Q4FY17 earnings season to kick off soon; these top 8 sectors to be in focus

Earnings season for January-March quarter (Q4FY17), which will be kicked off by Infosys on April 13, is likely to be similar to December quarter. The growth is likely to be driven by banks & metals stocks while technology and healthcare are likely to show dismal performance during the quarter.

According to analysts, there could be some impact of demonetisation on the earnings of automobiles, consumer goods and cement & constructions companies in the quarter ended March 2017.

The market already hit a record high on the Nifty before Q4 earnings getting announced. Hence, it may have partly discounted earnings expectations but the key factor to watch out for would be the outlook for FY18.

Overall, they believe this could be a start to the revival of earnings growth and the faster growth may be seen in the second half of current financial year.

"Q4FY17 is likely to be similar to Q3FY17. Topline and PAT growth of our coverage universe is likely to be 17 percent and 21 percent (Q3FY17: 9 and 17 percent top line /PAT growth)," Edelweiss says.

Akin to Q3FY17, the research firm feels entire profit growth of this quarter is likely to be driven by banks and metals. Excluding commodities and banks, profit growth is likely to contract 9 percent similar to last quarter's contraction (owing to Tata Motors and Telecom) but significantly lower than the steady 10 percent growth seen in past 2 years.

For its coverage universe, Kotak Institutional expects strong 32 percent YoY growth in net income (11.7 percent growth in topline), led by the banking sector, which will likely report strong earnings growth due to the low base arising from the asset quality review (AQR) exercise in Q4FY16. Excluding the banking sector, it expects 8.8 percent YoY growth in net income.

The brokerage house expects net income of the BSE-30 Index to grow 9 percent YoY and 15.3 percent QoQ.

Motilal Oswal says it expects Q4 earnings growth at 11-quarter high but quality remains weak.

"Motilal Oswal universe is expected to post 11-quarter-high earnings growth of 28 percent. However, excluding PSU banks, metals and oil & gas, the universe PAT is expected to decline 5.9 percent YoY. Entire YoY earnings growth of Rs 22,400 crore for MOSL universe in Q4FY17 would be led by PSU banks and metals," it explains.

As for sectors, Edelweiss says domestic consumption (staples, discretionary, autos) and export companies (IT and pharma) earnings are expected to remain subdued. Industrial companies are, however, likely to post a better quarter with double-digit topline growth.

Kotak says it expects YoY decline in the net income of automobiles (weak demand environment, raw material headwinds and increase in discounts), downstream energy (lower refining margins, muted growth in volumes and adventitious losses due to recent correction in crude prices), telecom (continuation of Jio's free offerings) and utilities (weak generation) sectors.

Overall, Edelweiss expects FY17 Nifty EPS growth of 10 percent, a marked improvement over zero in past 2 years. Its FY17/18/19 Nifty EPS is Rs 455/555/660 while Kotak's FY18 and FY19 Nifty EPS estimates are Rs 520 and Rs 608, respectively.

Motilal Oswal cut its FY18/FY19 Sensex EPS estimates by 4 percent to Rs 1,572/1,904. It now expects 1 percent EPS decline for Sensex in FY17, followed by 20 percent growth in FY18 on a low base of second half of FY17.

Here are eight sectors that will be in focus:-

Banks

Kotak says headline earnings growth for the sector will likely be strong due to low base arising from the asset quality review exercise. NII growth of 7 percent YoY will outpace loan growth of 5 percent YoY due to lower interest reversals and excess low-cost liquidity.

ICICI Securities believes NPA accretion for the overall sector will continue in Q4FY17, though pace of addition is expected to reduce.

Kotak sees public banks reporting lower slippages QoQ, but high provisions will continue, but without the support of treasury gains.

Treasury gains which were available in previous quarters, would be absent this quarter as yields have risen by 15 bps in Q4FY17. PNB and Axis Bank will see the most impact of lack of treasury gains owing to their large AFS (available-for-sale) portfolio and high NPA concerns.

Motilal Oswal says PSU banks should report PAT of Rs 3,400 crore (against loss of Rs 14,600 crore in the base quarter), contributing 80 percent of MOSL universe PAT delta in Q4FY17. PNB, BOB and Canara Bank, which reported losses in the previous quarter, are expected to report profits in Q4FY17. BOI and OBC are estimated to post losses.

Private banks are expected to report healthy 18 percent YoY PAT growth – the best in nine quarters. ICICI Bank, RBL Bank, Yes Bank, Kotak Mahindra Bank and IndusInd Bank are expected to post strong performance, while Axis Bank will have a muted quarter, it feels.

Technology

ICICI Securities believes that a bullish thesis on Indian IT services is hinged on three factors — Likelihood of improving demand backdrop in BFSI, higher market share of Indian vendors in downstream digital integration and valuations being lower than 3 and 5-year averages. It is positive on Infosys due to improving execution across board, Tech Mahindra as it has benign valuation and HCL Tech due to higher defensibility of estimates as it has highest exposure to macro agnostic IMS. But, with the recent appreciation in the rupee, it could also cap upgrades to the estimates in the interim.

Meanwhile, "TCS should post healthy growth of 1.8 percent QoQ on account of an expected pick-up in discretionary spends in the BFSI vertical and specific headwinds in terms of Japan, Diligenta, Energy etc., being behind,” it said in its report. It asks investors to watch out for FY18 revenue and growth guidance from Infosys, Wipro and margin guidance from HCL Technologies.

Among key factors to watch, IDBI Capital suggests watching out for FY18 outlook from all major IT firms, strategies to counter US’ visa policy, large deal wins and large clients’ growth, EBIT margin outlook due to rupee’s appreciation, growth in other services like BFSI, telecom, among others.

CLSA expects March quarter to feature some of the seasonal softness but supported by 50-70 bps in forex on revenues that result in a stronger exit to FY18. It expects constant currency (CC) QoQ growth on average of 1.4 percent led by HCL (3.6 percent), followed by TCS (1.3 percent) and lagged by Wipro/Infosys (0.8/0.7 percent).

“We expect Infosys to report the weakest results but guide to 8-10 percent constant currency for FY18. We would look out for signs of cyclical strength, particularly in US Banking, to filter into commentary for FY18.

Telecom

With the continuation of Jio offer, the telecom companies are expected to witness another subdued quarter (Q4FY17) and with the prime membership offer, the performance of the telecom companies will remain under pressure in Q1FY18 as well.

Brokerage houses expect the Bharti Airtel and Idea Cellular to report lower revenues and do not expect share prices to outperform in the near term.

"Continuation of Jio's free offerings through Q4FY17 is likely to reflect in another subdued quarter for listed wireless names even as the in-quarter MoM trajectory was likely better than that in Q3FY17. Sharp focus on cost rationalisation in the wake of revenue weakness should mitigate EBITDA erosion a tad but not much," Kotak says.

Motilal Oswal has cut revenue estimates by 5-6 percent and EBITDA estimates by 12-15 percent for Bharti and Idea in Q1FY18.

It says telecom sector would report PAT decline (around 85 percent YoY), despite the low base (PAT was down 2 percent YoY in Q4FY16). PAT of Rs 430 crore for its telecom universe is the lowest in multiple quarters.

Meanwhile, the free offer from Reliance Jio's will held them to hold subscribers and that will support earnings from FY19.

(Disclosure: Reliance Industries, the parent company of Reliance Jio, owns Network 18 and Moneycontrol.com.)

Auto

Motilal Oswal says autos would report one of the weakest performances, with 32 percent YoY PAT decline (worst in 20 quarters). Excluding Tata Motors (which is expected to post 74 percent YoY PAT decline), autos should post 2 percent YoY growth.

Kotak forecasts net profit of companies in its coverage universe to decline by 10 percent YoY, driven by 2 percent YoY revenue growth and 11 percent YoY decline in EBITDA. Revenue growth of companies under its coverage, excluding Tata Motors will be 7 percent YoY but EBITDA margin will likely decline by 80 bps YoY due to increase in commodity prices and higher discount levels.

"Auto coverage universe (ex-Tata Motors) is expected to witness revenue growth of 7.5 percent YoY in the quarter as volume de-growth of 1 percent will be offset by higher realisations. The volume decline is attributable to carry forward effect of demonetisation," ICICI Securities says.

Eicher Motors, Maruti Suzuki and Escorts are expected to stand out with 29 percent, 17 percent and 69 percent growth, respectively, Motilal Oswal says.

Metals

Metals would have a bumper quarter, reporting PAT of Rs 9,100 crore (up 2.8x YoY) and highest absolute PAT in 19 quarters, says Motilal Oswal.

ICICI Securities says, on a sequential basis, it expects EBITDA per tonne of steel players to remain flattish or decline marginally QoQ, while non-ferrous players are likely to report increase in their margins YoY on the back of healthy increase in realisations.

On a sequential basis, steel players undertook price hikes to the tune of around Rs 2000-2500 per tonne (price hike of around 6-8 percent QoQ). However, that did not fully compensate for the rise in prices of key raw materials, especially coking coal. Hence, it expects the EBITDA per tonne of major steel players to remain flattish or marginally decline sequentially.

Kotak says in case of ferrous, it expects the sequential increase in domestic steel prices (and export prices) to more than offset cost increases for domestic steel makers—cost increases largely relate to higher coking coal costs (lagged effect of inventories) & iron-ore.

Kotak expects EBITDA per tonne for steelmakers to increase marginally by 1-4 percent QoQ. This, combined with higher seasonal Q4 volumes, will result in 9-28 percent QoQ (71-105 percent YoY) increase in EBITDA for Jindal Steel & Power, JSW Steel and Tata Steel.

It estimates net income of Rs 1,020 crore for Tata Steel, Rs 900 crore for JSW Steel and net loss of Rs 400 crore for JSPL. It expects NMDC's EBITDA to increase by 46 percent QoQ to Rs 1,500 crore aided by higher volumes and realisations.

Motilal Oswal says Hindustan Zinc, Vedanta and Tata Steel are expected to post strong results.

Pharma

Pharmaceutical companies were under pressure through the year, largely due to regulatory issues from the US FDA. Major names such as Aurobindo Pharma, Sun Pharma, Wockhardt, among others, were in the limelight for the same.

Analysts also expect the sector to be under stress and expect not very strong set of numbers for the fourth quarter.

Motilal Oswal expects pharma sector to report low double digit EBITDA growth in Q4 of FY17 on the back of pricing pressure and higher R&D expenditure.

“Increased US regulatory scrutiny is resulting in higher remediation expenses and de-risking of key products. This, in turn, should weigh down on operating margins for our coverage universe,” the brokerage house said in its report.

Meanwhile, the domestic pharma business is expected to face headwinds from seasonal weakness and demonetization. Although the chronic business may benefit at the margin due to demonetization, the acute segment may be see some impact in the near term, the brokerage said in its report.Its top picks from the sector are Aurobindo, Sun Pharma, Fortis and Granules.

On the other hand, Kotak expects domestic formulations growth to be strong across the industry. “We expect US to be under pressure as lack of meaningful approvals, competition in existing products and FDA issues for certain companies will impact growth,” the report added.

Oil & gas

ICICI Securities says oil & gas universe is expected to witness 45.3 percent revenue growth mainly due to stronger growth in oil marketing companies on the back of increase in crude prices. The average Brent crude oil prices remained higher QoQ (9 percent) at USD 54.6 a barrel in Q4FY17 against USD 50.1 per barrel in Q3FY17.

This would lead to improvement in realisations of upstream oil companies QoQ, it says.

Motilal Oswal expects oil & gas to report healthy 16 percent YoY PAT growth – fourth consecutive quarter of double-digit growth. IOC, Indraprastha Gas, GAIL, ONGC and Petronet LNG are expected to report strong performance, according to the research house.

Kotak expects Oil India and ONGC to report sequential increase in EBITDA, driven by higher crude oil realisations amid steady volumes and higher other income due to dividend receipts from IOC; however, reported net income will be impacted by prior period onshore royalty adjustment as per recent Supreme Court order. It expects GAIL to benefit from increase in contribution of commodity businesses due to higher LPG realisations and increase in petchem production from PATA II.

It expects Reliance Industries to report sequentially steady EBITDA despite weak refining margins, reflecting an increase in petchem production volumes. It expects oil marketing companies to report weaker profitability, led by lower refining margins, muted growth in volumes and adventitious losses due to recent correction in crude prices.

On the subsidy sharing front, ICICI Securities expects PSU companies to bear nil subsidy during the quarter and the entire oil under-recoveries will be borne by the government.

Capital Goods

Capital Goods would be in focus with the government looking to increase its focus on spending on affordable housing.

But growth in the last quarter of the last fiscal could be somewhat muted in some areas, analysts feel.

ICICI Securities said that the sector is expected to witness 6 percent revenue growth on the back of pick up in execution while order inflows have picked up across segments (barring power BTG segment). Meanwhile, product companies are expected to exhibit muted topline growth of 2.3 percent YoY on account of weak volume growth in auto segment (2W, 3W and MHCV’s)

“L&T is expected to deliver decent revenue growth of 8% YoY coupled with expansion in margins and resultant PAT growth of 6%,” the brokerage said in its report.

Kotak believes overall growth for industrial companies would be subdued as private sector capex remains muted amid low capacity utilisations and is unlikely to revive before FY19. “L&T's revenue growth would be driven by infrastructure and hydrocarbon segments (overseas) with weakness likely to be seen in other segments,” it said in its report.

Companies that are geared more towards government spending (railways, roads, renewables and T&D) would have some cushion to support growth.
Motilal Oswal expects the sector to post muted performance with flattish PAT excluding BHEL. “BHEL is expected to post 3 times jump in PAT YoY, which should aid sector PAT growth of 15 percent,” it said in the report.