Following India Inc’s less-than-ordinary performance in the three months to September, earnings for both 2018-19 and 2019-20 have seen downgrades. Analysts have lowered their forecasts for the Nifty earnings by about 4-5% with the biggest cuts for Tata Motors and Vedanta.
Only a handful of companies beat analysts’ estimates during the quarter while many disappointed the Street. In a weak demand environment, companies have not been able to push through higher input costs to consumers, leaving operating profit margins weak. The reported net profit for the Nifty50 companies grew just 6.9% year-on-year.
While earnings growth may rebound in the next two years, the fact is that much of the incremental growth will come from banks and financials. “We now expect 15% and 26% growth in net profits of Nifty-50 Index for FY19 and FY20 with financials sector accounting for a large portion of incremental profits,” analysts at Kotak Institutional Equities wrote.
Net profits for a sample of 1,851 companies (excluding banks and financials) seen rising by just 5% year-on-year, if support from other income is not taken into account. That’s despite the topline growing an impressive 23% y-o-y.
The fact is operating margins have been under pressure thanks to rising raw material costs — the ratio of raw materials to sales was up 162 basis points y-o-y.
A proxy for gross value add (GVA) — the sum of the ebitda (earnings before interest, tax, depreciation and amortisation) and the wages — shows the growth in Q2FY19 was just 8% y-o-y, much slower than the 20% y-o-y increase in Q1FY19.
Should the recovery in the economy be less robust than anticipated, even the anticipated numbers will not come through. Elevated commodity prices, rising interest rates, low levels of job creation and weak private sector capex remain the primary headwinds. Rural demand, which has been driving consumption, could slow down if prices of crops are not remunerative. Also, spends by the government, which too have been holding up consumptions, are expected to decelerate due to fiscal pressures.
In the current year as also in 2019-20, banks will fare well with loan losses tapering off and requiring small provisions. Analysts have trimmed their forecasts for automobile companies in 2018-19 given the subdued volumes in the recent months. Moreover, they believe cement companies will report very average numbers in both FY19 and FY20 with prices likely to remain subdued in the wake of modest demand, plenty of supply, better capacity utilisation and a rise in input costs.