The 2019 Lok Sabha elections gave an outcome that was better than what Mr. Market had expected. With the Union Budget over, the markets anxiously await the India Inc. earnings. Will the earnings deliver this time or disappoint? The wait is long given that corporate earnings have failed to live up to experts' expectations for several quarters. If the stock markets have to convincingly move higher, support from earnings is a must. The focus is shifting to fundamentals amid a weaker backdrop for earnings in general and consumption in particular. There has been no relief on the slowdown narrative, save inflation. The Reserve Bank of India (RBI) has brandished its rate-cut sword multiple times, but that has not been enough to lift sentiments and earnings. Several indicators and corporate commentaries point towards a weak backdrop as we enter into the first earnings season of FY20. Easing of interest rates and commodity prices are the only saving grace.
According to experts, there are some positives. First, the cost of capital has fallen. Second, finance minister Nirmala Sitharaman's maiden budget has announced an initiative to tap the overseas markets to meet part of the government's borrowing needs. Other than that, there is little to boost listed corporate earnings. If earnings do not deliver, investors can complain that Nifty valuations remain rich, offering limited room for re-rating. This could give more fuel to Bears to push down the stock prices.
The beginning of a new fiscal year is likely to be subdued like the last quarter of the last fiscal. A couple of drivers are common compared to the last quarter. Firstly, the subdued economic activity is likely to have impacted revenue growth. Additionally, revenue could be impacted by the ongoing inventory correction. Both the factors will also impact margins and thus net profit growth.
According to Vivek Ranjan Misra, head of Fundamental Research at Karvy Stock Broking, for stocks under Karvy coverage the forecast is for a top-line decline of 0.8% Y-o-Y, EBITDA decline of 1.7%; Net profit may decline by 0.3%, EBITDA margin to decline modestly 13 basis points. Karvy Stock Broking believes the following sectors will be impacted from a demand slowdown in Q1FY2019-20: 1) Autos and auto ancillaries 2) Consumer discretionary 3) FMCG.
For the quarter, consensus expects Nifty index constituent revenues to grow by 7.4%; EBITDA is expected to grow by 10.4% and EPS is expected to grow by 29%.(See graphic of earnings expectations - Karvy coverage)
"While earnings may be subdued in Q1FY2019-20, we believe that earnings cycle should bottom by Q2FY2019-20 and improve from thereon. Firstly, the margin pressure on account of raw material prices will dissipate in the coming quarters. Secondly, while we believe that drivers for a recovery in private Capex are present, certain factors have held back Capex spending; largely lack of liquidity, political uncertainty and weak rural economy. The first two factors are likely to improve and Capex spending should pick up later in 2019 and boost corporate earnings growth," hopes Misra in his earnings preview report.
Experts feel financials will drive the performance single-handedly in Q1FY20 (April-June quarter). Corporate banks will account for entire growth in the Nifty. Autos will have another lackluster quarter. Consumer sector is also expected to report a muted quarter.
"We expect MOFSL Universe PAT to grow 7% YoY, led by Financials and dragged by Metals. Global Cyclicals are likely to post a decline of 16% in profits, Defensives are expected to post flat profits YoY. Domestic Cyclicals will post 49% YoY jump in PAT. MOFSL ex-OMC and PSU Banks PAT growth is estimated to be absolutely flat," says brokerage Motilal Oswal.
The brokerage has cut its FY20/21 Nifty EPS estimates by 3.4%/2.1% to Rs 583/Rs 691 (prior: Rs 604//Rs 706). It is now building in EPS growth of 21.1%/18.5% for the Nifty for FY20/21. Excluding corporate banks, it is expecting 7.5% profit growth for the Nifty in FY20.
Emkay Global, for instance, says the growth slowdown that started a couple of quarters ago is expected to broaden (almost all sectors under coverage) and deepen (Emkay universe sales growth to fall below 3% Y-o-Y from 13% two quarters ago).
The deceleration is more pronounced among the large caps versus small and mid-caps under Emkay coverage. In addition to rural stress, disruptions due to the elections are playing truant. Margins could continue to remain under pressure (negative operating leverage, rising input costs, rising competition etc), despite low reported inflation. Thus, it could be the second consecutive quarter of flat EBITDA for Emkay universe.Among sectors, auto, telecom, media, pharma are likely to see sharpest sales growth deceleration.
On the other hand, building materials and engineering/capital goods should show reasonably stable trends.
Sectors with worst EBITDA growth deceleration are auto (negative operating leverage), media (weak ad spends), IT services (higher digital investments, visa fees). Emerging from corporate stress and with tailwind of government recap support, banking sector is likely to be among the better performers," says Sunil Tirumalai, head of Research and Strategist, Emkay Global. Edelweiss believes that Q1-FY20 is likely to be a soft quarter. It estimates profit of Nifty companies could grow at mere 7%.
What's worrying is the sharp moderation in top-line growth to just 3% (18% in FY19 and 7% in Q4FY19). "And, it’s across the board; excluding commodities, top-line growth is likely to be the lowest in a decade, reflected in high-frequency indicators as well. What stands out is the slowdown’s breadth with even IT and industrial companies, which had posted mid-teen profit growth in FY19, likely to report 4% and 10% profit growth, respectively, in Q1-FY20. Sectors like cement, retail banks and pharma will be key sectors where profit growth is likely to hold up at reasonable levels. This puts FY20 Nifty earnings estimate of Rs 608 (26% growth) at risk," says Prateek Parekh (CFA) of Edelweiss Research in a report. (The author is a journalist with 14 years of experience)