Brokerages see profits growing 12-20%, sales at around 15-18% from a low base in October-December quarter
The corporate earnings scorecard for October-December quarter is expected to provide a further leg-up to the rip-roaring rally in the Indian stock markets, which have shot up despite adequate earnings support.
With benchmark indices now ruling at new record highs amid above-average valuations, investor expectations are sky-high.
A survey shows that top brokerages expect third-quarter sales growth to be between 15% and 18%, while profit growth is anticipated to be between 12% and 20% year on year (YoY).
For Nifty-50, topline is expected to grow 15-20%, helping the bottomline expand by 12-18%. All this indicates that earnings are set to rebound from a low base – demonetisation had impacted select business-to-consumer (B2C) sectors in the same quarter last fiscal.
Commodity companies are expected to post solid topline growth owing to rising commodity prices. Domestic consumption oriented sectors (excluding telecom), such as auto and consumer would post double-digit topline growth after many quarters. Exportoriented sectors like IT and pharma would remain soft. In banking, while credit growth is higher, it will be partially offset by lower investment gains as bond yields have risen in last 34 months, say analysts.
The glass is half-full for many. So market experts are preparing for the end of a long drought in earnings as revival seems to be finally on the horizon.
Motilal Oswal Securities sees the profit growth (after tax) of its stock coverage universe growing 19.6% YoY, the second highest growth print after June 2014. While defensive sectors are expected to post the fifth consecutive quarter of profit decline dragged by IT and healthcare, global cyclicals will post 41% YoY growth in profit after tax (PAT), led by metals, oil & gas. Sales growth is seen coming in at 16.2%, the highest in 21 quarters, led by auto, cement, metals, oil & gas and mid-caps.
"We expect Nifty sales, Ebitda (earnings before interest, tax, depreciation and amortisation) and PAT to growth 16.5%, 11% and 18%, respectively. The estimated 18% profit growth for Nifty, if delivered, will be the highest in 14 quarters," said Gautam Duggad, head of research, Motilal Oswal Securities.
Kotak Institutional Equities expect 3QFY18 net income of its stock coverage universe to grow 12% YoY from a low base in 3QFY17 (affected by demonetisation). It expects double-digit growth in the net income of automobiles (volume growth on a low base and margin improvement), cement, consumer products (low base, cost-saving initiatives, operating leverage and good & services tax-led savings), energy (significant adventitious gains for oil marketing companies due to rise in crude prices), industrials, metals & mining (higher realisations) and non-banking financial companies (festive demand pickup in auto and consumer durables) sectors.
"We model year-on-year decline in the net income of PSU banks (lower treasury contribution on higher bond yields and elevated loan-loss provisions), pharmaceuticals (continued pricing pressure in the US) and telecom (sharp cut in mobile termination rate) sectors," said Sanjeev Prasad, co-head and managing director at Kotak Institutional Equities. The brokerage projects Nifty constituents' third-quarter profit growth at 15.4% YoY on the back of 15.7% jump in sales.
It is clear that the earnings recovery momentum is likely to accelerate in Q3FY18. Edelweiss Securities estimates PAT of its 230-strong coverage companies to grow 14% YoY. Nifty companies are estimated to report topline, Ebitda and PAT growth of 20%, 12% and 12% YoY, respectively, according to Edelweiss Securities.
"What is more encouraging is that earnings would be more broad-based with even our coverage universe, for example banks and commodities, likely to post 9% profit growth after contracting for four quarters. Undoubtedly, though low base will be at play, things seem to be improving. Autos, metals, and consumers would drive earnings, while cement, IT, pharma and OMCs (oil marketing companies) would be laggards," said Prateek Parekh, an analyst at Edelweiss Securities.
For investors, key things to track include: hit on banks' treasury income (owing to higher interest rates), the impact of higher commodity prices on gross margins of consumer companies, GST-related issues and foreign exchange impact on exportoriented sectors such as IT and pharma.
...& ANALYSIS
- A survey shows that top brokerages expect third-quarter sales growth to be between 15% and 18%
- Commodity companies expected to post solid topline growth owing to rising commodity prices
- Excluding telecom, domestic consumptionoriented sectors such as, auto and consumer would post double-digit topline growth
- Export oriented sectors like IT and pharma would remain soft
- In banking, while credit growth is higher, it will be partially offset by lower investment gains as bond yields have risen in last 34 months
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