The lagged effects of demonetisation, an appreciating rupee, a weak demand and investment environment and a slight rise in raw material costs will result in earnings growing in single digits in Q4FY17. As earnings season kicks off with Infosys set to announce its quarterly results later this week, expectations are tempered. The stock markets, however, have been rallying to new highs, in the hope corporate earnings will rebound in FY18 on the back of policy reforms.
Despite expectations of a strong showing from banks, net profits for the BSE-30 are estimated to grow by just 9%
year-on-year, according to Kotak Institutional Equities (KIE). Excluding banks, earnings for the Sensex pack are tipped to grow at 8.8% y-o-y. While metal producers are expected to do well with output prices having risen, companies in the construction, cement and real estate spaces could report lackluster numbers.
Banks are expected to benefit from a favourable base effect—in Q4FY16 they had set aside large sums as provisions for loan losses following the Asset Quality Review (AQR) initiated by the central bank. Although some slippages of assets —from standard to non-performing—are anticipated, the amounts are unlikely to be high. There are unlikely to be any treasury gains and in fact bond portfolios might see a marginal hit.
The IT sector, analysts believe, would be impacted by the firming up of the rupee in the three months to March to levels of sub-65 against the dollar.
The rupee has gained around 4.5% and this could result in lower margins although some of the impact could be offset by favourable cross currency movements. IT firms may resort to smaller variable compensation so as to protect their margins.
The sluggish demand environment, in a weak economy exacerbated by the acute shortage of cash, is believed to have hurt businesses such as automobiles. Two wheeler makers, in particular, are expected to put up a very modest performance with the ban on BS3 vehicles from April 1, announced by the Supreme Court, compelling them to offer huge discounts in the last couple of days in March. Even before that demand was not really robust for commercial vehicles as reflected in the volume data.
Intensive competition in the telecom space, following the continuation of the free data and voice offering from RJio in the March quarter, is expected to dent the profits of telcos such as Bharti Airtel and Idea Cellular. Earnings of power generation companies too are not expected to be particularly exciting going by the generation data.