Downgrades follow on heels of tepid Q1

By: | Updated: August 5, 2015 1:15 AM

Analysts have resumed earnings cuts for FY16 with Kotak trimming FY16 & FY17 estimates by 2%

Although the Street is looking for some positive triggers to maintain the momentum it gained since late June, the much dreaded earnings downgrades are back with below-expectation financial performance of Indian companies in the April-June quarter.

While the sustained decline in commodity prices have bolstered the operating performance of India Inc, lower demand is well reflected in the top line growth. For a clutch of 648 companies excluding banks and financials, y-o-y net sales for Q1FY16 has contracted by over 3%. However, nearly 6% y-o-y decline in raw material cost supported operating performance (margins expanded by 202 basis points) and net profit expanded by 9% compared to the same quarter last year.

JPMorgan in an analysis on July 27 noted that the earnings season has had a “cloudy start”with weaker-than-expected revenue growth and relatively mixed improvement in margins.

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In continuation of the trend that defined earnings performance of the last few quarters, the asset quality remains a concern for the banking space, especially public sector banks, with some big PSBs like Punjab National Bank, Bank Of India and Union Bank of India reporting a double digit drop in their profit compared to last year.

At a time when non-food credit uptick has slowed, even NBFCs showed relatively higher asset quality stress. For example, net profit of M&M Finance fell more than 40% with a similar extent of jump in provisioning and write-offs during the quarter.

Earnings from other sectors also point towards weak underlying economic parameters. Order inflow of some of the prominent engineering and capital goods players witnessed y-o-y drop in the quarter. While L&T’s order book stood at a healthy R2.4 lakh crore, due to lack of pick up in MMH ( Metallurgical & Material Handling) and heavy engineering segments, the capital goods major reported a 21% decline in the order inflow and a 37% drop in net quarterly profit compared to last year.

Cement companies reported a mixed margin performance with players focused towards industrials reporting disappearing numbers.

Although players including Dabur and Godrej Consumer managed to report strong volume growth, Hindustan Unilever the biggest FMCG company by market cap reported a muted volume growth of 6% despite passing on the benefit of lower commodity prices in terms of price cuts in soaps and personal product categories.

With a continuation of these trends, analysts have resumed cutting earnings expectations for FY16. Consensus estimates of Sensex FY16 EPS (earnings per share) has come off to R1,686 compared to R1,714 in early July, according to Bloomberg.

Kotak Institutional Equities, which has cut FY16 and FY17 Sensex earnings estimates by 2% this earnings season expects to bring it down further by the end of the earnings season as well as in the July-September quarter.

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