What To Expect From Third Quarter Earnings Season
The third quarter earnings season is set to kickstart on Thursday, with IndusInd Bank and Tata Consultancy Services.
Earnings recovery will be broader and not restricted to Nifty 50 companies on the back of a low base, a rally in commodity prices and domestic consumption aided by festive demand in the quarter ended December.
That’s what brokerages expect in the earnings season for the third quarter. It kick-starts on Thursday with IndusInd Bank Ltd. and Tata Consultancy Services Ltd. reporting earnings, followed by Infosys Ltd. on Friday. Brokerages estimate the Nifty 50 profit will rise around 15-20 percent over the year-ago period when demonetisation had hurt the economy.
The BloombergQuint earnings tracker shows that in the previous (July-September) quarter, 24 out of the 50 Nifty companies reported results which met expectations, while 16 reported strong numbers. The analysis of the past three quarters showed that the trend of results outperforming estimates is narrowing down.
What To Expect?
With the disruption caused by Goods and Services Tax fading and the demonetisation-hit economy reviving from its slowest growth pace in three years, earnings recovery is likely to accelerate.
Sector-Wise Expectations
Auto
Among the four-wheeler makers, Maruti Suzuki India Ltd. continues to gain market share on the back of new launches. Tata Motors Ltd. may report healthy margins due to new launches and improved performance of Jaguar Land Rover.
An all round pick up across commercial vehicle segments and the ability to pass on the price hike after stricter emission norms came into force will aid bus and truck makers like Ashok Leyland Ltd. and Tata Motors
Bajaj Auto Ltd.'s seen a sharp rise in its commercial vehicle sales, aiding its move away from being just a bike manufacturer. It also provides a good cushion for volatile 2-wheeler sales. Meanwhile, Eicher Motors Ltd. may report muted number on back of stagnant volumes.
Banks and Non-Bank Lenders
Public sector banks may continue to drag private sector peers in the December quarter. State-run lenders may report lower slippages on improved asset quality, but but higher provisioning may continue. Lower treasury gains on higher bond yields may result in some banks reporting losses.
Earnings of retail-heavy private sector banks are expected to be stable, while credit costs may rise for corporate heavy banks. Asset quality of Axis Bank Ltd., Yes Bank Ltd. and ICICI Bank Ltd. will be watched.
Non-banking financial companies are expected to sustain growth momentum and improve asset quality. Housing finance companies like HDFC Ltd. and Indiabulls Housing Finance Ltd. will maintain momentum and vehicle financiers such as Shriram Transport Finance Co. Ltd. will report better earnings.
Cement
A low base as demand had fallen after demonetisation in the year-ago period will aid earnings. Pricing pressure, sand shortage and an increase in fuel costs could keep earnings muted. East India exposure will help ACC Ltd. and Shree Cement Ltd., while Ultratech Cement Ltd. may be impacted by JP Associates’ assets. South India players like India Cements Ltd. and Ramco Cements Ltd. will be hurt by sand shortage.
Capital Goods, Industrials
Larsen & Toubro Ltd. is expected to lead the pack due to improvement in the construction segment. Domestic capital expenditure cycle continues to remain weak, especially on the industrial front, so Thermax Ltd., Cummins India Ltd. and ABB India Ltd. are expected report muted earnings. Execution of orders for the Yadari thermal power plan may aid financials of BHEL Ltd.
Ports, logistics and road companies will do well on a low base.
Consumer Goods
Revenues of fast-moving consumer goods companies are expected to rise, continuing the trend that started in the second ended September. A low base may aid volume growth but the underlying volume trends are still subdued as rural demand remains impaired by weak agricultural growth.
ITC Ltd. is likely to report subdued earnings due to the GST, while spiralling copra prices will dent Marico Ltd.’s margins. Strong margin expansion is expected for Hindustan Unilever Ltd., while GM Breweries Ltd.’s strong financials will keep alcohol stocks in the limelight.
Information Technology
The October-December quarter is a seasonally soft for the Indian information technology firms, and there has been no change in the trends in banking, financial services and insurance sectors or even the U.S. market. Currency was largely neutral and there were no major margin headwinds or tailwinds. The trend of mid caps outperforming large caps will continue into the quarter. Tata Consultancy Services Ltd. and Infosys Ltd. are expected to grow 1-1.5 percent in constant-currency terms, while companies like HCL Technologies Ltd., Mindtree Ltd. and Tech Mahindra Ltd. are expected grow in excess of 1.5 percent quarter on quarter.
Pharma
Pricing pressure and higher competition will continue to impact the pharmaceutical sector. New launches and relaunches and a strong performance from subsidiary Dusa will aid Sun Pharmaceutical Industries Ltd.’s earnings. Lupin Ltd. and Dr Reddy’s Laboratories Ltd. will be impacted by pricing issues in key drugs as well as regulatory hurdles. Key U.S. approvals will start contributing for Cipla Ltd., while Cadila Healthcare Ltd. may report the best quarter as incremental Tamiflu sales offset other product weakness.
Telecom
Cuts in interconnection user charges will impact results for the quarter. Competitive pressure on telecom companies and average revenue per user will remain. Earnings before interest, tax, depreciation and amortisation margins likely to bear the brunt of IUC cut and revenue deceleration. Reliance Jio Infocomm Ltd.’s financials will be most watched. Bharti Airtel Ltd.’s profits is expected to decline sharply, while Idea Cellular Ltd.’s losses may increase.
Oil & Gas
The oil and gas sector is expected to report a mixed quarter on the back of rising crude prices and a fall in Singapore refining margins. Oil prices rose 19 percent quarter-on-quarter, which will aid explorers like Reliance Industries Ltd. and Oil and Natural Gas Corporation Ltd. Higher crude oil realisations and upward revision in domestic gas prices will aid ONGC, Oil India Ltd. and RIL.
Continued strength in volumes and unit Ebitda margins will aid GAIL (India) Ltd. and Petronet LNG Ltd. Inventory gains on crude will be offset by lower refining and marketing margins for oil marketing companies. RIL will benefit from new capacities and competitive ethane imports.
Metals
Metals will report another strong quarter on a high base, led by strong underlying commodity prices and healthy volumes.
Vedanta Ltd., Hindalco Industries Ltd., Tata Steel Ltd. and other metal companies will sustain their growth momentum, primarily on higher prices. Ferrous companies are likely to gain from price hikes and relatively benign raw material costs. The non-ferrous players are expected to gain from firm London Metal Exchange prices.
Vedanta will benefit from mined metal production ramp up at Hindustan Zinc Ltd. and Jharsuguda II smelter, while Jindal Steel & Power Ltd. will benefit from a new blast furnace.
(These expectations have been compiled from reports of Kotak Securities, Motilal Oswal, Edelweiss Securities and Credit Suisse.)