Post China burns, market braces up to face Q3 earnings monsters

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Moneycontrol Bureau

After China debacle, brace up for another monster waiting to gulp down few more moolahs in domestic market. Most analysts feel October-December quarter results are likely to show tepid recovery and earnings recession will continue. Sentiment is already at a low, unable to withstand Chinese, Indian market sinking to 52-week low in the beginning of 2016 itself. Last week, the Sensex tumbled 4.7 percent and the Nifty crashed 4.5 percent following geo-political tensions, China fears, and multi-year low by crude oil prices.

How bad will be third quarter of FY16?

Crisil thinks Q3 will be sixth consecutive quarter of single-digit topline growth. It expects Q3 revenue growth to be tepid at 2 percent and sees a 60-70 basis points (bps) decline in the overall EBITDA margins.

Ambit has cut FY16-end Sensex target to 26500 and set FY17-end Sensex target to 29,000 based on single digit earnings growth for FY16 and FY17 amid a 6.8 percent GDP growth in FY17.

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In Q3, companies under Antique's coverage universe, including oil and gas, are likely to post a revenue decline of 5.8 percent year-on-year. It expects topline to contract yet again (5.8 percent down Y-o-Y), with weakness across most sectors. However, margin growth is once again expected to pick up slack with a whooping 200 basis points (bps) EBITDA margin gain, driven largely by oil and gas.

Antique’s 12 months Sensex target of 30800 and warns that earnings downgrades to continue while FY17 outlook will hold key for the market. “We also believe that at the macro level, reforms in sectors which do not require a legislative framework have witnessed a decent traction and will continue to support growth,” it says in a report.

All is not that bad!

Edelweiss says that revenue and profit may remain flattish but EBITDA margins may improve over the past three quarters. The brokerage feels that consumer discretionary and private banks are likely to drive earnings in December quarter. 

“Excluding commodities, top line and bottom line growth will be better at 7 percent and 9 percent YoY, respectively, higher than past four quarters’ run rate of 4‐5 percent. EBITDA margin of our coverage universe is estimated to improve 40‐50 bps Y-o-Y and Q-o Q predominantly led by domestic consumption, while export sector’s margins are likely to contract, “ it adds. 

Good & bad sectors

Adding to woes will be Chennai floods which will impact earnings of  consumer discretionary sectors , IT services, auto components and engineering while commodity prices are likely to hurt topline growth of steel, petrochemicals, and commodity chemical producers.

Crisil further warns that steel, housing, IT services and pharmaceuticals sectors are likely to see an overall decline. It expects IT revenue growth in the range of 10 percent and sees moderate 13 percent revenue growth in pharmaceuticals

According to Crisil, export-linked sectors to be the only bright spot in terms of topline growth and media, retail, & telecom sector to post healthy double-digit topline growth. It estimates EBITDA margin for the cement sector to improve by 200-220 bps and 50 bps improvement for automobile players.

Ambit has downgraded outlook for technology, capital goods and real estate dependent sectors. Auto is the only sector it has upgraded. Its largecap buys are ITC, HCL Tech, Coal India, Ashok Leyland and recommends selling UltraTech Cements, BHEL and Hindalco.

Antique also feel that margins are expected to expand by 200 bps annually with the largest increases being in oil and gas, although automobiles and industrials are also likely to post decent upticks.

“We expect banks especially PSU to post only a moderate growth, wherein regulatory directives such as the one to clean up the balance sheet will increase provisioning. Private banks are expected to maintain their healthy earnings trajectory. However, fresh slippages could surprise negatively,” Antique adds.

Antique's top picks are HDFC Bank, ONGC, Tata Motors, Ultratech Cement, Power Grid, YES Bank and Ashok Leyland among others.

Though, Edelweiss sees an uptick in growth, it feels commodities, auto exports (Tata Motors) and PSU banks are likely to clock a soft quarter with profits continuing to contract in teens. Domestic consumption, especially autos is likely to report strong EBITDA and profit growth due to superior margins. Private banks are likely to report decent growth in teens—mirror run rate of past 3‐4 quarters.

Currency war, crude volatility coupled with weak Asian markets and tepid December quarter are likely to keep market under lot of pressure. Vikas Khemani of Edelweiss Securities people are struck with panic and fear about future because of yuan devaluation and next 3-6 months will be volatile.

Vivek Gupta, CapitalVia Global Research says macroeconomic data, trend in global markets, investment by foreign institutional investors, movement of rupee against US dollar and movement of crude oil prices will dictate trend of the market in near term and also CPI, IIP data to be announced on January 12 and WPI data to be announced on January 14.Follow @NasrinzStory