Rupee, rising costs to keep India Inc growth tepid in Q2

Information technology, commodities and retail banks would drive profits in July-September quarter of this fiscal while the overall earnings of the corporate sector will remain tepid, according to stock brokerages.

In its earnings preview, Edelweiss Securities said the second quarter is expected to be tepid with year-on-year profit growth for companies in its coverage universe likely to rise 3% and for ex-commodities and corporate banks likely to contract 1%.

"This weakness is attributable to rising base and headwinds from input prices, and interest expenses rising ahead of growth cycle. The slowdown in profit growth is broad-based with rupee, interest rate and input prices being the swing factors," the report said.

According to the Edelweiss report, over 15% profit growth is expected in commodities, retail banks and non-banking financial services, while domestic autos, pharma, cement and industrials are likely to post flat profit growth. Domestic auto has posted 20% of average growth over the last four years, it said.

A deep profit contraction is anticipated for sectors such as telecom, airlines, corporate banks and export auto.

Phillip Capital India Research in its preview said the highest profit after tax growth will be seen in IT, NBFC, FMCG, speciality chemicals and capital goods while pharma, infra, cement, automobiles and banks will see contraction. However, FMCG earnings will be a "drag" in the second quarter due to the goods and service tax (GST) led high base and inflationary pressures.

"Rupee weakness to benefit IT services and pharma (revenues), pharma earnings would remain weak," it said.

For financials, margins will remain under pressure due to no major resolutions, while credit growth would gain momentum. NBFCs' earnings growth is likely to be strong at 36%, aided by low base. For pharma, revenues will benefit from currency weakness, but operating performance will be weak due to ongoing price pressure in the US generics business and higher raw material costs due to Chinese supply disruption.

Retail banks will continue to report strong performance with net interest income (NII) growth of 19% year on year. NBFCs and retail (unsecured) will keep driving credit growth. Working capital loans have seen increasing demand due to rising commodity prices while hardening of interest rates is resulting in some shift from credit substitutes to the loan portfolio. While slippages will be similar to the first quarter, higher slippages are expected from corporate and moderation in retail and agri, Phillip Capital report said.

Kotak Institutional Equities Research in its earnings preview said net income for its coverage universe is likely to be flat for Q2FY19. It expects strong growth in the net income of consumers with continued volume-led sales growth aided by a modest margin expansion, technology with rupee depreciation aiding the revenue growth in a seasonally strong quarter and upstream energy companies. A weak quarter is expected for automobiles, banks and telecom, the report said.

The Kotak report expects net income of the BSE-30 Index to increase 2% year on year and that of Nifty to increase 3% yoy.

Edelweiss in it report said that Nifty companies are estimated to post PAT growth of 6% yoy versus 8% yoy in Q1FY19 and the numbers are in line with expectations, the PAT growth for the first half of the fiscal is likely to 7% y-o-y, which is much lower than the full year FY19 earnings per share consensus growth of 23%.