Q3 earnings sail, but DeMo looms on next two quarters

The market's wait to gauge the demonetization's impact on third quarter earnings is almost over.

Companies have posted results for the quarter that ended December 31 that show the impact of demonetization is not as tumultuous as was being feared.

Out of the 26 Nifty companies that have announced results, about two-third have reported net profits that have either exceeded or were in line with the analyst estimates.

While the companies may have ducked the storm, experts say full impact of demonetization will be revealed in the next two quarters.

"Looking at the results of companies like Dabur, Marico, etc, consumption sector including FMCG, two-wheeler, among others, saw a marginal impact," said G Chokkalingam. While 3QFY17 has not seen severe after-effect of demonetization, the impact is likely to be more visible in the next two quarters, he said.

In the third quarter, FMCG sector which depends on lower-end consumption where the flow of currency is critical, saw mixed volume growth, with discretionary sectors like auto, paints, consumer electricals, cement hit the most.

In the Sensex pack, the net profit in healthcare exceeded Street estimates by 25.94% followed by technology 4.12%. On the other hand, oil & gas earnings lagged estimates by 5.80%, basic materials 62.45%, industrials 13.76% and telecommunications 33.14%.

An analysis of the results of BSE100 companies also shows market participants' worries may have been alleviated, if not quelled.

Net profit of consumer goods and healthcare sectors among BSE 100 firms beat analyst estimates 5.84% and 12.23% while financials surpassed 9.38% and technology 4.37%.

Firms such as Dr Reddy's Laboratories beat estimates by 25.94%, Glenmark Pharmaceuticals 30.94%, Tech Mahindra 15.61%, Tata Global Beverages 107.62%, Godrej Consumer Products 7.91%, Kotak Mahindra Bank 12.89%, UPL Ltd 9.88%, HCL Technologies 1.80%, Infosys 4.69% and TCS 5.20%.

However, sectors like oil & gas lagged estimates by 6.74%, telecommunications fell 25.71%, followed by the underperformance of consumer services, industrials and basic materials.

While companies like ONGC, Axis Bank and Coal India posted upbeat results for 3QFY17, Bharti Airtel, Wipro and Hindustan Unilever saw earnings downgrades. Reliance Industries too did not match up to analysts estimates.

The Nifty EBITDA/PAT for the 26 Nifty companies showed an upsurge of 7.9%/2.9% as against the expectation of 6.2%/2.7%. However, the telecom sector underperforming 33.14%, weighed on Nifty with its players dragging the Nifty net profit performance. Automobiles, capital goods and metals reported less than 15% net profit growth. Among sectors that reported net profit fall included stood private banks (9%), retail (15%), telecom (32%) and utilities (93%), as per Motilal Oswal Securities.

"Based on the results of the 16 Sensex companies, we upgrade our Sensex EPS estimates marginally by 0.6%/0.7% for FY18/FY19 to Rs 1,678/2,019. We raise our FY18E EPS for 12 companies (3% upgrade) and cut our FY17E EPS for 30 companies (3% downgrade)," the brokerage said.

With the Budget snapping tax incentives thereby discouraging investments into the second home and limited remonetization, experts see real estate prices as well as demand falling in the near term.

The sales of the remaining companies are expected to grow over 6% driven by PSU banks, oil & gas and metals while Nifty companies are expected to deliver sales growth of 3% year on year, experts said.