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India Inc to continue with dismal profit run in Q2, margins to slip: Analysts

Dismal show of previous three quarters to continue

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As markets trade near all-time highs, all eyes are on corporate earnings that can justify high valuations.

Market analysts project 8-12% revenue rise and 5-9% earnings growth for listed corporates as a whole for the second quarter ended September 30, with 30 Sensex companies on an aggregate basis posting lacklustre growth while Nifty-50 showing 8-9% profit rise. The estimates indicate an unchanged story just like previous three quarters, as operating environment remains challenging for most. Banks and commodities are likely to be the only large sectors reporting profit growth owing to base effects, say brokers.

Kotak Institutional Equities is modelling a 5.7% year on year (yoy) growth in net profits of its stock coverage universe, led by strong growth in consumers (restocking post GST-implementation and early/strong festive season), energy (higher refining margins and large adventitious gains for downstream companies), industrials and metals & mining (higher realisations and consequent improvement in profitability) sectors. Sanjeev Prasad, co-head and managing director at Kotak Institutional Equities says, "We expect net income of the BSE-30 Index to decline 4% yoy while that of the Nifty-50 Index to increase 8.4% yoy, led by strong earnings growth in the downstream companies.

As per ICICI Securities, among Sensex firms the five companies that top the charts in terms of profitability growth include Axis Bank (lower provision year on year), Power Grid (higher asset capitalisation), Cipla (growth in Indian & European business and lower exposure to US business), Gail India (improved performance of LPG business) and HDFC Bank (credit growth and steady asset quality). The bottom five companies include Bharti Airtel, ONGC, & Maruti Suzuki. "The trend of sharp price erosion in the US and absence of meaningful launches continued for pharma giants like Sun Pharma and Lupin," it said. For its entire stock universe (ex-BFSI and oil & gas), i-Sec projects revenue growth of 8.8% yoy, primarily driven by sectors like metals & mining (+20.9% yoy), auto & ancillary (+13.2% yoy) and FMCG (+7.8% yoy). "Operating margins (ex-BFSI and oil & gas) may contract 18 basis points yoy to 19.9% while earnings are expected to grow 6.7% yoy," the domestic brokerage said.

Foreign brokerage Morgan Stanley believes earnings growth in the quarter ended September could be spotty for domestic sectors given the impact of GST-related inventory changes. "Demand, in our view, is seeing signs of recovery...QoQ earnings are likely to be better, albeit earnings revisions breadth has remained negative, suggesting that sell-side estimates have been too high," cautions Morgan Stanley analysts Ridham Desai and Sheela Rathi.

Edelweiss projects that Q2 earnings will show the effects of an operating environment that remains challenging. "Hence, we foresee 232 companies under coverage clocking yet another quarter of weak earnings growth (5% yoy), relatively better top line (up 12%) and moderate margin (-72 bps). Profit is likely to fall in contraction zone if one excludes base effect driven commodities (profit up 35%) akin to Q1 of FY18. The fact that earnings are not improving despite ebbing disruptions and an early festive season is a tad disappointing and is certainly lagging market expectations of 10% Nifty EPS growth in FY18 (H1FY18E: +1%)," notes Prateek Parekh, analyst, Edelweiss.

With earnings expected to be soft, market participants are positioning themselves suitably. "There is a time for offence and a time for defence. Heading into what appears to be a vulnerable earnings season, our strategy is titled towards including a bit of defence. Sectors exposed to financialisation look likely to do well, says Sunil Sharma, chief investment officer, Sanctum Wealth Management.

Sales growth for Emkay stock coverage universe (excluding financials and oil & gas) is expected at 10.2% yoy in Q2FY18 from 5.9% yoy in Q1FY18. Ebitda growth is expected to improve to 9.9% yoy (vs 3.6% decline in Q1FY18) while adjusted profit after tax is estimated to grow by 9.4% yoy (versus a decline of 9.6% yoy in Q1FY18). "Ebitda margins in Q2Y18 is expected to see a decline of 6 bps, reflecting weak pricing power. This decline is expected to be contributed by sectors like Telecommunications (-455 bps), Pharmaceuticals (-415 bps) and IT services (-164 bps)," says Dhananjay Sinha, head, institutional research, economist and strategist, Emkay Global Financial Services.

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