Nasrin Sultanamoneycontrol.com
Amid growing turmoil in Eurozone and China, Indian equities are readying for what looks to be yet another disappointing earnings season.
Weak commodity prices, delayed capex recovery and soft rural demand are the key factors that will weigh on June quarter corporate earnings, says CRISIL Research.
Stock prices have been resilient to much of the global bad news over the last few days, but experts caution that lackluster earnings growth could hold back investors from betting big money on India.
"Our analysis of 600 companies (excluding financials and oil & gas), which account for 70 percent of overall market capitalisation, shows only a mild 3 percent uptick in revenue growth,” says the CRISIL note.
Quarter-on-quarter, this growth works out to 0.93 percent, a tad better than the 0.7 percent sequential growth for the March quarter.
Earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins could shrink 70 basis points year-on-year, estimates CRISIL.
Bank of America Merill Lynch sees Sensex consolidated profit growth to be a mere 0.3 percent. Excluding financials, aggregate profit is seen falling 4.4 percent. The brokerage forecasts a 2.8 percent decline in aggregate sales of Sensex companies, the third consecutive quarter of contraction.
The sluggish earnings growth spells bad news at a time when Indian equities are not exactly cheap.
“Both Nifty and Sensex are trading at about 18 times March 2016 (earnings); so clearly valuations are on the higher side,” Sanjeev Prasad of Kotak Institutional Equities told CNBC-TV18 earlier this week.
“More importantly when you look at valuation by sector then most of the growth stocks that you want to own in India are very expensive,” he said.
But one also has to bear in mind that the overall Sensex growth could be dragged down by a handful of companies.
“Profits are expected to be dented primarily due to metal companies and Tata Motors," broking firm Edelweiss said in its note to clients. The broking firm expects Sensex companies’ topline and bottomline to decline 2.7 percent and 2.4 percent respectively, year-on-year.
Tata Motors is expected to be hurt by weak demand for luxury cars in China over the last couple of months, and this trend could persist for a while because of the slowing economy, say analysts tracking China’s auto sector.
Silver Linings
But it is not all gloom out there, say analysts. According to Bank of America Merrill, aggregate EBITDA margins for Sensex companies are expected to expand 75 basis points year-on-year.
Edelweiss points out that if commodity companies were to be excluded, topline growth will be a more respectable 7 percent year-on-year.
CRISIL is betting on sectors like telecom and petrochemicals to report a better performance. Analysts at Morgan Stanley say domestic sectors in general will fare better than companies with a global exposure.
“On a sectoral basis, estimates suggests that energy (namely oil PSUs), consumer discretionaries, industrials, telecoms and utilities will report better growth numbers versus the previous quarter,” says the Morgan Stanley note, while cautioning that the earnings growth recovery is still a quarter away.
Likely best and worst performers
According to BoAML, banks (HDFC Bank, Axis Bank), telecom (Bharti) are expected to lead the growth and metals (Tata Steel) industrials (L&T) and autos may drag growth. Among Sensex companies Cipla, BHEL, ONGC, HDFC Bank and Bharti are expected to be the key growth drivers. On the other hand Tata Steel, GAIL, Sun Pharma and L&T are likely to be laggards.
CRISIL feels that rural consumption will continue to drag, in turn hurting companies heavily dependent on hinterland such as FMCG, tractors, and motorcycles.
“The FMCG sector reported just over 7 percent topline growth in the fourth quarter ended March 31, 2015,” says the CRISIL note.
“We do not foresee growth outpacing in the quarter ended June 30, 2015. Likewise, tractor manufacturers are expected to witness a 20 percent decline in sales volumes," the note says.
Edelweiss sees capex cycle picking up with engineering and capital goods to log 3 percent Y-o-Y topline growth, after contracting for eight straight quarters.
“Some segments of consumption are also expected to improve with domestic auto companies expected to post 12 percent annual topline growth,” says the Edelweiss note, which also predicts strong growth for private sector banks.
Among Sensex companies, the broking firm expects Bajaj Auto, Maruti Suzuki and Cipla to do well, and Tata Steel, Wipro and Tata Motors to disappoint.
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