The quarter ended September 2018 was one of the best quarters in recent times, with 16.2% growth in net profits for Indian companies. This growth was largely aided by lower input costs and better traction on sales. There was also the base effect, since the corresponding quarter in 2017 was a relatively tepid one with stock markets
still recovering from the twin effects of demonetisation and the implementation of the Goods and Services (GST). How will the quarter ended December 2018 be?
At the outset, the quarter was a tumultuous one. A tight liquidity situation combined with rocketing of yields, high crude oil prices and a weak rupee contributed to making the quarter a challenging one. How are the sectors likely to pan out?
Consumer stocks: They could be the saviours
The FMCG stocks and the consumer durables could be the beneficiaries of a sharp rise in consumption demand during the quarter. Input costs stayed under control but sales traction was visible across most consumer sectors. We expect these sectors to announce the sharpest growth in terms of top line and bottom line. In fact, these FMCG stocks are likely to sustain top line growth of closer to 6-7% in the quarter.
PSU Banking: Could be the surprise package in Q3
PSU banks had a lot going for them in the third quarter. Apart from the benefits of the capital cycle, even the RBI has hinted that the NPA cycle may have bottomed out. That could show up in the third quarter results. Secondly, the NCLT has resulted in nearly Rs 80,000 crore of loans being written back with another Rs 70,000 crore coming in the last quarter. This inflow could keep PSU banks buoyant in the third quarter. Frontline PSU banks may be the big beneficiaries in terms of growth. Private Banks may still see business growth but margins are likely to remain in a range.
NBFCs: Could display the real pain
NBFCs and housing finance companies reported decent growth in the second quarter. But the IL&FS crisis actually erupted in a big way in the third quarter and that is likely to show up. We could see a lot of NBFCs taking an actual hit on their top line and bottom line due to weak business conditions and loan provisions on their loans and also on their investments. It could be one of the most challenging quarters that NBFCs may have faced in quite some time. However, pure consumer finance companies may not be largely impacted.
Automobile sector: Look for signs of a slowdown
This is the one sector that has seen genuine pressure in the last 3-4 months as demand for cars and two-wheelers has really slackened. Growth pressure is visible on all consumer facing autos and also on tractors in the recent monthly numbers. We expect autos to come under pressure both in terms of top line growth and bottom line growth.
Commodities: Steel may be ok but expect pressure on oil and non-ferrous
Metals may be a mixed bag in the third quarter. Most non-ferrous segments like aluminium, copper and zinc are likely to see pressure. Even upstream oil companies and refiners may come under pressure due to sharp volatility in the price of crude oil getting reflected in Singapore GRM. We expect weak numbers from non-ferrous and upstream oil companies.
While downstream oil could be neutral, it is steel stocks that could manage to put up a good performance in the third quarter, largely backed by domestic demand. However domestic steel prices are at par with landed imported steel and Chinese slowdown pulling down prises on LM is to be observed. However, lower inventories and softness in input costs should provide respite on margins.
IT and Pharma: This could be the surprise package
Both these sectors benefit from a strong dollar, which went all the way up to Rs.75/$. While the rupee may have recovered, it is substantially weaker than previous year. Secondly, the US growth story and the geographical diversification should benefit both these sectors. Management commentaries around digital / deal wins from BFSI/ Retail/ manufacturing in the event of an impending US slowdown shall intimately decide the constant currency / dollar revenue growth.
The author is Fund Manager at Angel Broking Ltd.