The earnings season will kick off this week with IT blue-chip Infosys Technologies releasing its first quarter (Q1) numbers on July 13. The market will take cues from the results to figure out the future direction of corporate earnings, though the expectations are modest this time.

Analysts expect companies to report flat net income. They see sectors like automobiles, pharmaceuticals, metals & mining, Infotech and consumer goods reporting good numbers and banking and telecom reporting subdued figures. Net income is seen rising 6 per cent year-on-year (YoY) for Sensex firms and 12 per cent for Nifty-50 firms.

Non-banking finance companies (NBFCs) are expected to do well, thanks to the mess the banking sector is in. Though the first quarter is seasonally dull for the sector, analysts project a strong growth trajectory for NBFCs in FY19. Business momentum might have moderated in 1Q after a strong 4Q in segments like commercial vehicle finance and higher recovery rates in rural finance. Bajaj Finance, Cholamandalam Invest & Finance Company, HDFC and IIFL Holdings could show strong growth.

Corporate loan growth remains weak for all financial sector companies, with the broad trends in the corporate sector remaining unchanged for many years now. With a sharp slowdown in fresh investments, loan disbursements to the corporate segment have fallen sharply and this is particularly hurting public sector banks given that their exposure to the corporate book is above 50 per cent of loans.

Banks may report losses on the back of high provisions for bad loans as well as mark-to-market (MTM) losses on their investment portfolios. Retail-oriented private banks like HDFC Bank, IndusInd Bank and City Union may, however, report stable numbers. Anticipating the trend for the full year, brokerage Kotak Securities pegs the earnings per share (EPS) of Sensex-30 at Rs 1,755 for FY19 and Rs2,180 for FY20, while that of Nifty-50 at Rs 545 and Rs 670 for the two years.

“We expect strong growth in the net income of (1) automobiles (strong volume growth on low base and operating leverage-led margin expansion), (2) consumers (continued volume-led sales growth and margin expansion due to operating leverage), (3) metals & mining (higher domestic realisations for ferrous although global prices of base metals were mixed) and (4) pharmaceuticals (led by domestic formulations and stabilisation of US businesses) sectors. We model net loss for (1) banks under coverage (high loan-loss provisions as well as MTM losses on investment portfolio) and (2) telecom (ARPU—average revenue per user—dilution due to intense competition),” Kotak Securities said in a report.

IT companies are projected to post better growth rates in FY19 than in FY18. “We expect TCS to lead FY19 growth among Tier-1 at 11.7 per cent in USD terms, significantly outpacing Infosys at 8.1 per cent. For 1QFY19, we estimate QoQ USD revenue growth of (2.4)-3.7 per cent with cross-currency headwinds of 20-80bp,” Elara Capital said in a report.

It says Ebitda (earnings before interest, taxes, depreciation and amortisation) will be up for most IT firms because of rupee depreciation and seasonally strong demand, but Ebitda margin may be down QoQ for most firms, except for L&T Technology Services (where a wage hike is expected only in Q2FY19) and Wipro (down 155 basis point QoQ adjusting 4QFY18 for one-off impact of insolvency of a customer and impairment loss in one of its acquisitions).

According to ICICI Securities, TCS would deliver sector-leading performance in FY19, with constant currency (CC) revenue growth at 9.5 per cent versus 6.7 per cent in FY18 and Ebit margin expansion of 90 bps to 25.7 per cent. TCS revenues are expected to get a boost in the medium term from the ramp-up of large, platform-centric and digital deals won in the recent past and the shift in enterprise IT spends back toward the core of the business.

ICICI Securities says Infosys traditionally enjoys strong seasonality in H1, while the first quarter could be materially weak for Wipro, with a likely decline in dollar revenues by 3 per  cent QoQ and in IT services Ebit margin by 60 bps QoQ to 15.4 per cent. It expects HCL Technologies to retain revenue growth guidance of 9.5-11.5 per cent in CC terms.

Tech Mahindra is expected to report a seasonally weak Q1 with dollar revenues declining by 2.5 per cent QoQ and Ebitda margins by 140bps QoQ to 16.1 per cent.

First quarter earnings for energy sector companies are expected to be weak for oil marketing companies (OMCs) because of the sharp decline in marketing margins amid curtailed pricing of auto fuels and lower underlying refining margins. But the numbers would be stable for RIL—as lower refining margins will be offset by a weaker rupee—and steady for gas sector companies—amid strength in volumes and higher unit margins for city gas distributors.

RIL could report stable standalone net income at Rs 8,700 crore, as the effects of lower refining margins will be mitigated by the weaker rupee and higher petchem volumes. There may be a modest decline in refining margins to $10.5/barrel.

GAIL is expected to report a modest 3 per cent QoQ increase in adjusted net income to Rs 1,020 crore, led by higher contribution from gas marketing and petchem segments and steady contribution from the gas transmission segment. Petronet LNG may report a modest 2 per cent QoQ increase in net income to Rs 530 crore led by a 5 per cent escalation in Kochi tariffs and sequentially steady volumes. Indra-prastha Gas and Mahanagar Gas are likely to report sequential increases in Ebitda and net income, driven by sustained momentum in volumes and expansion of unit margins based on price hikes made during the quarter.

Ferrous companies’ earnings momentum is likely to sustain in Q1FY19 driven by eight-year high spreads and volume surge. According to Edelweiss estimates, major players’ Ebitda growth would jump more than 35 per cent YoY. But the non-ferrous segment may clock relatively moderate Ebitda growth due to higher cost. Among mining companies, Coal India’s Ebitda growth is seen at 70 per cent, driven by higher volumes and realisation, NMDC’s performance is likely to be dented by lower volumes. Edelweiss Research expects ferrous companies to outpace non-ferrous players on earnings growth for the first time in nine quarters.

UBS expects telecom companies to show signs of revenue stabilisation in Q1 though recovery would still elude them. “We expect India mobile revenue for Bharti and Idea to decline by 1.5 per cent and 3 per cent QoQ, respectively, given 1) continued APRU down-trading 2) seasonal weakness and 3) pressure on postpaid ARPU given launch of Jio Postpaid. We expect Bharti's revenue decline to be lower than Idea’s due to consolidation of Telenor and its higher mobile broadband additions,” UBS said in a report.

Bonanza Portfolio said an earnings degrowth or flattish trend is mostly priced in. “Henceforth any uptick in earnings will be positive for individual good quality stocks. Stocks should be picked on individual growth stories of their businesses,” Bonanza said.

ashwinpunnen@mydigitalfc.com