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Four factors that will drive September quarter results of India Inc

Mayuresh Joshi/Mumbai 12 Oct 18 | 06:16 AM

The first quarter ended June will qualify as the quarter of very slow growth but decisive growth. However, the second quarter has seen the Nifty and Sensex touching new highs but it also saw a very narrow rally in the markets. The key theme was consumption and most of the other sectors were hit by a weak rupee and high crude oil prices. Crude oil prices were higher and there were headwinds due to rising input costs and interest rates weigh on companies as they enter the earnings season.

The Nifty50 reported an EPS of Rs 115 in the June quarter, valuing the market at around 25-26 times P/E on a rolling basis. Second-quarter ended analysts estimate the range from Rs 130-132 EPS, which may face some pressure due to rupee, oil and input cost pressures. 

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Factors that will drive September quarter results of India Inc

The following are some of the major trends that will impact the results in the second quarter of the fiscal year 2018-19:

• The rupee has depreciated from around 67/$ to 74/$ during the quarter and will be the key to growth for the IT and the pharma sector. However, there might be cross currency headwinds for the IT sector. Management commentaries and growth outlook in the digital arena should hold the key for IT stocks in tier I and tier II names. New launches expected in the complex generic space and cost optimization should enable Pharma companies to report stable EBITDA margins on a sequential basis. 

• Bond yields have gone above the 8% mark and despite the RBI maintaining status quo in the October policy, the impact of 2 rate hikes will be visible in the performance of rate sensitives like banking, NBFCs, realty, and auto companies. Banks with a retail franchise are expected to better than corporate books.

• Commodity prices will be the major theme in the quarter. While copper and aluminum prices fell post-June, there has been some recovery post-August. On the oil front, upstream oil companies will benefit on higher crude prices but downstream companies like HPCL and BPCL are likely to come under pressure. The subsidy is expected to wipe out 50% of the profits of downstream oil companies. Thus, should, however, play out in the coming quarters. Albeit, the movement of rupee and crude shall be key monitorables, as they have an impact in terms of sensitivity to earnings.

• The big question mark will be over FMCG and consumer companies. Rural demand may be visible in the third quarter and a lot will depend on the efficacy of the MSP. Delayed festive season and Kerala floods to impact the financials of consumer companies. Also, the higher input costs due to higher crude prices will hit most of the FMCG companies. They may not be able to sustain growth at the robust levels of the previous quarter. However, most of them have taken price hikes. Also, Q1 had a benefit of low base and again management commentaries have hinted to volume growth reverting back to mean levels from this quarter. Consumers discretionary spending in the aftermath of the rising crude prices and the impact on demand is to be observed from results and management outlook from FMCG / consumer staple companies.

Automobiles and auto ancillary companies

The first signs of weakness were visible in the monthly numbers of August and September. In fact, September was disappointing across the board as the high base effect played a role. In addition, Kerala floods in August and delayed festive season are likely to dent earnings of auto companies. However, the second quarter is likely to be stronger for companies in the HCV and the MCV segments. Overall, auto is likely to disappoint on the top line front. In fact, the normally robust passenger vehicle companies are most likely to disappoint. Higher input cost and discounting whether 2 Wheeler or 4 Wheeler might impact margins. However, festive season and demand coming back should ensure volume reverting to normalized levels in the coming few quarters. 

Banking and other financial companies

The big story is likely to be the impact of IL&FS issue on banking space. While the actual impact could still be one quarter away, it remains to be seen how many NBFCs and banks are willing to make a clean breast of the potential losses on IL&FS in the current quarter itself. With bond yields well above the 8% mark, higher cost of credit is also expected to compress margins. For most state-run banks, the issue of NPAs is likely to be paramount. Recovering and upgrades hold the key. Of course, credit costs will hit both the PSU banks and the private banks too. While the impact on NBFCs will be visible in the third quarter, many of the NBFCs may look to take a bigger hit in the September quarter to underplay expectations. Provisioning might remain elevated for most PSU’s/ corporate retail banks because of aging-related NPA’s, power related distress and delay in resolution of NCLT cases. NBFCs might be under pressure for the broader universe.

Cement and Construction companies

The cement companies have been correcting sharply in the second quarter on the back of weak cement price and higher fuel costs. Competition and monsoon seasonality will keep prices subdued. The highlight of the construction companies could be the road construction companies to report strong financials due to robust order book. It remains to be seen as to what will be the impact of the IL&FS fiasco on the results of road companies since a lot of toll roads have been either funded or structured by IL&FS.

FMCG and consumer stocks

This is the one sector that could disappoint on the top line. Rising crude oil prices and a depreciating rupee will dent margins. Volume growth likely to be subdued due to a higher base and also because the demand push really has not come through in this quarter. Margin expansion is likely to be hit by rising crude prices and rupee plunging. While the growth has been a lot more robust in the rural areas than in urban areas, the full impact of the MSP is likely to be seen only by next quarter. Also if the actual MSP realized by the farmers are lower than anticipated then the impact on these stocks could be limited.

IT and pharmaceuticals

These are the two sectors most likely to see positive signals from a weak rupee and the impact is already visible in the stock prices of these companies. The second quarter could see high-growth digital business and large transformational wins as well as the advantage of a weak rupee which will aid their dollar earnings. For pharma stocks, the rupee impact will continue to be positive. However, the June quarter of 2017-18 was marked by GST restocking and that base effect will dent the growth of pharma sales in this quarter on a YOY basis. Fundamentally, the US generics business faces pricing pressure due to competition.

Upstream and downstream oil

Upstream companies like ONGC and Oil India will continue to benefit from higher crude prices which are already at $84/bbl ahead of the Iran sanctions. Higher gas consumption and the doubling of LPG prices will help gas companies. And they could see robust numbers this quarter. Refining companies could face pressure on the GRM front but the higher valuation of inventory will bail them out. Oil marketing companies will face pressure on marketing margins due to crude. In addition, there is the worry of subsidy hitting them in the third quarter.

Disclaimer: The above opinion is that of Mayuresh Joshi (Fund Manager -Angel Broking Ltd) 

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