Incipient signs of recovery in the economy notwithstanding, the Q2FY18 earnings season is unlikely to throw up any big surprises.
Incipient signs of recovery in the economy notwithstanding, the Q2FY18 earnings season is unlikely to throw up any big surprises. The re-stocking of inventories post the rollout of the GST on July 1 and the early arrival of the festive season would no doubt have boosted sales especially of automobiles, but in some sectors such as FMCG, the pace of re-stocking has been relatively slow. Analysts say wholesale channels are still under pressure as is rural demand. Meanwhile, telcos remain bruised, embroiled as they have been in a tariff war, post the entry of Reliance Jio last September.
While the headline aggregate numbers might reveal a reasonably good increase in the top line, a good part this of this would be the result of a spike in prices of commodities and the large adventitious gains for downstream oil marketing companies. Exporters will benefit from the fall in the rupee towards the end of the quarter but the full impact of the depreciation in the currency will be felt in Q3FY18.
As such, sectors such as IT and pharmaceuticals are expected to turn in very ordinary numbers; tech firms are fighting for market share amidst a global slowdown while drug firms are grappling with regulatory issues. Crisil Research believes the aggregate top line should have grown by about 6-8% y-o-y much like it has in the last six quarters.
Operating margins for India Inc would have likely contracted due to rising input costs and the lack of pricing power though companies that receive input tax credit benefits will do well. The last rabi harvest was a good one but rural demand may have been muted with farmers not getting good realisations for their crop; agri GVA grew just 0.3% in the three months to June.
Nonetheless, a combination of farm loan waivers and higher minimum support prices (MSP) for crops would have boosted farm incomes to some extent. The strong tractor sales, up 13% y-o-y in the April-August period, are a sign there is a fair amount of purchasing power in the hinterland.
Kotak Institutional Equities (KIE) expects net profits to grow at around 5.7% y-o-y for its universe of companies. For the Sensex set of companies, the brokerage estimates profits will fall by 4% y-o-y; for the 50 Nifty firms, profit growth has been pegged at 8.4% y-o-y.
Although volumes may have risen about 4-5% y-o-y, cement companies may see operating profits under pressure due to higher costs — diesel, pet coke and slag — that could not be passed on to customers owing to seasonality factors. That’s despite a rise in realisations of anywhere between 2-10% year-on-year depending on the region. “Given the low utilisation levels of around 70%, the peak ebitda/tonnes is unlikely to be realised before FY21-22,” analysts at ICICI Securities wrote recently.
The higher GST of 18% for telcos compared with the earlier 15% service tax could hurt margins of these companies at a time of intense completion and the consequent inability to pass on costs.
Analysts at Nomura believe Q2FY18 will be an uninspiring quarter for the IT sector with a few companies such as Infosys likely to lower their guidance for the year. Moreover, given the commoditization of legacy offerings, pressure on pricing remains while changes in on-site staffing necessitated by the tighter immigration laws in the US would also push up costs, they point out.
The rollout of the GST on July also prompted retailers to advance their end-of-season-sales (EoSS) to June. As such, sales in July and August would have been subdued though an early festive season would have helped mitigate some of the loss in same-store-sales. ENDS