Drop in oil, metal prices likely to hurt Nifty50 companies' Q3 net profit

The decline in crude oil and metal prices is expected to result in a fall in net profit of companies in the Nifty50 index of the National Stock Exchange for the October-December 2018 period, after five quarters of growth.

The combined net profit of the Nifty50 companies is estimated to fall by 3.6 per cent year-on-year (YoY) to around Rs 85,000 crore, their worst show in seven quarters. In comparison, these companies’ earnings were up 12.9 per cent during October-December 2017 and 14.6 per cent in the September quarter of 2018-19.

The fall in commodity prices is also likely to impact revenue growth. According to brokerages’ estimates, the combined revenue of the Nifty50 companies is estimated to grow by 14.4 per cent in the third quarter, the slowest in the last five quarters.  

“Global cyclicals like metals and oil and gas — the drivers of earnings growth over the last few quarters — are looking jaded, given the correction in commodity prices, and are likely to post a decline of 13 per cent in profits after five consecutive quarters of strong growth,” writes Gautam Duggad of Motilal Oswal Securities in his report.

Based on numbers for Nifty50 companies whose earnings estimates are available for the October-December 2018 quarter Net interest income as revenues for banks and non-bank finance companies Compiled by BS Research Bureau Source: Brokerage Estimates
Rating agency CRISIL expects slower revenue growth for companies excluding financials and oil and gas during the quarter. “Corporate revenue growth for the third quarter of this fiscal is expected to be 400-500 basis points lower than the 17 per cent on average in the first two quarters. That’s primarily because of the high base effect created by the 13 per cent growth seen in the third quarter, which was followed by 7 per cent growth in the preceding two quarters,” says Prasad Koparkar, senior director, CRISIL Research. He also expects companies to report a margin contraction of around 50 basis points (bps) YoY amid rising raw material costs across sectors. One bps is one hundredth of a per cent.

The decline in commodity prices and bond yields is, however, likely to benefit domestic manufacturers and corporate banks. Most brokerages expect a strong quarter for corporate banks, including public sector banks, and companies from the capital goods, information technology (IT) and consumer goods sectors.

“We expect strong growth in the net income of banks, capital goods and consumer staples, while automobiles, oil, gas and consumable fuels, and telecom are likely to report weak numbers during the quarter,” writes Sanjeev Prasad of Kotak Institutional Equity in his report.

Excluding metals and energy, Nifty companies’ net profit is likely to grow by 14.3 per cent YoY during the December quarter, the best in nearly three years. These firms’ combined revenue is estimated to grow by 11.8 per cent YoY in the third quarter, as against 10.1 per cent growth during July-September.

Excluding energy and financials, the combined net profit of the Nifty 50 constituents is estimated to grow by 7.2 per cent YoY against 11.4 per cent growth during the corresponding quarter a year ago and 7.3 per cent during the second quarter of the current fiscal year. Their combined net sales are expected to grow by 12 per cent during the quarter, the lowest in the last four quarters.

The analysis is based on October-December 2018 quarter earnings estimates by equity brokerages including Edelweiss Securities, Kotak Institutional Equity, Motilal Oswal Securities and Prabhudas Lilladher. For banks and non-banking financial firms, net sales are gross revenues net of interest expenses (also called net interest income), while for others, it’s total income from sales of goods and services (net of indirect taxes).

The combined net profit of metal and energy companies that are part of the Nifty 50 index is estimated to decline by 28.6 per cent YoY during the December quarter against an average earnings growth rate of 31 per cent YoY in the previous five quarters. These commodity producers together accounted for 40 per cent of the combined net profit of all index companies during the September 2018 quarter.

Among individual index companies, State Bank of India, Axis Bank, Oil and Natural Gas Corporation, Sun Pharma and Grasim are likely to report strong earnings momentum. At the other end of the spectrum, Bharti Airtel, Indian Oil, Bharat Petroleum, Vedanta, and Maruti Suzuki are likely to be the biggest laggards during the current earnings season.

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