Poor earnings breadth to cloud India Inc.’s Q2 performance

COIMBATORE: Though the profit after tax (PAT) of companies that form part of the Nifty are projected to grow in double digits for the first time after six quarters in the second quarter (Q2) of 2017-18, the increase in earnings would be driven by just three sectors — oil marketing companies (OMCs), firms engaged in metals business and public sector (PSU) banks, estimates by brokerages showed.

"Excluding OMCs, PSU banks and metals, the Nifty PAT will post a muted 5% y-o-y growth," said Gautam Duggad, head, research, Motilal Oswal Securities. "We see huge scope for earnings breadth to improve. Quality of earnings remains less than impressive, with low-RoE (return on equity) sectors driving the performance," he said.

"The growth (would be) mainly driven by good performance coming from three sectors—metals with a 24.7% revenue growth and 170.1% PAT growth, oil & gas with 20.1% revenue growth and 21.8% growth in PAT, and financial services with 18.8% increase in NII (net interest income) and 18% PAT growth all on a y-o-y basis," said R Sreesankar, co-head, institutional equities, Prabhudas Lilladher.

Automobile companies would report growth in profits after three consecutive quarters of decline. Consumer-oriented firms would also see an increase in PAT, analysts said. Global cyclicals are expected to post strong earnings growth of on the back of a solid performance by metals and OMCs, they said.

Apart from OMCs, which will benefit significantly from inventory gains and higher GRMs (gross refining margins) post 'Hurricane Harvey' in the US, a low base effect would help banks, metals firms and companies in the utilities sector to post a strong jump in PAT.

Defensive sectors are expected to post 9% y-o-y decline in PAT in Q2, dragged down by IT (information technology) and healthcare firms. This would be the fourth consecutive quarter of PAT decline for companies in the defensive sectors.

Telecom, IT and healthcare firms would be among the underperformers during Q2. IT companies are expected to report third consecutive quarter of flattish PAT in Q2. Consumer-oriented sectors would however be able to ride out of the GST de-stocking impact of the first quarter (April-June), analysts said.

Rising prices of key commodities such as steel pose a risk to earnings in the forthcoming quarters, experts said. Commodity cost deflation boosted the profit margins of consumer-oriented sectors between 2014-15 and 2015-16 as well as the first half of 2016-17 even in the absence of major demand pick-up, they said.