Q2 Results Forecast: Weak Demand To Weigh On India Inc.’s Earnings

Weak demand despite the festival season kicking off in September and the U.S.-China trade war are likely to weigh on India Inc.’s second-quarter earnings despite a record monsoon.

The Nifty 50 companies will announce their results for the quarter ended September starting with Tata Consultancy Services Ltd., Infosys Ltd., IndusInd Bank Ltd. and Avenue Supermarts Ltd.

The muted earnings forecast comes after nearly half of the index constituents failed to meet Bloomberg consensus estimates in the preceding three months, resulting in the worst performance in at least three years as a prolonged slowdown in the economy, poor asset quality of lenders and currency fluctuation weighed on corporate earnings.

BloombergQuint has been tracking the earnings expectation-versus-performance data of Nifty 50 stocks since the second quarter of 2016-17.

While the government over the past few months announced a series of steps—like corporate tax cuts and Goods and Service Tax reductions—to revive the economy, analysts expect benefit from the measures to kick in towards the end of the fiscal.

The sentiment in the second quarter will also get impacted due to the ongoing crisis at PMC Bank, Dewan Housing Finance Corporation Ltd., Yes Bank Ltd. and Indiabulls Housing Finance Ltd.

Investment and consumption-related high-frequency indicators suggest a significant slowdown in the last six to nine months. Weak gross fixed capital formation, Index of Industrial Production, sales of capital goods and commercial vehicles, import of engineering goods, new project announcements—all point towards weakness in investment, Dhirendra Tiwari, head of research at Antique Stock Broking, said.

Weakness in private final consumption expenditure, IIP consumer durable, retail and wholesale trade, credit growth, unemployment rate indicate continued consumption slowdown, he said.

A report by Prabhudas Lilladhar expects sales of agriculture, aviation, pharma and media companies to grow while auto, metals and oil & gas sectors may be laggards in the second quarter. It also expects widespread margin pressure in sectors like automobiles, durables, information technology and metals.

Brokerages considered while making this note include Antique Stock Broking, BofA ML, Citi, Edelweiss, Emkay, HSBC, Investec, Prabhudas Lilladhar, Motilal Oswal and Nirmal Bang.

Q2 Results Forecast: Sector-Wise Analysis

Agriculture

• Despite excess rainfall, the delay in monsoon may impact financials of some agro-chemical companies.
• Uneven distribution of rainfall has led to delayed sowing and miss in some round of sprays.
• Export-driven companies like PI Industries and UPL will fare better than pure domestic plays.

Automobile

• The second-quarter earnings are likely to be weak for auto companies on the back of inventory and production correction impacting wholesale volumes.
• Two-wheeler companies will fare better than four-wheeler firms as well as the auto ancillary space in the quarter due to exposure to export markets.

Financials

• The quarter will see divergent results as companies having strong asset quality will report good earnings while several banks will struggle with asset quality issues.
• Key focus area for banks will be the commentary and exposure to stressed accounts and groups.
• NBFCs will be impacted on the back of general consumption slowdown as well as auto slump and housing-focused companies will continue to report stress due to weakness in the real estate sector.

Capital Goods and Infrastructure

• Earnings are expected to remain tepid amid the slowdown in domestic infrastructure spending as well as sluggishness in export markets.
• Slowdown in infra spending will intensify challenges for EPC companies due to elections.
• With virtually no pick up in private capex, capital goods companies will report muted financials.

Cement

• Most cement companies will see a decline in volumes but with higher realistions in the quarter.
• Margins for cement companies will be higher due to decline in prices of raw materials like coal and pet coke as well as higher prices.

Consumption

• Liquidity concerns, floods during the monsoon season in large parts of the country and muted initial response to the festive season will impact FMCG and consumer-facing companies.
• Rural growth slipped below urban growth for many consumer-facing companies after several quarters which will impact volume growth.
• Benefits of low raw material costs will be offset by spending on promotions and price cuts.

Hotels

• Slowdown will impact the hotel industry while benefits of GST rate cuts will be applicable from the coming quarters.
• Reduction in corporate spending will impact financials of the industry.

Insurance

• Continued push for protection and product innovation with health riders are likely to improve the product mix in favour of higher-margin segments.
• Unit-linked insurance plans will be under stress due to the inherent cyclicality of the business which may impact the annualised premium equivalent growth.

Information Technology

• Margins are expected to improve sequentially for most firms given the absence of visa costs, lower impact of wage hikes and rupee but revenue growth for large IT firms will be stable.
• Despite being a seasonally strong quarter, deal closure is expected to be muted due to uncertain global environment. Analysts expect cautious commentary from IT firms.

Metals

• Metal companies will report weak earnings in the wake of lower prices and weak demand.
• Ferrous companies (steel) to remain under stress owing to a sharp dip in domestic steel prices while weak London Metal Exchange prices may result in subdued growth for non-ferrous companies.
• Mining firms to benefit from volume uptick, though realisations are expected to remain stagnant.

Multiplex Chains

• Increased bargaining power of exhibitors as well as strong content will aid industry in a typically weak quarter.
• Strong openings at the box office and a sharp pick-up in occupancy in the quarter will aid companies but slowing economy will impact advertisement revenues.

Oil & Gas

• Oil marketers will report strong quarter led by gross refining margins almost doubling over the last quarter and with inventory losses abating.
• Refining strength in Reliance Industries Ltd. will be seen offsetting petchem weakness. Capacity expansion at Dahej will aid Petronet LNG
• IGL’s margin will continue to expand led by price hikes.

Pharmaceuticals

• Pharma sector will continue to show muted performance led by weakness in the U.S. market due to competition and pricing pressures.
• Delay in approvals given increasing U.S. FDA issues will impact export businesses of several large pharma companies.
• Domestic-focused pharma firms will continue to show robust growth given the pick-up in domestic markets. Margins of most companies will remain under pressure due to pick up in R&D as well as remediation costs.

Real Estate

• Weakness in real estate markets will impact financials of developers.
• High inventory levels and lack of pricing power will impact financials.
• Balance sheet stress is key monitorable.

Telecom

• Reliance Jio Infocomm Ltd.’s revenue and subscriber market share gains to continue at the cost of Bharti Airtel Ltd. and Vodafone Idea Ltd.
• Top line growth for incumbents to be muted, as introduction of minimum recharge plan and customers moving to 4G are unlikely to result in meaningful ARPU (average revenue per user) recovery.
• Bharti Infratel to have a muted quarter with modest tenancy addition.