Continuing demand slowdown, price fall would see revenue and net profit at Nifty 50 companies grow slow in December quarter; rebound likely in Q4
The hurdles
IT-- Cross currency movements to hit
Metals-- to face output drop
FMCG-- Fall in discretionary spending to hurt
Banking-- Build up of bad assets
Hope in Q4
A spike in demand will lead to an improved operational leverage
Financial leverage will start kicking in
The earnings season in the New Year kicked off with a bang, thanks to stronger-than-expected numbers posted by Infosys.
But the cheer may not last long as overall corporate earnings for the December quarter are likely to be muted with sectors such as cement, utilities, capital goods, engineering, metals and mining turning out to be laggards.
Car makers, private banks, select non-banking finance companies, and home loan companies, however, will outshine.
Rakesh Arora, associate director at Macquarie Capital Securities (India), said the estimated net profit and revenue growth of Nifty 50 companies will be 7% year on year, the market was likely to consolidate in the near term.
The net profit and revenue growth was 15-20% in the comparable period year on year, but is a substantial rise over 3-2% in the sequential quarter.
Dipankar Choudhury, head - institutional research, Centrum Broking, said the metal manufacturers will face brunt of free fall in their output price as compared to the drop in iron ore cost.
Although the gap between the two reduced in fag end of the December quarter, it will have a bearing on the numbers of metal companies, he said.
Though it started on strong footing, the IT sector will witness an overall weak quarter, with TCS posting the strongest net profit growth as compared with its peers, said Amar Ambani, head of research, IIFL. The cross currency movements will also have a negative impact on the earnings of the exports- oriented IT sector.
On the fortunes of FMCG sector, Ambareesh Baliga, market expert, said, "The volumes will suffer due to a fall in discretionary spending; thus it won't be able to witness the benefits of a fall in commodity prices."
In the banking sector, there is a build up of bad assets which has led to margin pressure and quality of assets getting stressed. The credit growth, which is one of the best indicators of the economic situation is at a decade low, shows signs of a demand slowdown, said Choudhury of Centrum.
But amidst a gloomy scenario, experts said recovery is in sight.
A spike in demand will lead to an improved operational leverage as the fixed components of the plants will be better utilised. Also, with the interest rates softening, the financial leverage will also start kicking in.
Arora sees earnings picking up in March quarter as historically 32% of the full-year earnings are garnered during this period.
Ambani said a low base will act as a positive factor and we could expect earnings growth of 18-20% in next one or two years. The future for pharma sector looks positive as the companies could see traction in Middle East, Latin America and other emerging markets where they have major presence.
Baliga said the government spending and the budget will be the two major factors that will showcase the governments intent on improving growth and thus help the earnings improve.
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