Citi Research: Weak Auto Sales, Energy Firms To Weigh On Q1 Earnings
A weaker performance by automakers, metals and energy firms in the first quarter may offset the possible earnings pick up in banks, according to Citi Research.
The research firm expects earnings of the 150-odd companies tracked by it to grow 3 percent year-on-year. It expects the earnings of S&P BSE Sensex and NSE Nifty 50 Index constituents to grow 24 percent and 6 percent year-on-year.
However, barring the financial sector, it sees a 13 percent decline in corporate earnings. The three struggling sectors may post a decline of around 20 percent over last year, it said in its note.
“It would be difficult for the companies to stay optimistic in their commentaries during this time,” Surendra Goyal, managing director and head of India Research at Citi India, told BloombergQuint in a conversation.
The report said the de-growth may continue in the automobile sector, and a lower marketing margin and muted volumes among steel firms to weigh on the commodities segment in the three-month period. Utilities and pharmaceuticals sectors are set to perform well in the quarter, it said.
Citi said the mid-cap companies’ earnings tracked by it are getting dragged by metals sector—steel companies, in particular—and the banking sector, led by Yes Bank Ltd. and the Union Bank of India Ltd.
Watch the discussion with Citi’s analysts here
Citi’s Sectoral Outlook
- Citi expects operating deleverage to impact margin with weak sales volumes. Overall, the sector will exhibit weak guidance on volume growth.
- Pricing strategy and margin of two-wheeler companies may be impacted by Anti-lock braking system.
The expectations are relatively better in the auto space, Goyal said, adding the stocks are unlikely to take a “big hit unless the commentary is materially worse than what the Street is expecting”.
- Price hikes witnessed by the industry between May and March could lead to strong improvement in realisation.
- But the cost will remain ‘benign’ due to lower petcoke prices and flat costs of diesel.
- A slowdown in construction activity in election season may have hurt volumes.
The cement companies may witness a year-on-year decline in volumes during the quarter, according to Raashi Chopra, director of India research at Citi India.
Unfortunately, the volume story doesn’t kick in. But we (Citi) see a very strong quarter for the cement space, given that 75 percent of their cost faces variables... The driver is pricing, and this quarter should see very strong pricing.Raashi Chopra, Director of India Research, Citi India
- Although there could be modest volume growth for most companies in the first quarter, issues in rural India and wholesale channels could persist.
- Margin trends could vary since pockets of inflation are emerging, especially on the food and beverage side while lower crude oil prices could aid the packaging industry.
- Domestic players with exposure to Middle-East and Africa will continue to face problems.
- Core gross-refining margin for Reliance Industries and other oil companies to remain soft.
- Marketing margin of oil companies will fall sharply on a quarterly basis.
- Upstream profitability is set to improve owing to higher crude and administrative price mechanism for gas prices.
- Asset quality slippages are set to moderate further but recent defaults and downgrades will exert asset quality pressure on banks and non-bank lenders.
- Provision coverage ratio is forecast to improve further from the current levels.
- On a quarterly basis, margins are expected to remain stable despite tighter liquidity since the hikes in MCLR are transmitted in loan pricing.
- Loan growth is expected to remain steady because of continued growth in retail and working capital corporate segment.
- Non-bank lenders’ liquidity will remain in focus while disbursement growth will stay benign.
Manish Shukla, director at Citi India, said, the earnings growth in the banking sector would be driven by a reduction in provisions and not because of any significant improvement in headline numbers.
If you talk about the earnings growth, it would be driven by the ICICI, Axis, SBIs of the world, because there’s a big fall in the credit cost, but the earnings momentum is not driven by balance sheet growth or loan growth. That’s the big distinction.Manish Shukla, Director, Citi India
- Normalisation of growth in India, stability in the U.S. generics—with the exception of tapering down of one-off launches—and cost control initiatives will aid Indian pharmaceutical sector in the quarter.
- The unfavourable currency situation may upset margins.
- Citi expects growth in this sector to return to normalcy since the ongoing inventory/portfolio rationalisations by players is nearing its end.
“It would be a normal quarter for the drugmakers,” said Prashant Nair, director and deputy head of India research at Citi India. “The numbers would not throw up any meaningful surprises.”
He, however, expects Dr. Reddy’s Laboratories to stand out as the company continues to cut costs and rake in benefits of its new product launches.