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ET Intelligence Group: After a dip in the previous quarter, aggregate net profit of the Nifty50 companies is expected to catapult in the December 2019 quarter due to lower comparable base a year ago, lower corporate tax rate, and better performance by select banks and finance companies amid lower provisioning towards bad loans.
The top line growth, however, is expected to be modest amid demand slack and higher base a year ago.
Although the downward trend seems to have bottomed out, analysts do not expect a major turnaround anytime soon.
According to the ET Intelligence Group’s estimates, net profit of the Nifty 50 companies is likely to jump by a ninequarter high at 55.2 per cent year-on-year in the December quarter compared with 12.2 per cent drop in the previous quarter as several companies fully adjusted for the deferred tax assets in the aftermath of the government’s decision in September to cut corporate tax rates.
Profits had fallen sharply by 23.5 per cent in the year-ago quarter.
The actual profit growth will depend upon the extent of deferred tax adjustments by companies.
Net sales may increase by 3.6 per cent in the September quarter on a higher base of 24.1 per cent growth in the year-ago quarter.
The operating margin may expand by 240 basis points to 18.6 per cent.
“We expect the repeat of the second quarter performance.
The topline may continue to drop for our universe of companies while net profit is likely to grow by 12 per cent boosted by corporate tax cuts in the December quarter,” said Gautam Duggad, research head of institutional equities, Motilal Oswal Financial Services (MOFSL).
The pressure on revenues will continue given the sluggishness in consumer as well as industrial demand.
“Going by the weak IIP and core infra numbers for October and November, weak corporate advance tax collections for the December quarter though in part due to corporate tax rate cut and the low GDP forecast for FY20, the Q3 corporate revenues and profits may not be too exciting.
However most of this negativity is (captured) in the (stock) prices,” said Deepak Jasani, retail research head, HDFC Securities.
While there are signs of demand revival, analysts are observing caution.
Duggad believes that though the declining trend in the corporate performance may have bottomed out, it would be too early to draw a conclusion.
“We see mixed signals.
For instance, auto demand improved in November but fell again in December.
The volume of bikes sold was poor.
Though things may not deteriorate much from hereon, the recovery will be rather gradual than quick,” Jasani said.
Analysts are not in a hurry to revise earnings estimates aggressively.
MOFSL’s FY20 Nifty50 earnings per share estimate has remained more or less stable at Rs 535 compared with Rs 530 at the end of the previous quarter.
This is 10 per cent higher than Nifty’s FY19 EPS of Rs 480.
SECTORAL EXPECTATIONSAutomobiles: Volume growth appears to be bottoming out for the passenger vehicles segment, but the pressure has continued for two-wheelers and commercial vehicles.
The realisations are likely to be subdued due to the record festive discounts and high promotional activity.
This will weigh on the revenue of the automakers, while profit growth is likely to supported by the corporate tax cut.
Banking and finance: Select private sector banks are likely to report lower bad loan growth.
ICICI Bank and Indusind Bank are expected to report higher profit growth.
State Bank of India may report fresh slippages in the aftermath of the DHFL bankruptcy.
Nonbanking lenders including HDFC and Bajaj Finance are expected to report robust bottomline growth.
Capital goods: The order activity and execution has moderated owing to lower capital expenditure by the states and the Union Government.
The orders from the state governments which were prime drivers for the pick-up in the execution earlier have turned wobbly following order reviewing activity of some of the state governments including Andhra Pradesh and Maharashtra.
The management commentary of L-T regarding the order growth guidance which is currently 10-12 per cent for FY20 will be keenly watched by the Street.
Cement: Cement prices increased by 4 per cent year-on-year in the December 2019 quarter to Rs 337 per 50 kg bag.
Since the fall in cement prices was higher in FY19 than in FY20 till date, cement companies may record higher revenue growth in comparison with the last year's December quarter.
Large companies such as Ultra-Tech Cement, Ambuja Cements, ACC, and Shree Cement are expected to record 7-16 per cent growth in revenues in the December 2019 quarter.
Lower per coke prices are likely to help these companies to report 85-96 per cent growth in their earnings.
FMCG: While the topline growth will be impacted by the low sales volumes, the bottomline growth will continue to be healthy — aided by cut in the corporate tax rate.
The volume growth will be subdued despite the festive demand boost in consumer buying given the slowdown in rural demand.
Despite this, most FMCG companies are likely to maintain their profit margins due to rationalisation of expenses and lower corporate tax.
IT: Top IT companies are expected to report 1.5-3 per cent growth in dollar denominated revenue.
Wipro and Tech Mahindra will benefit from the inorganic revenue stream and may report better revenue growth than peers.
The management commentary on the demand trend in the banking and financial vertical, which is a major source of revenue for Indian IT companies, will be critical.
Infosys is expected to revise its FY20 revenue guidance upwards.
Metals: Metals companies are expected to post a strong quarter after weak first half of FY20.
After a consistent fall in the first six months of the fiscal, domestic steel prices have risen by 10 per cent since its lows in September.
In addition, the benefit of fall in raw material (iron and coking coal) prices in the second quarter will benefit the companies in the current quarter due to lag effect.
This is positive for JSW Steel, Tata Steel, JSPL and SAIL.
The trend is similar for aluminium as well, a positive for Hindalco.
Aluminium prices are up 7 per cent in the past three months.
However, zinc prices remained flat, which may lead to a flat set of numbers for the largest zinc producer, Hindustan Zinc and Vedanta, its parent company.
Pharma: Pharma companies are likely to post subdued growth in the quarter to December.
Pricing pressure in the US generics market, price control concerns in the domestic market and USFDA regulatory woes will continue to impact the performance.
Measures such as cost cutting, rationalisation of R-D expenditure and exiting from low-margin products are likely to aid margin growth.
