With the asking rate for Q4FY20 and FY21 being high, Emkay foresees further earnings cuts going forward.
The earnings for the quarter that ended on December 2019 were largely in line with expectations considering the economic growth slowdown and several companies have taken the advantage of corporate tax rate cut which supported bottomline.
The topline performance of companies was in fact weak, but operating growth with margin expansion was better given the fall in commodity prices.
"Q3FY20 earnings season was largely in line with our expectations. Our universe EBITDA growth was 10 percent (4 percent below estimate) while ex-financials it was 2 percent below estimates," PhillipCapital said.
"PC universe revenue growth was 1 percent below expectations, supported by financials; flat ex-financials. Negative revenue growth was seen in automobiles, metals, and infrastructure," it added.
Emkay Global also said that aggregating its Q3 results across its coverage universe, more companies reported sub-10 percent YoY topline growth than in Q2, indicative of topline weakness.
"On the other hand, operating profit trends appear strong – showing clear trends of margin expansion (across both large- and smallcap stocks). Aggregate operating profit growth picked up to around 5 percent YoY from zero a quarter ago. Margin improvements in largecap space is stronger than that of SMID (small-midcap)," it added.
The cooling-off in commodity prices appears to be a significant driver of margin expansion for the largecaps. However, the same benefits were not seen in smallcaps probably due to weaker pricing power.
"In face of weak topline growth, companies seem to have cut down on other expenses/SG&A. A common theme is slowing staff cost growth – from 20 percent plus levels a year ago to around 6 percent now. However, this is still growing faster than topline," said Emkay.
The key negative seen in Q3 earnings was downgrade that continued for another quarter, which as a result, analysts see more downside risks to their earnings estimates.
"Direction of earnings revision for the broader markets still remains downward, with 66 companies in MOFSL Universe witnessing an earnings cut of 3 percent plus and 42 witnessing upgrades of 3 percent plus for FY21. Given the weak underlying macro and mixed high frequency indicators, there are downside risks to our earnings estimates," Motilal Oswal said.
Emkay also said 68 percent of the stocks under its coverage saw earnings being cut post results, with average cut being 6 percent. "Earnings cuts were more frequent in retail, banks and chemicals. Agri-chem, NBFC and metals saw most earnings increases. Thus, it appears that most of the Nifty EPS growth in 9MFY20 has come primarily due to the corporate tax cut announced in Sep-2019."
With the asking rate for Q4FY20 and FY21 being high, Emkay foresees further earnings cuts going forward.
Motilal Oswal cut its FY21 Nifty EPS estimates have been cut by 1/2 percent to Rs 527/679 from its earlier Rs 532/693.
The management commentary after Q3 earnings were more or less positive, as they were betting more on rural growth given several government measures, low commodity prices, and good monsoon.
"Management commentary is incrementally positive on rural consumption (both auto and consumer managements alluded to rural consumption recovery) but cautious on loan growth/asset quality trends in retail banks," Siddhartha Khemka, Senior Vice President | Head-Retail Research at Motilal Oswal Financial Services told Moneycontrol.
Pankaj Bobade, Head- Fundamental Research at Axis Securities also said as the economy expands at a faster pace, it would lift the consumption led demand. "To start with, the rural demand is expected to improve with a good Rabi crop along with the measures taken by the government to improve the income levels in rural economy."
"The budget, and the RBI policy following the same have put in place few good measures to put the economy on an accelerated growth path. Hence we are quite confident of economic recovery and market direction over mid to long term," he said.
The worrisome part was the latest novel coronavirus threat, which may impact supply chain disruptions across some industries in the short term and there could be some impact on earnings if it stays longer than June.
"Indian economy will have far reaching implications of Corona virus as China is India's largest import partner and accounts for 45 percent of electronics, 40 percent chemicals, 33 percent machinery and 65-70 percent API's and 90 percent of mobile components," Prabhudas Lilladher said.
CII estimated that shipping, pharmaceuticals, automobiles, mobiles, electronics, textiles etc. could be impacted due to prolonged impact.
"Although there are hopes of factories resuming production, the 10 percent production cut by Hero MotoCorp shows the way things can turn in event of delay in recovery as Indian manufacturing industries will exhaust raw material inventory by middle of March," said Prabhudas Lilladher which expected a shortage of goods and a sharp increase in prices, which has the potential to impact the growth rates in Q1FY21.
But as companies look for alternate sources of manufacturing, it will provide opportunities to Indian manufacturers to fill the vacant space left by the Chinese, Bobade said.
After a recent rally and the passing of key events like the budget, earnings, RBI policy etc, experts expected the markets to remain narrow in range and concentrated till the broadbased earnings recovery.
After third quarter earnings, brokerages selected 14 midcaps to bet on; including IRCTC, Jubilant Foodworks, L&T Infotech, CG Consumer, Indian Hotels, Alkem Labs, Federal Bank, Mindtree etc.
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