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  1. Taking stock: Late festivals, high base to dampen earnings season despite gains for IT, pharma

Taking stock: Late festivals, high base to dampen earnings season despite gains for IT, pharma

A delayed festive season and an unfavourable base will keep India Inc’s earnings subdued in the three months to September despite a boost for IT and pharmaceuticals from the weaker rupee.

By: | Mumbai | Published: October 9, 2018 5:57 AM
In a seasonally strong quarter, technology firms will gain from the weaker rupee. However, revenues from the automobile sector will be muted partly because the festival season sets in later this year.

With earnings growth in the three months to September expected to be subdued, the consensus forecasts of a 25% increase in earnings in 2018-19 are beginning to look increasingly optimistic.

A delayed festive season and an unfavourable base will keep India Inc’s earnings subdued in the three months to September despite a boost for IT and pharmaceuticals from the weaker rupee.

“We expect the net income of the BSE 30 Index to increase 2% year-on-year and that of Nifty 50 Index to increase 3% y-o-y,” analysts at Kotak Institutional Equities (KIE) wrote on Monday. For its broader universe of stocks, the earnings growth could be flat, they said. Given that investments remain sluggish and that much of the capital expenditure by the private sector is primarily for maintenance, the key engineering sector is unlikely to report exciting numbers. One could, however, see a pick-up in execution, hitherto slow on account of various factors, especially the rollout of the GST in July 2017.

In a seasonally strong quarter, technology firms will gain from the weaker rupee. However, revenues from the automobile sector will be muted partly because the festival season sets in later this year. Moreover, margins could be crimped because not all manufacturers have been able to take price increase in a highly competitive environment. Banks will report yet another quarter of weak numbers partly because their investment portfolios have been badly hit by the sharp increase in yields during the quarter. Moreover, provisions for loan losses will eat into profits. The cement sector is tipped to be something of a mixed bag.

While the industry reported a volume increase of 13% y-o-y in July and August — on a low base — the increase was in a range of 7-20%. Similarly, since not all manufacturers were able to take a price increase, the rise in operating profits would vary widely; only those firms that were able to take care of the higher costs of pet coke will report good margins. The consumer space should report a good increase in volumes and operating profits since companies have been able to pass on the higher input costs. Pharmaceutical firms are expected to put up a modest show on the back of an unfavourable base — in Q2FY18, the companies had restocked post the GST rollout.

Telecom service providers have seen another rough quarter with pre-paid consumers down-trading and post-paid consumers continuing to reprice their packages. Even otherwise, Q2 is typically a dull quarter and the popularity of RJio’s Monsoon Hungama exchange scheme would have hurt incumbents who are already reeling from tariff wars.

Given the many macro-economic headwinds – elevated crude oil prices, rising interest rates and tighter credit — corporate profits could be under pressure in the second half of the year as the government spending remains subdued. “A government-led squeeze still lies ahead. The central government has spent around 44% of its budgeted target for capital expenditure in the first five months of 2018-19 versus 35.5% during the corresponding period last year,” Sonal Varma, chief economist at Nomura, wrote recently.

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