Although earnings estimates have been trimmed by about 3-3.5% post the results season, a favourable base will see earnings in 2018-19 growing by 20% plus. Corporate results for 2017-18 have been disappointing, especially the Q4FY18 numbers with the net profits for the Nifty50 falling 9%, way below expectations.
Despite elevated commodity prices, the top line for an aggregate of 2,281 companies grew at 8.6% in 2017-18, shade slower than the 9.9% rise in 2016-17. While the operating profit margins were flat, thanks to expenditure being reined in, higher, taxes, interest and depreciation resulted in net profits rising by less than 11% compared with more robust 26% increase in the previous year. That’s despite a big jump in other income.
The 20% growth in corporate profits in 2018-19 is expected to come in on the back of a weaker rupee that will support earnings in the IT and pharma sectors, better realisations and profitability for metals producers, a continuing pick-up in domestic demand for consumer durables and FMCG products and lower provisions for loan-losses by banks.
However, despite a revival in rural demand as seen in the performance of top FMCG and automobile producers, strategists at brokerages are cautious given the many macroeconomic headwinds and in particular the widening current account deficit.
Economists are expecting the economy to lose momentum in the second half of 2018-19 since commodity prices remain elevated and interest rates have risen sharply — GDP growth is expected to slip to around 7%.
They point out private consumption growth has tapered off in the last several quarters and moreover, the IIP in March grew by just 4.4% y-o-y, a five-month low, led by a performance in capital goods. Management commentary from engineering firm Larsen&Toubro suggested a meaningful pick-up in private sector investments is about two