The December quarter earnings season is expected to be a mixed bag with banks driving performance on a low base, most analysts said.
Analysts are expecting some downgrades to continue after third-quarter earnings. But, according to them, the one positive thing that is going to happen in Q3 is growth in broader space earnings, which is likely to be better than frontline space.
"After analysing coverage universe (162 companies) — 61 largecaps and 43 midcaps — we find that underlying business conditions are improving in favour of midcap companies, with 24 percent sales growth and 26 percent PAT growth versus largecap companies, with 18.7 percent sales growth and 5.7 percent PAT growth," Elara Capital said.
Both large and midcaps are feeling pressure at the operating margin level, as EBITDA margin is likely to contract by 1.5 percent and 7.2 percent for largecaps and midcaps, respectively, it added.
The likely muted bottomline growth of 5.7 percent by largecap companies, despite banks posting a healthy earnings expansion of 69 percent, is primarily due to expected contraction in auto, energy and telecom sectors.
On an ex-commodity basis, the research house expects PAT growth at 13.8 percent YoY. In case of Nifty companies, margin is expected to be healthy, with an EBITDA margin (ex-financials) of 15.6 percent YoY and PAT margin of 11.5 percent YoY, it said.
It feels the impact of declining crude prices would be felt the most in the energy space due to inventory losses (energy PAT down 23.8 percent YoY).
During the quarter-ended December 2018, international benchmark Brent crude fell 35 percent while in the year 2018, it dropped around 6 percent.
Elara said NBFCs are expected to bear the brunt of tightening liquidity, down 18.6 percent YoY, whereas banks would benefit, up 69 percent YoY, due to improving credit deposit ratios and improvement in pricing power, given the stress in the NBFC space.
Softening coal, petcoke and diesel prices coupled with operating leverage benefits would benefit cement, up 39.1 percent YoY, while a sharp ramp-up in execution is likely to boost infrastructure, up 20.4 percent, the brokerage added.
It expects healthcare sector earnings growth of 9.5 percent which would benefit from seasonal strength of Q3 (flu season) while a strong business outlook and receding benefits of rupee depreciation are likely to reflect in IT which can show 3.5 percent earnings growth in Q3 YoY.
According to the research house, it would be a challenging quarter for auto space as earnings are expected to be down 27.9 percent YoY on lackluster festival sales and elevated cost of ownership.
Within its coverage universe, Elara expects the most PAT expansion in Federal Bank at 156 percent YoY, Oberoi Realty at 157 percent, Karur Vysya Bank at 155 percent, Glenmark at 154 percent and JK Lakshmi Cement at 136 percent.
Among largecaps, at the stock level, SBI is expected to post earnings growth (on a free float weighted basis) of 131.6 percent YoY, aided by NPL recoveries and credit expansion moving it from loss to profit, followed by HDFC Bank (likely earnings growth of 34.4 percent YoY, driven by expanding retail credit growth).
On weaker side, Indian Oil Corporation is likely to disappoint as earnings are expected to fall by 71.7 percent YoY and HPCL down 32.4 percent YoY due to gross refining margin compression, it said, adding HDFC is likely to contract by 28.6 percent YoY due to tightening liquidity.
Here are at least 15 stocks where Elara is bullish, and the consensus estimates of sales, EBITDA and PAT. These stocks — La Opala RG, Motherson Sumi, Petronet LNG, ABB India, Britannia Industries, MRPL, IndiGo, Supreme Industries, KNR Constructions, Persistent Systems, Wipro, Union Bank of India, Bharti Airtel, City Union Bank and Karur Vysya Bank — could give 3-55 percent return.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.