The financial year 2019-20 (FY20) is likely to start on poor note for Corporate India, with brokerages expecting a contraction in earnings and stagnation in revenue for India’s top listed companies.
The combined net profit of Nifty50 companies
(excluding oil and financials) is likely to decline by 2.5 per cent year-on-year (YoY) during the April-June 2019 (first quarter, or Q1) quarter — their worst showing in the last nine quarters. The companies’ combined net sales is likely to inch up by 1.8 per cent YoY, growing at the slowest pace in at least 14 quarters.
In comparison, the combined earnings of the entire sample of 49 Nifty companies
are likely to grow by 8.9 per cent YoY in Q1, down from 19.6 per cent growth a quarter ago. Their combined net sales are estimated to grow by 4.1 per cent YoY, growing at the slowest pace in the last three years.
Corporate lenders are likely to be the bright spot during the quarter, with strong growth in earnings, largely due to a favourable base effect. For example, State Bank of India is expected to swing a profit of Rs 4,042 crore, against a loss of Rs 4,976 crore a year ago, while ICICI Bank is expected to post a net profit of Rs 2,128 crore in Q1FY20, against a loss of Rs 1,878 crore a year ago. Axis Bank’s net profit is expected to jump two and a half times to Rs 1,900 crore during the quarter.
Together, these three corporate banks are expected to post incremental earnings of around Rs 12,300 crore, against the Nifty’s total incremental earnings of around Rs 7,400 crore.
Other private sector lenders such as Bajaj Finance and Housing Development Finance Corporation are also likely to report strong double-digit growth in earnings in Q1.
Cement companies are also expected to report robust growth in earnings, thanks to higher realisation and favourable base effect.
The analysis is based on Q1FY20 earnings estimates by equity brokerages Edelweiss Securities, Motilal Oswal Financial Services, Prabhudas Lilladher, Reliance Securities, and Narnolia Financial Advisors.
“We expect headline Citi universe earnings growth at 3 per cent YoY, despite a strong base benefit in financials, largely corporate banks owing to weak earnings in commodities (metals and energy producers) and the auto sector. Companies in these three sectors are likely to report around 20 per cent YoY decline in earnings,” write Surendra Goyal and Vijit Jain of Citibank in their earnings estimates for Q1FY20.
For banks and non-banking financial firms, net sales are net interest income, while for others, it is the total income from the sales of goods and services (net of indirect taxes). Profits for the current quarter are estimated by brokerages and may exclude exceptional gains and losses.
The subpar corporate earnings performance in Q1 will lead to earnings downgrade for FY20, said brokerages.
“The growth slowdown that started a couple of quarters ago is expected to broaden and deepen. The deceleration is more pronounced among the large-caps versus small- and mid-caps under Emkay coverage. In addition to rural stress, disruptions due to elections are the key cause. Margins could continue to remain under pressure, despite low reported inflation, leading to a second consecutive quarter of flat earnings before interest, tax, depreciation and amortisation for the Emkay universe,” writes Sunil Tirumalai, head of research and strategy at Emkay Global Financial Services.
The biggest worry for D-Street is the sharp slowdown in top line growth, hinting at a decline in aggregate demand in the economy.
“What’s worrying is the sharp moderation in top line growth to just 3 per cent, against 18 per cent in 2018-19 (FY19) and 7 per cent in the fourth quarter of FY19. And, it is across the board; excluding commodities, top line growth is likely to be the lowest in a decade, reflected in high frequency indicators as well,” writes Prateek Parekh and Padmavati Udecha of Edelweiss Securities in their earnings estimates.
This puts FY20 Nifty earnings estimate at Rs 608 per share, which translates to a 26 per cent YoY growth at risk, they say.
In all, 21 index companies (out of 49 in our sample) are expected to report a YoY decline in earnings in the quarter, led by oil marketing companies, YES Bank, metal companies, and automakers. Bharti Airtel is expected to turn red in the quarter, while Tata Motors’ losses are expected to widen.