Asia’s top software exporter Tata Consultancy Services.

Kotak Institutional Equities
  • While Nifty index’s pre-tax earnings are seen declining, banks led by Axis Bank Ltd., ICICI Bank and State Bank of India should post 34 per cent growth, analysts led by Sanjeev Prasad wrote in Oct. 7 note.
  • Pharmaceuticals are a top pick as the domestic drug business could see 10-12 per cent growth from a year earlier.

Motilal Oswal
  • Profit before tax for the firm's universe to grow 2 per cent year-on-year but net profit to drop 6 per cent, dragged by automobiles and metals. Ex-financials, PBT/PAT to decline 14 per cent and 8 per cent YoY.
  • Private banks, consumer, cement and capital goods will provide some respite.
  • Top picks: SBI, ICICI, HDFC among large-cap stocks; mid-cap bets include Indian Hotels, M&M Financials, Colgate and Alkem

Citigroup Inc.
  • Expects 3 per cent decline in profit before tax for Nifty index; profit before tax ex-financials is expected to decline 12 per cent
  • Expects weak trends across consumer names, commodities, financials and pharmaceuticals
  • Top picks: Dr Reddy’s Laboratories Ltd., HDFC and HCL Technologies Ltd.

Bank of America Merrill Lynch
  • Economic growth spurred by tax cuts is a ‘second order effect’ and may take time.
  • Nifty’s EPS up by about 7 per cent because of tax cuts but difficult to justify upside to the index based on ‘first order effect’ of the reduction.
  • Prefer financials, industrials, cement; overweight software exporters as a hedge against currency risks.

Antique Stock Broking
  • Poor consumer demand and narrower margins for commodities-related companies will weigh on Nifty profits. Antique will revise its 13,100 year-end target after the results season. The index was little changed at 11,135.85 at 11 a.m. in Mumbai.
  • Margins for steelmakers to narrow sequentially due to weak demand, while upstream oil players’ profitability will be eroded by lower oil prices.
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