With GDP growth at just 5%, the first quarter of 2019-20 was disastrous for India. As domestic slowdown persisted in the second quarter, the government announced stimulus packages to help boost the economy. However, with the US-China trade war continuing to negatively impact global growth, India Inc is likely to report another set of weak numbers for the second quarter.
Experts, however, feel the second quarter won’t be as bad as the first. “With an expected aggregate revenue growth of 2-3% yo-y for Nifty companies, the situation is better,” says Amar Ambani, Senior President and Head of Research, Yes Securities. However, pressure on the bottom line remains. Companies would have found it difficult to cope had the corporate tax cut not been announced.
“The second quarter net profit will get a boost because of lower taxes and write back of higher taxes provided in the first quarter,” says Ashish Shanker, Head, Investments, Motilal Oswal Private Wealth Management. While the situation is still weak at the aggregate level, it is a mixed bag at the sectoral level. Let us take a look at how sectors are likely to fare.
As auto companies report monthly sales figures, the fall in second quarter sales volume is known. The market’s focus will now be on realisation per vehicle, following the discount companies had to give to push demand, and the margin, which will reflect the impact of fall in commodity prices. The impact of fall in key raw material prices will only be visible in the coming quarters and not in this one. Net profit fell badly due to lower realisation on the back of higher discounts. Aggregate net profit will also be dragged down due to huge losses suffered by Tata Motors. “Auto numbers would have been worse without the tax reversals,” says K. Subramanyam, Co-Head - Equity Advisory, Altamont Capital.
While consumer facing banks will report stable net profit growth (around 30% y-o-y), most of the aggregate net profit growth is expected to come from corporate facing banks due to reduction in asset write down and low base effect. For example, SBI, ICICI Bank and Axis Bank are expected to report 100% plus net profit growth y-o-y.
Revenue and net profit for the quarter is expected to show decent y-o-y growth because of increased execution of pending orders, especially by companies from the engineering and T&D segments. However, private sector capex is yet to pick up and therefore, the order inflow will be under pressure, except for a few companies like L&T. The new taxation rule—only 15% tax for new manufacturing facilities that come up by 2023—should attract global manufacturing majors and therefore, result in private capex revival in future.
Lower taxes will help push Q2 results Sectors like auto, mining and oil and gas will continue to be under pressure
Despite a visible slowdown in rural demand, consumer staples companies (or FMCG companies) are expected to report decent numbers because the slowdown is yet to impact non-discretionary consumption. The fall in raw material prices is another factor helping them. Big FMCG companies like HUL, Nestle, ITC, etc are big taxpayers and therefore, will benefit from the recent reduction in corporate tax.
While consumer staples are holding up, the situation is not rosy for consumer discretionary companies. This is because many consumers still buy big ticket items like televisions and air-conditioners on instalments and therefore, ongoing credit tightness is hampering sales. However, the government’s efforts to shore up consumer confidence and RBI’s interest rate reductions should improve the situation. “Consumer spending is expected to pick up in the coming quarters because of continued rate reductions by RBI,” says Atul Kumar, Head – Equity Funds, Quantum MF. Some improvement in rural discretionary consumption due to a good monsoon can be another positive. “Spending by households is expected to improve in the third quarter due to festival demand and also due to large discounts offered by companies to clear inventory,” says Dhananjay Sinha, Head of Strategy Research, IDFC Securities.
The ongoing fall in commodity prices, triggered by global slowdown concerns, have taken a toll on the performance of the metals and mining segment. Since the situation is worsening at the global level, their woes may continue in the coming quarters too. “The pressure on metal companies, especially steel, will increase. They will be the real losers in the coming quarters if their demand of anti-dumping duty is not accepted by the government,” says Subramanyam.
Though some companies are postponing orders due to uncertainties generated by the ongoing trade war between US and China, the order situation is under control for Indian IT companies. “Impact of trade war is limited on Indian IT companies because the US is still doing well compared to Europe,” says Sinha. Among large caps, while TCS and Infosys are expected to report steady performance, Wipro is expected to lag.
This segment has been a mixed bag for the last few years. While pharma companies continue to face pressure from their US businesses, their domestic divisions continue to do well. There may be some positive surprise by large exporters also, mostly because the US FDA-induced problems are getting solved and also because of low base. For example, Dr Reddy’s is expected to report 50% plus y-o-y net profit growth in the second quarter.
Oil & gas
While independent refineries and city gas distribution segments are expected to report stable numbers, others will be impacted by the volatility in crude oil prices (while global slowdown is pulling it down, political tensions in Middle East is holding it up). Though there won’t be any impact on oil PSUs in the second quarter, the government may impose subsidy burden on them in coming quarters if crude oil flares up.