With most of the major macro events behind us, it is the corporate earnings that will be the key driver for market trajectory from now on. Most of the management commentaries post Q4FY19 have been weak. Demand slowdown, production cuts, higher inventory at the dealer level, working capital issues and delayed capex have become common. In this backdrop current quarterly result season is highly important to decipher how the remaining three quarterly results will come for corporate India.
The onset of Q1 earnings season with TCS, Infosys, IndusInd Bank, Avenue Supermarts has been positive. TCS' result was in-line with the expectations and there was a broad base growth in Infosys. Infosys has revised its full-year constant currency revenue growth guidance upwards to 8.5-10 percent and has maintained margin in the range of 21-23 percent, and more importantly, has increased its payout guidance from 70 percent to 85 percent of the cumulative free cash flow over a period of five years. This will set a strong case for narrowing down of the Infosys-TCS valuation differential that many analysts been expecting for some time.
For the IT sector as a whole, the total contract value is expected to remain strong. Cross currency headwinds will impact the growth by 20 to 50bps. EBIT margins will be impacted by 50 to 150 bps in Q1FY20 due to the wage hike, increased sub-contracting and higher visa cost.
The index heavyweights, i.e., financials, particularly corporate banks, are expected to report strong earnings as NPA provisioning softens and loan growth become stable along with lower slippages, improving NIM and higher treasury gain. Despite any big account resolutions, overall assets quality is likely to improve due to low slippages from the corporate portfolio.
Retail banks focused on vehicle finance will continue to face pressure. For NBFCs, growth should remain subdued. Costs have not declined while competitive pressure continues. Steps towards liquidity improvement in the system have been planned but will take some time before we see an impact.
Infrastructure is another sector that is expected to surprise positively this quarter. Projects worth Rs 20,000 crore have commenced execution in the last quarter. Our coverage universe companies are expected to post strong revenue growth of 22 percent YoY supported by execution pick up in ongoing projects and commencement of new projects.
Pharmaceuticals should also report better revenues and profitability as the US pricing stabilizes and few one-off opportunities due to shortages, etc. help revenues of certain companies.
Automobile margins are expected to be affected due to weak operating leverage, though weaker commodity prices will provide a little relief. Components manufacturer's growth remains questionable. Companies that are focusing to increase the share in OEM's pocket through increased product portfolio and those catering to the replacement market should report better numbers.
FMCG companies are expected to deliver tepid volume growth in Q1FY20 on the back of rural stress and tight liquidity. Oil and gas and metals sector should continue to deliver poor results. The slowdown in the metals prices along with tepid volume growth will keep profitability under check.
Nifty companies will deliver revenue growth of 5.2 percent and net profit growth of 8.2 percent for Q1FY20. We factor in 18 percent growth for Nifty earnings in FY20 based on which Nifty is currently trading at 19.3 times FY20 EPS.
The author is Head of Research at Narnolia Financial Advisors Ltd.
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