1. Loss of earnings momentum

Loss of earnings momentum

Weakest sequential sales growth in four years likely on account of note ban

By: | Published: January 17, 2017 6:02 AM
BSE, BSE Index, BSE sensex, Nifty, Stock Market, Brexit The decision of the Modi government to demonetise the currency disrupted the normal business cycle mid-way through Q3FY17. (Source: Reuters)

Our analysts’ forecasts for Q3FY17F earnings point to a significant loss of momentum, after a rather strong Q2FY17. The numbers for Nomura’s ex-oil & gas PSUs and banks universe are showing the weakest sequential sales growth in the last four years. Our analysts forecast sales growth of 3.1% y-o-y, and 0.8% q-o-q. Despite favourable H2 base effects, sales growth of 3.1%y-o-y in Q3FY17 is a significant slowdown from the 5.3% y-o-y sales growth in Q2FY17.

The decision of the Modi government to demonetise the currency disrupted the normal business cycle mid-way through Q3FY17. A massive contraction in money supply has meant demand destruction at the retail end as well as severe supply chain disruptions given that cash is a primary means of transaction in several sectors, either at the retail end or at the supply chain level. We note the impact of demonetisation is only for about half the quarter in Q3FY17 since the exercise was undertaken on November 8, after the end of festival season in October 2016. This also means the impact will likely spill into Q4FY2017, post which demand conditions should hopefully start to stabilise.

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The corporate profit performance should also be seen in light of the earlier expectations that a combination of strong base effects, strong monsoons and pay commission-led consumption increases would lead to a strong pick-up in profit growth in H2FY17. Instead, the growth has decelerated.

Our bottom-up analysts’ expectations—for the 103 stocks in our coverage, but looking at the ex-oil and gas PSUs and ex-financials sub-universe—are as follows: net sales up 3.1% y-o-y and 0.8% q-o-q; Ebitda up 4.9% y-o-y and 4.8% q-o-q; net profit up 7.7% y-o-y and 2.6% q-o-q; and Ebitda margin up 34 bps y-o-y, and 77 bps q-o-q.

We expect the net profit for financials to increase by 77% y-o-y, and 5% q-o-q. We note that oil PSUs will likely have a strong quarter and including those numbers, we estimate profit growth of our universe ex-banks at 21% y-o-y for the Q3FY17 quarter.


This quarter marks a bit of a reversal from earlier trends, as consumer-facing sectors face the heat of demonetisation. Global sectors such as oil & gas and pharmaceuticals are expected to outperform local sectors such as autos and consumers. The only exception is the banking sector, which should benefit from bond gains and favourable y-o-y comparisons on asset quality.

While the market has bounced back about 5% from its bottom, it is still 3% lower from demonetisation day levels. At 15.7x 12-month forward earnings, market multiples compare favourably with their five-year trading multiple of 16.9x. In addition, the 45 bps rally in bond yields has made the relative earnings yield more attractive. We however note that markets may not see a runaway rally because the demand conditions remain fluid and earnings growth trajectory is highly uncertain. This is a market to be bought for the longer term, with the understanding that short-term reward/risk is uncertain.

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