Citi Expects Margin Pressures To Keep Q3 Earnings Growth Tepid

Citi Research has low earnings growth expectations from the December-ended quarter owing to margin pressures in automobiles and dip in metal prices. Anchored by the financial sector, the research arm of Citi group sees Nifty and Sensex earnings, excluding those of oil marketers, to grow 12 percent on a yearly basis.

“We expect another quarter of decent sales growth trends of 17 percent and 19 percent year-on-year for Nifty and Sensex respectively, but margin pressures etc are likely to keep earnings growth tepid,” Citi said.

Citi’s Sectoral Outlook For Q3 Earnings:

Energy:

• In the energy sector, which is riddled with tumultuous oil prices, there could be significantly lower gross refining margins, and inventory losses for oil companies for the December-ended period to pull down overall earnings growth.

Auto:

• The sector’s higher discounts and raw material pressures are set to continue this quarter.

Metal:

• Expects steel producers to report lower operational margins sequentially as pricing continued to fall through November and December.
• Lower commodity prices and higher input costs in this segment will likely offset the growth trajectory of the overall earnings.

Financials:

• Expects decline in bond yields, improvement in asset quality trends and a favourable base in financials to lead to improvement in earnings trends.

Information Technology:

• Expects a 1.7-4.7 percent constant-currency revenue growth on a quarterly basis for large Indian IT companies in the third quarter of the current fiscal.
• It's also likely that cross-foreign exchange headwinds could upset the dollar revenue growth by as much as 60-80 basis points on a quarterly basis.

Media:

• Envisage a steady business performance with chances of company-specific variances.
• The assembly elections in December and the festive season preceding it are likely to lead to an uptick.
• Slower than expected subscription revenues are seen for the quarter, in addition to chances that investments in the sector could weigh on margin growth.

Pharmaceutical:

• Forecasts a lower-than expected growth in India and a sharp price correction in the U.S. given the country’s generic pricing trend.
• Eventuality of a lower-than expected offtake in the U.S markets remains a concern for the group’s estimates.

Real Estate:

• The liquidity crunch brought by the non-bank lender crisis last year continues to affect the earnings of the sector.
• The cost of debt, given tighter financing conditions, along with impediments in execution brought by liquidity tightening are a key lookout in outlook for this sector’s earnings.

Utilities:

• The sector’s components which are under recovery, and those with a capacity addition are key to lookout for this earnings season.
• Higher fuel costs and lower-than-anticipated realisations are key factors to watch out for.

Watch the full discussion here

Disclosures