Bank of America Merrill Lynch feels earnings expectations for the Sensex for FY16 are high, despite recent downgrades. (PTI)
Corporate India might see operating margins expand, thanks to the collapse in prices of commodities, but there might not be much more to cheer about this earnings season. With retail demand anaemic and capital expenditure slow, neither producers of consumer goods nor makers of industrial machinery are expected to fare too well. The economy remains sluggish — GDP in the June quarter grew just 7% year-on-year — and data across sectors show few signs of a pick-up in volumes.
It’s not surprising then that Kotak Institutional Equities expects headline Sensex earnings for Q2Y16 to fall 2.8% year-on-year. Or Bank of America Merrill Lynch feels earnings expectations for the Sensex for FY16 are high, despite recent downgrades.
“Consensus Sensex EPS growth for FY16 is around 17% on a bottom-up basis. We expect this to get downgraded to 8%-10%,” the brokerage wrote on Tuesday.
Firms like Bajaj Auto, for instance are expected to see only a muted increase in revenues since the growth in volumes during the quarter hasn’t been particularly robust. With only moderate increases in the minimum support price for farmers rural demand has remained weak impacting sales of two wheelers — Hero MotoCorp’s volumes, for instance, were down 7% in the three months to September. It’s possibles sales of consumer staples too might have been hit though the impact of the subnormal monsoon can be better gauged once the size of the harvest is known. Experts believe, however, that urban incomes that typically support rural incomes have been almost missing this time around, hurting purchasing power. To be sure, government spending has risen 8.8% y-o-y between April and August but much of the capex has been limited to a couple of sectors and that might not have been enough to give purchasing power a meaningful boost.
But as Nandan Chakraborty, managing director, research, Axis Capital, observes, the six months to March or the second half of the year might see companies post better volumes as the economy recovers on the back of lower interest rates.
Meanwhile, analysts predict moderate to negative earnings growth for the Sensex set of companies in Q2FY16. BofA-ML doesn’t see any green shoots just yet and expects headline numbers to be weak. The brokerage feels the topline will stay subdued and could even contract for a whole host of companies. “The worrying aspect of the earnings is that even excluding commodities, sales growth is expected to remain muted at 3.5%,” equity strategist Anand Kumar wrote, adding that the only silver lining could be improvement in y-o-y margins.
Automakers and manufacturers of consumer goods companies are likely to be the biggest beneficiaries of softer commodity prices in a sluggish demand environment where revenues are slowing down. Andrew Holland, CEO of Ambit Investment Advisors, believes that lower commodity prices have already helped corporate India post better margins, adding, however, that earnings downgrades may continue for commodity-linked businesses. Indeed, metals firms will turn in modest performances with most of the prominent steel producers set to report losses.
According to KIE steel companies could see a sequential fall of anywhere between 4% to 13% in operating profits, on the back of more than 5% quarter-on-quarter drop in domestic prices. “Prices were weak across product segments including flats and longs and hence profitability of all steel names will be under pressure,” the brokerage said. While steel producers are expected to benefit from the recently implemented safeguard duty of 20% on hot-rolled coil products, the benefits may not be visible during Q2FY16 given that the implementation of the duty took place mid-September.
The impact of a demand slowdown will be seen across the board and also in the performances of banks. Despite healthy treasury gains, which are likely to cushion the bottomlines of banks, a slower pick-up in credit growth coupled with base rate cuts could impact margins. For the fortnight ended September 18, non-food credit growth stood at 9.8%; credit offtake has shrunk between April and September with companies tapping the money markets for short-term working capital needs.
While public sector investments have started to gain traction, it is yet to reflect in the performance of capital goods firms as demand remains weak and there is overcapacity. Order books at engineering firms are not expected to see any big jumps with balance sheets remaining over-leveraged.
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