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Tax cuts to jazz up Q2 bottomlines of Nifty50 even as revenue growth slows

The operating profit is likely to fall by 4.5 per cent.

ET Bureau|
Oct 07, 2019, 07.50 AM IST
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ET Intelligence Group: A lower corporate tax is likely to boost India Inc’s bottomline for the September 2019 quarter amid slower topline growth and shrinking operating margin due to sluggish demand.

According to the ET Intelligence Group’s estimates of the Nifty50 companies, aggregate net sales is expected to increase at a nine-quarter low rate of 5.5 per cent compared with the year-ago quarter. The operating profit is likely to fall by 4.5 per cent.

“We don’t expect any material improvement in Q2FY20 (the second quarter of FY20). Weak consumption demand will impact several sectors including automobiles and consumers. Weak global commodity prices will hurt metals and oil and gas companies,” said Gautam Duggad, institutional research head, Motilal Oswal Financial Services. He believes adjustments owing to deferred tax after the recent changes in corporate tax rates will impact profitability of large corporate banks.

The government’s recent decision to reduce the corporate tax rate to 25.17 per cent including cess and surcharge for FY20 may benefit the net profits of companies in the second quarter. But, gauging its extent is difficult since companies are likely to adjust for the taxes paid at the then prevailing rates during the first quarter of the fiscal. Assuming a flat tax rate of 25 per cent, the sample’s net profit may shoot up by 26.5 per cent year-on-year for the September quarter, which will be the highest in the past nine quarters.

Deepak Jasani, retail research head, HDFC Securities, drew attention to several macro parameters that portray a drab picture for the quarterly earnings season. “Advance and corporate tax collections have grown just 6 per cent till mid-September this fiscal; collections of GST for September were at a 19 month low; sales of automobiles fell for the eleventh consecutive month in September; index of core infrastructure industries fell at a 52-month low of 0.5 per cent in August. In this backdrop, Q2 growth numbers especially on the topline may not be exciting,” he said.

The operating margins of the Nifty50 sample is expected to contract by 170 basis points (bps) to 18 per cent, which will be the lowest since the December 2018 quarter.

“We expect sharp margin contraction year-on-year in autos, metals, technology and oil and gas companies. Cement companies should report strong margin expansion while for those in the consumers and capital goods sectors, operating margins would be flat,” said Duggad.

While demand is expected to remain sluggish in the next two quarters, industry observers believe that a turnaround cannot be ruled out during FY21. Jasani expects a better monsoon, though partly uneven, may result in a bumper Rabi harvest thereby sprucing up rural income. “The impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand,” he added.

According to Duggad, the step to recapitalise the public sector banks, improving liquidity and tax cuts augur well for the demand trend. “We expect corporate earnings to pickup in FY21 even as FY20 earnings may remain volatile depending on the treatment of deferred taxes of corporate banks. We continue to prefer private financials, consumers, IT and select industrials,” he said.

SECTORAL TRENDS

AUTOMOBILES
The financial performance of the auto companies is likely to be under pressure owing to volume contraction over the past 12 months. During the September 2019 quarter, it fell by by16-33 per cent across categories. The discount level for passenger cars reached to a record high and accounted for 15-25 per cent of the ex-showroom prices in the quarter. This will weigh on margins.

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BANKS
Banks will have to reduce their deferred tax assets in the aftermath of corporate tax cut, which will affect the net profit. The extent will depend upon whether banks mark down these assets in one go or over the remaining quarters of the fiscal. On the business front, loan growth has been lower amid slack demand. Asset quality may once again deteriorate after showing improvement in recent quarters.

CAPITAL GOODS
The continued order momentum from the state government and public sector companies is expected to keep the order books buoyant. L&T, India’s largest infrastructure company, is expected to report 20-35 per cent growth in orders for Q2. It has guided for order inflow guidance of 10-12 per cent for the current fiscal.

CEMENT
Falling demand from infrastructure sector resulted in 6 per cent drop in cement prices sequentially in the September quarter.

Due to the low base effect in the year-ago period, earnings of cement companies may show moderate growth. Large companies are expected to show revenue growth in the range of 8-12 per cent in the September 2019 quarter year-on-year.

Net profits of large-sized companies such as UltraTech Cement, ACC, Ambuja Cements, Shree Cement and Dalmia Bharat are expected to grow by15-50 per cent, following benign crude oil prices and corporate tax cut.

FMCG
Revenue of the FMCG companies is expected to be affected by slow demand while net profit may show the benefit of corporate tax cut. Rural demand remains under pressure. Management commentaries on the demand outlook would be a key factor to watch out for.

IT
Top information technology (IT) companies are expected to report 1-5 per cent sequential growth in dollar denominated revenue. HCL Tech is expected to report the highest topline growth among peers helped by the additional revenue from the acquired business of select IBM products. Slower traction in the global banking and finance vertical may affect topline growth. Investors would keenly watch Infosys for a possible upward revision in FY20 guidance.

METALS
The earnings growth is likely to be muted due to listless volume growth and 6-15 per cent sequential drop in metal prices. The operating profit before depreciation (Ebitda) for steel companies may fall by ?1,000-1,500 per tonne.

PHARMA
Pharma companies are likely to maintain momentum. Sales growth from the US market is gradually picking up. Corporate tax cut may improve profitability of companies including Dr Reddy’s Labs and Cipla. Management outlook on performance of specialty drugs portfolio, volume growth in Indian pharma market and update on regulatory compliance will be key factors.

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