Mumbai: A slowdown in economic growth amid the trade dispute between the world’s biggest economies has put Indian corporate earnings at risk, analysts say.
“It’s the confluence of headwinds — weak global demand, fading impact of rupee depreciation, non-bank finance company crisis and scale-back of government spending — which is deepening the slowdown,” Edelweiss Securities Ltd. analysts led by Prateek Parekh said in a note.
The country’s economic growth slumped to a five-year low of 5.8% in January-March. The absence of any substantial fiscal stimulus for companies in the federal budget last week puts the onus back on the government to spur growth. The Reserve Bank of India has already cut interest rates three times this year and signaled more easing to come.
Edelweiss expects profits for companies in the NSE Nifty 50 Index rose 7% year-on-year in the April-June period. The broker sees profit expansion concentrated in just a few sectors, namely financials, airlines, pharmaceuticals and cement.
Here’s what analysts expect from the results season that kicks off Tuesday with Asia’s top software exporter, Tata Consultancy Services Ltd.
Reliance Securities (Naveen Kulkarni)
- Expect “uninspiring” 1Q earnings. Nifty company profits are likely to grow by just 6%, led by banks and financial services stocks.
- Autos will be the major drag on earnings.
- Inventory losses at oil marketing companies will hurt profits for the oil and gas sector.
- Consumer sector will see growth challenges. Price growth is critical as volume growth tapers. Titan Co. Ltd., ITC Ltd., Hindustan Unilever Ltd. and Marico Ltd. top picks.
- Building materials, infrastructure and capital goods will see healthy earnings. Top results picks are Ultratech, JK Cement, KEC International and Larsen & Toubro.
- Agrochemicals and specialty chemicals are potential winners.
- Auto companies are expected to report sharp drops in profits. Bajaj Auto Ltd. and TVS Motor Co Ltd are likely to report relatively better performance.
- Kotak Mahindra Bank Ltd and HDFC Bank Ltd are likely to perform above par, but improvement in net interest margins is expected to remain marginal as funding costs are unlikely to taper materially.
- Expect revenue growth to remain muted for consumer companies due to the liquidity crunch in the first half of the quarter.
- Expect revenue momentum to continue for software exporters due to strong deal signings in 4Q. Cross-currency movement will have a negative impact of 10-50 bps on the dollar revenue of Indian IT vendors.
Edelweiss Securities (Prateek Parekh)
- Auto margins are expected to be range-bound due to poor volumes. The benefits of relatively lower commodity costs are expected to be offset by company efforts to reduce inventories. Ashok Leyland, Mahindra & Mahindra Ltd. and Eicher Motors are top picks.
- Tight liquidity, risk aversion and slower growth dent the earnings outlook for shadow lenders. Their overall assets under management likely grew 2.1% q/q and 12.8% y/y.
- Among banks, those with robust deposits, pricing flexibility and ability to aggressively raise deposits have an edge. Edelweiss prefers ICICI Bank, SBI and Kotak Mahindra Bank; among NBFCs, the picks are Housing Development Finance Corp Ltd and Mahindra & Mahindra Frinancial Services Ltd.
- Sharp price hikes and easing fuel costs will offset impact of low demand for cement companies. Top picks are Shree Cement and JK Cement Ltd.
- Consumer goods companies will post weak volume growth overall. Sees Britannia and Marico posting strongest growth, at over 6%.
- Positive on software exporters on basis of demand; prefer large caps due to execution capabilities, investment ability and better valuations. Buy on Infosys Ltd, Tech Mahindra Ltd. and HCL Technologies Ltd., Hold on Tata Consultancy Services Ltd. and Wipro Ltd.
Kotak Institutional Equities (Sanjeev Prasad)
- The outlook is positive for corporate banks ICICI Bank and SBI given their inexpensive valuations and visibility of steady progress toward RoE “normalization.” Yes Bank will face one of its most challenging quarters. There is more focus on asset quality for IndusInd Bank Ltd. and RBL Bank Ltd.
- Expect sharp improvement in profits for Indigo on higher yields and after Jet Airways stopped functioning.
- Reliance Industries is likely to report a marginal q/q increase in standalone Ebitda led by higher refining margins, an increase in crude throughput and petchem volumes.