Corporate earnings growth to show rise in fourth quarter of FY2018-19
Experts say that low base effect and improved growth in select sectors will boost aggregate corporate earnings.
The financial sector is expected to top the performance charts due the turnaround in the prospects of corporate-facing banks. The base effect—poor results in the fourth quarter of 2017-18—will also be key to the sector’s higher growth. “Though quarteron-quarter profit growth of PSU banks will be flat, their year-on-year (y-o-y)growth will look fantastic because they reported an aggregate loss of Rs 24,100 crore in the fourth quarter of 2017-18,” says a Motilal Oswal report. “The aggregate net profit will go up by Rs 20,000 crore as earnings have normalised in three large corporate-facing banks—ICICI Bank, Axis Bank and SBI,” says Dua.
As financials have high weightage in the Sensex and the Nifty, the upswing in their earnings will push aggregate corporate earnings. The other two segments—consumer-facing banks and NBFCs—will perform on expected lines. “While consumer-facing banks will continue to report stable growth, NBFCs will struggle in the fourth quarter as well,” says Saurabh Mukherjea, Founder, Marcellus Investment Managers.
Though the threat of a recession has had an impact on the global economy, it has not hurt our export-oriented sectors such as pharma and information technology. “IT and pharma should continue to report good numbers in the fourth quarter too,” says Mukherjea. Among these two sectors, pharma is expected to do better because issues related to the US Food andDrug Administration have been getting resolved. “IT should report steady numbers: neither sharp growth nor any negative surprises,” says Ajay Bodke, CEO, PMS, Prabhudas Lilladher.
Manufacturers of global commodities will drag aggregate corporate earnings growth. “Due to the global slowdown risk, base metal prices have fallen globally. This will impact Indian companies as well,” says Mukherjea. However, the fall will be small at the aggregate materials level—metals and mining combined—due to the relatively stable performance of the mining sector. Though prices of global commodities fell, crude oil prices rose due to geopolitical issues. Rise in prices should help upstream oil companies. “Net profit of oil refining and marketing companies will also be positively impacted due to inventory gains,” says Bodke.
Financial sector to push aggregate EPS growth
Nifty earnings per share will grow at 17.3%, y-o-y, in the fourth quarter.
The auto sector has been driving corporate earnings for several years, but it hit the brakes last quarter. There will be a negative base effect in the auto sector’s fourth quarter performance. “Since auto companies reported bumper profits during the fourth quarter of 2017-18, its y-o-y net profit will significantly fall in this quarter,” says Bodke. The sector’s aggregate net profit was down in the third quarter as well due to the huge loss reported by Tata Motors. But this time the fall will be across companies.
The telecom sector continues to bleed. There is no end to the pain induced by Jio and telecom will be the third sector that will pull down fourth quarter earnings growth. While Bharti Airtel is expected to report a huge loss in this quarter—it reported a small profit in the fourth quarter last year—Vodafone Idea will further the aggregate loss.
Performance of traditionally strong sectors such as FMCG is expected to be stable in the fourth quarter. “Due to sustained volume growth, FMCG companies will continue to report steady growth in the fourth quarter as well,” says Bodke.
Outlook for 2020
The effects of the fourth quarter will spill over in 2019-20 as well. For example, the performance of corporate-facing banks will improve. “There has been an earnings drought in the past few years and, hopefully, 2019-20 may be an exception to it. Large IBC (Insolvency and Bankruptcy Code) processes are unclogging the banking system, and it is expected to continue in the coming year as well,” says Bodke.
Similarly, the problems of sectors like auto are likely to continue. Hardening of interest rate and NBFC related liquidity crisis could also last for few more quarters. “Auto will continue to struggle in 2019-20 as well because it is a cyclical issue. Irrespective of RBI actions, market determined interest rates will also remain high due to huge government borrowing,” says Mukherjea.