Poor earnings ahead as consumer spending slows
The recently-concluded festive season would have been a wake-up call for those tracking the economy, so desultory were the sales. The volume of automobiles sold, a measure of the consumer’s mood and means, was so disappointing that, Pawan Munjal, promoter of Hero Motors has asked for a lower GST rates on two-wheelers. Not surprising then that expectations for corporate earnings during October-December are very tempered; factory output in November came in at a 19-month low, rising just 0.5% y-o-y on the back of a contraction in both intermediate goods and manufacturing.
Kotak Institutional Equities (KIE) expects earnings for the companies that it assesses to not grow at all while, for the Nifty-50, profits are tipped to fall by about 3% y-o-y. In sum, Q3FY19 earnings season will be a forgettable one for India Inc. That is despite some helpful trends. Although the rupee regained value during the quarter, it depreciated by a little over 10% y-o-y, a factor that would have boosted top-lines for export-oriented businesses such as IT and pharmaceuticals. Indeed, this will ensure that aggregate revenues for India Inc increase by about 12-13%, not an exciting pace but a reasonably good one.
To be sure, there is a base effect; Q3FY18 was a good quarter coming off the demonetisation in Q3FY17. Moreover, given government expenditure remained on track between October and December, and infrastructure projects progressed, volumes of steel and cement would have been fairly good. The rise in revenues for auto firms is expected to be only around 4-5% y-o-y.
However, since costs remained elevated, it is not clear whether companies would have been able to protect their operating margins given the near absence of pricing power. Nowhere was this more evident than in the auto sector where the higher prices—led by the changes in insurance policies and costlier loans—hurt sales badly. Elsewhere too, weak demand has left manufacturers unable to pass on rising input costs. Sectors such as banking, which have gone through a long rough phase, should see a slight rebound in Q3FY19. The other sector which has fared poorly for several years thanks to weak investments by the private sector is capital goods; this sector, too, will be helped by a favourable base. Unfortunately, although top telcos such as Bharti Airtel and Vodafone Idea have been dragged through the mud with the entry of RJio and its low tariffs, their performance will remain modest despite the low base. It is not surprising at all then, that KIE expects net income for the universe of stocks that it tracks to remain flat in Q3FY19. The net income for the 50 companies in the Nifty-50 index is projected to fall by 3% y-o-y. Given it was the festive season, retailers and airlines are likely to have fared reasonably well though one must wait to see how the distress in the farm sector has impacted sales of consumer durables and staples. Despite a helpful base, Q2FY19 was an ordinary one; the reported net profit for the Nifty-50 companies grew just 6.9% y-o-y prompting analysts to trim their forecasts. Net profits for a sample of 1,851 companies (excluding banks and financials) rose just 5% y-o-y if support from other income was excluded, even though the top-line grew an impressive 23% y-o-y. The demand environment has deteriorated further since then while investments aren’t showing any improvement. That means the Q3FY19 numbers will be nothing to write home about.