Lenders halve Nifty earnings show in June quarter

Financial companies, including banks, are being a lingering drag on the overall Nifty earnings.

Classified as BFSI (banking, financial services and insurance), these firms have more than halved the profit growth of the Nifty 50 universe.

In the quarter ended June 30, 2018, net sales of 40 non-BFSI (out of Nifty 50 companies) grew 23.2% year on year (YoY), whereas their net profit grew 21.3%.

In contrast, net interest income (NII) of 10 BFSI firms grew 20.4% YoY, but their bottomline or net profit declined by a whopping 47.4%.

Combining the profit of 40 non-BFSI and 10 BFSI companies, Nifty profit growth would be a mere 5.9%, says Jagannadham Thunuguntla, senior vice president and head of research, Centrum Wealth.

This has also inflated the overall market valuations. Nifty's market valuation is arrived at by dividing Nifty current level (say 10,000) by Nifty profit per share number (say Rs 500). So, valuation is 20 times. Now, if the total Nifty profit is lower, say Rs 400, due to losses by BFSI firms, then automatically Nifty market valuation number looks bigger at 25 times.

Valuations of a market are determined by trailing profit and also future expectations. With some banks disappointing on the back of higher provisioning along with slippages and mark-to-market losses, the overall picture looks worse than it is. If BFSI contribution was not taken into account, there would be healthy double-digit profit growth for the Nifty universe.

The best performing BFSI in this quarter is yet again Bajaj Finance, in both in NII and net profit terms. "The biggest deterioration in net profit terms among BFSI stocks was seen again in State Bank of India (on the back of lower trading income and higher mark-to-market losses), where this bank has posted loss for the third consecutive quarter, of Rs 4,876 crore. In the private sector banks, Axis Bank reported a profit decline of 46% to Rs 701 crore and ICICI Bank reported its first quarterly loss (since its initial public offering) of Rs 120 crore," said Thunuguntla.

In the non-BFSI segment, the best-performing companies are Grasim Industries (in net sales terms, second quarter in a row) and Dr Reddy's Laboratories (in net profit terms). Adani Ports & SEZ was the worst performer in terms of net sales and Tata Motors, which reported a loss on the back of challenges faced by its subsidiary Jaguar Land Rover in the UK, was the worst performer in terms of net profit.

Of the Nifty 50 companies, 13 companies (26% of the set) have reported numbers above expectations, 11 companies (22%) have reported results in-line with expectations, 14 (28%) have reported a mixed set of numbers and 12 (24%) have reported numbers below estimates.

With pressure on rupee now mounting, future earnings expectations are likely to see some impact.

UBS says that the impact of INR fall is mixed – while 5% fall would push up inflation by 10-15 basis points, the impact on growth would be favourable, given the boost to net exports. "The earnings impact is actually fine. A 10% increase in oil prices is likely to keep Nifty earnings unchanged while currency depreciation drives higher earnings. However, the Nifty has generally underperformed relative to emerging markets during periods when oil prices rise more than 10% and also when the INR depreciates >5% in the near term," points out Gautam Chhaochharia, analyst, UBS Securities India.

RESULTS ANALYSIS

• Biggest deterioration in net profit terms among BFSI stocks was seen in SBI, which posted Rs 4,876 crore loss on the back of lower trading income and higher mark-to-market losses
   
• In the non-BFSI segment, the best-performing companies are Grasim Industries in net sales terms (second quarter in a row) and Dr Reddy's Laboratories in terms of net profit
   
• 26% of Nifty companies reported numbers above expectations, 22% posted results in-line with expectations, 28% reported a mixed set of numbers and 24% saw numbers below estimates