Stock Market

Distressed sectors earnings may improve in Q2

The second quarter (July-September) earnings season, which kickstarts Thursday, is expected to bring some cheer but the market will closely watch whether distressed sectors will be show any improvement.

Most analysts think business in India has most likely improved in the last three month but there may be challenges this quarter when it comes to recovery in sectors like capital goods, construction and engineering.

According to Edelweiss, Q2FY17 is likely to be a better quarter, following seven consecutive quarters of contraction, with profit growth of 6 percent. It says that though overall growth may still remain subdued, a churn in sectors’ profit growth will be encouraging.

The brokerage firm is positive that sectors with depressed earnings growth in past two years — metals, capital goods and cement — may show traction in earnings.

“These sectors faced severe headwinds in FY15 and FY16, which seem to be receding now. The trend in domestic investment companies is starker, with these companies expected to report second consecutive quarter of 25 percent plus growth,” it says.

CRISIL is also confident that revenues of companies in key sectors, excluding BFSI and oil companies, may rise 7 percent (on-year) in Q2, second-best showing in six quarters. EBIDTA (operating) margin is seen up 50 basis points (bps).

The fillip comes from the low-base effect (revenue growth in the corresponding quarter last fiscal was stagnant), improvement in urban and rural consumption, and low commodity prices.

CRISIL expects sectors focused on urban and rural consumption such as automobiles and retail, along with pharmaceuticals and IT services, to record double-digit revenue growth.

According to ICICIDirect.com, average top line of Sensex companies is likely to grow at a moderate 3.6 percent year-on-year while EBITDA and PAT are expected to report strong growth of 13.6 percent and 9.8 percent respectively. It expects Sensex earnings per share (EPS) to grow at a CAGR of 16.9 percent in FY16-18.

In Q1FY17, India Inc reported 5 percent annual revenue growth, compared with about flat revenue growth in Q1FY16.

Earnings of over 500 companies across 50 sectors (excluding financial services, oil and gas) showed that growth was lower compared with a 7 percent increase in Q4FY16.

While the revenue of export-linked segments grew 12 percent in the first quarter, those related to consumer discretion and investments posted 8 percent annual growth.

Best bets

IT sector is likely to see a slowdown in this quarter while capital goods and sectors focused on urban and rural consumption such as automobiles, FMCG and consumer discretionary sectors are likely to see firm growth.

Disbursements from Seventh Pay Commission hikes, a pick-up in rural demand led by normal monsoon and pre-festive inventory pile-up at the distributor and dealer level are likely to boost consumption.

Crisil sees automobiles reporting 13 percent growth, riding on new launches and healthy rural demand following a good monsoon. Retail is expected to grow 12 percent on the back of improvement in disposable incomes and India’s economic outlook, while pharmaceuticals, driven by new launches in the US, should see 13 percent growth.

The broader consumer discretionary sector, comprising airlines, cars and two-wheelers and retail, are expected to grow faster than industry because of improved volumes.

Cars and two-wheelers are expected to grow 16-18 percent and 13-15 percent respectively, due to new model launches and improved demand, including rural.

Boosted by same-store sales growth and store additions, revenues of retailers are expected to increase 12 percent during the festive season. The aggregate revenue of airlines is seen up 7-9 percent on strong growth in domestic passenger traffic, says CRISIL.

It says EBITDA margins may rise 80 basis points (bps) with input costs, especially crude oil and copra prices, declining.

According to ICICIDirect.com, auto sector is likely to see strong growth, led by 20 percent revenue growth in original equipment manufacturers (OEMs). This would be largely contributed by 14 percent volume growth. Lesser promotional offers and selective price hikes may drive double digit topline growth for FMCG contributed by a mix of volume & prices, feels the brokerage firm.

On a sectoral basis, healthcare, oil &  gas  and  auto  companies  are top  five  performing   companies  based  on  PAT  growth.  “Five  companies  top   of the  chart  in  terms  of  profit  growth  include  Sun Pharma ,  Lupin , Gail India (~67.1 percent  YoY),   Maruti Suzuki and L&T ,” says ICICIDirect.com.

Technology companies may report subdued Q2 results as few of them have already issued revenue warning citing slowdown in business. Margins are likely to contract due to muted growth, rupee strength against the British pound (over 8.3 percent QoQ) and slow decision-making among clients post-Brexit.
Crisil says IT services sector is expected to grow 10 percent, slower than in the past, aided by volume and rupee depreciation.

“Even for banks, asset quality stress is unlikely to inch higher. However, improvement in other sectors is likely to be offset by poor/slowing growth in FMCG and IT, which are expected to report low mid single digit profit growth,” Edelweiss says in a report.

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