Motilal Oswal has cut its FY20 Nifty EPS estimate by 3.8 percent to Rs 539 from Rs 560.
The July-September quarter was eventful. The government announced a string of measures to boost the economy and the Reserve Bank of India, in tandem, cut the repo rate, lifting investor sentiment, but overall the market ended Q2 with a loss.
The Sensex lost 1.9 percent and the Nifty slipped 2.7 percent. The broader markets continued to be hit hard, with the Nifty Midcap and Smallcap indices falling more than 9 percent each. It is clear that the pain is still there in the economy as well as corporate earnings, but the corporate tax rate cut announced on September 20 could offer some support.
The GDP growth in the June quarter at 5 percent was the lowest in six years. In the October policy, the RBI further cut its full-year growth forecast to 6.1 percent from 6.9 percent, citing demand worries and global slowdown fears amid US-China trade war.
"Hence, the second-quarter earnings-report season will be more of the same–tepid and uneventful. Underlying demand slowdown in the domestic economy and weak global commodities prices are expected to take a toll on the earnings with very few bright spots, if any," Motilal Oswal said.
However, it is important to look at this quarter's numbers from a profit-before-tax (PBT) perspective, as the reduction in the corporate tax will result in several adjustments in this quarter's tax numbers (eg large corporate banks will make deferred tax adjustments), it added.
The brokerage expects its universe's PBT to grow 2 percent YoY but profit after tax (PAT) to decline 6 percent YoY, dragged by automobiles and metals.
"The difference between PBT and PAT is exaggerated because of the deferred tax adjustments in financials. Ex-financials, we expect MOFSL Universe's PBT/PAT to decline 14 percent/8 percent YoY. Private banks, consumer, cement and capital goods, however, will provide some respite," it said.
Motilal Oswal cut its FY20 Nifty EPS estimate by 3.8 percent to Rs 539 from Rs 560. "We now build in EPS growth of 12 percent for FY20. Ex-corporate banks, we expect 3 percent profit growth for the Nifty in FY20."
The brokerage says earnings risks continue to be tilted downside on account of weak domestic demand, uneven asset quality trends in financials and deflationary trends in the commodity prices.
At this point, tax rate cuts will largely limit the downgrades rather than driving big upgrades on the earnings front, it said.
"Fiscal and monetary stimulus are trying to work in tandem to boost growth, the impact of which will be visible only with a lag. High-frequency data and interactions with managements spanning sectors suggest that the 2019 corporate earnings will be a washout and any normalcy will only return in 2020," Motilal Oswal said.
The brokerage expects strong earnings growth from private banks and NBFCs. While decent growth is expected from cement, pharma, capital goods and consumer sectors, autos, PSU banks and metals are expected to show subdued numbers in Q2 compared to the same period last year.
Among largecaps, ICICI Bank, SBI, HDFC, Bharti Airtel, L&T, Infosys, Maruti, HUL, Titan Company and NTPC are its top picks.
Midcap picks include Indian Hotels, Federal Bank, M&M Financial, Ashok Leyland, ABFRL, JK Cement, Oberoi Realty, Colgate and Alkem Labs.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.