Elevated costs to limit earnings growth in Q2

NEW DELHI : India Inc.’s September quarter performance is likely to be boosted by the domestic economic recovery, while global volatility keeps performance muted for export-oriented sectors.

Mint calculations based on Bloomberg consensus earnings estimates showed that 41 out of 50 Nifty companies (excluding financials) may post average revenue growth of 18.6% year-on-year. However, cost pressure, though it may be peaking, may pull down operating performance and earnings growth. Consensus profits before interest, tax, depreciation and amortization in the September quarter (Q2) may decline 9.3% year-on-year and 14.5% sequentially.

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“Q2 will mark five consecutive quarters of contraction in operating margins on a y-o-y basis for our coverage universe, excluding financials and oil marketing companies. However, margins are likely to expand flat sequentially, indicating signs of bottoming-out in Ebitda margins,” said analysts at Yes Securities Ltd. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Even though crude oil and commodities have fallen from the peaks in June, high-cost raw material inventory may continue to hurt companies before easing in Q3.

Analysts at Elara Securities (India) Pvt. Ltd said, “Owing to continued margin pressure, ex-financials Ebitda and overall Nifty net profits are expected to remain flat year-on-year.”

Revenue growth in Q2 may be led by domestic-oriented sectors and consumption plays, led by financials and supported by consumer discretionaries. Pent-up demand and stocking ahead of the festive season may help automobiles and consumer durables.

Sectors focused on domestic consumption and investments may outperform those dependent on global demand/cyclicals/commodities, said analysts at Motilal Oswal Financial Services Ltd (MOFSL).

Sectors such as metals, oil and gas that were leading the growth in earlier quarters are expected to turn laggards. The downturn seen in base metals and steel demand and prices, as well as export duty on steel, are likely to impact metal companies, while higher coal costs further limit earnings. In addition, the windfall tax, declining refining margins, inventory losses and higher natural gas prices are key headwinds for oil and gas producers, marketers and distributors.

“We expect net income of automobiles (helped by improvement in chip availability), banks (strong loan growth, net interest margins expansion and a sharp decline in loan-loss provisions) and diversified financials (accelerating loan growth) to rise sharply on a year-on-year basis,” said analysts at Kotak Institutional Equities. They expect net income from construction materials due to high fuel and power costs, metals and mining due to lower commodity prices, weak realization, and oil, gas and consumable fuels (weak refining margins and large inventory and marketing losses in case of downstream oil firms), to decline sharply both sequentially as well as y-o-y basis. Single-digit y-o-y growth is expected for consumer staples as they record modest volume growth. For IT services, modest constant currency revenue growth and margin headwinds will be key influencing factors.

“Earnings growth for Nifty 50 is expected to be muted at around the low single digit in Q2, mainly due to margin compression in cyclical sectors and also due to the high base effect of last year Q2,” said Sushant Bhansali, chief executive of Ambit Asset Management.

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