The latest results season has started on a somber note. Both the
IT bell weather TCS and Infosys have highlighted the challenges persisting in
the operating environment. Though the 2QFY20 saw divergent performance for both
the leading companies, the guidance for near future underlined the growth
challenges.
The quarterly performance has to be evaluated with the backdrop
of already muted expectations and earnings downgrades post 1QFY20 results.
Some key points of 2QFY20 results forecast by brokerages could
be summarized as follows:
- Expect profit before tax (PBT) for the KIE coverage universe to decline by 4.6% yoy in 2QFY20, led by a yoy decline in PBT in the following sectors: (1) automobiles (lower sales volumes and margin compression due to increase in discounts), (2) metals & mining (sluggish demand, weak realizations and volumes on a yoy basis), (3) oil, gas & consumable fuels (dragged by decline in volume growth for Coal India and lower net crude realizations for ONGC) and (4) telecommunication services (seasonal weakness).
- Expect strong yoy growth in PBT for several sectors: (1) banks (led by Axis Bank, ICICI Bank and SBI) (2) construction materials (yoy improvement in profitability but deterioration on a sequential basis), (3) diversified financials (steady operating performance aided by a decline in the marginal cost of funds for large players) and (4) pharmaceuticals (strong quarter for the domestic formulation segment).
- Expect PBT of the BSE 30 Index to decline by 1.4% yoy and that of Nifty-50 Index to decline by 4.4% yoy.
Note that 2QFY20 net profit/earnings numbers are not comparable
with 1QFY20 and 2QFY19 numbers given (1) lower corporate tax rate for several
companies for 2QFY20/FY2020 (announced on September 20, 2019) and (2) resultant
tax reversals pertaining to higher taxes paid in 1QFY20 in 2QFY20 tax numbers,
which will ‘inflate’ 2QFY20 net profits/earnings. (Kotak Institutional
Equities' Research)
- "The second-quarter earnings-report season will be more of the same – tepid and uneventful. Underlying demand slowdown in the domestic economy and weak global commodities prices are expected to take a toll on earnings with very few bright spots, if any. However, it is important to look at this quarter’s numbers from a PBT perspective, as the reduction in the corporate tax rate cuts will result in several adjustments in this quarter’s tax numbers."
Our FY20 Nifty EPS estimate has been cut by 3.8% to INR539
(prior: INR560). We now build in EPS growth of 12% for FY20. Ex-corporate
banks, we expect 3% profit growth for the Nifty in FY20.
The reduction in the corporate tax rate has brought some cheer
to earnings, but for FY20, it has been more than offset by sharp cuts in Autos
and significant adjustments of deferred taxes for large corporate banks. The
silver lining to this somber backdrop is that the festive season demand has
begun on a positive note. (Motilal Oswal Securities).
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- In 2QFY20, the first quarter after the cut to corporate tax rates, for the 164 companies under our coverage we expect a profit growth of c.5.4% YoY, revenue growth of (-0.6%) YoY and EBITDA growth of 0.9% YoY. Excl. financials, we expect an PAT growth of (-3.5%) YoY while excl. corporate banks (SBI, PNB, BoB, Axis, ICICI and Yes) the growth is expected to be c.1.0% YoY. Excl. financials, profitability is expected to decline with overall EBITDA margin contraction of c.26bps YoY driven by metals and auto and auto ancs companies. For the Nifty50, EPS is likely to grow by c.3.7% YoY aided by strong growth in financials even as telecom and consumer discretionary remain a drag (exhibit B). Financials, healthcare and consumer staples are likely to be the main driver of earnings growth thereby offseting the weakness in other sectors.
- From the consideration set, financials, cement and chemicals are expected to be the major sectors with highest profit growth YoY in 2QFY20 while auto & auto ancs and metals are likely to witness the highest decline in PAT.
In terms of profitability, cement, pvt. Banks and NBFCs could witness the highest expansion in operating margin YoY while that of metals, utilities and auto & auto ancs are expected to have the highest decline. (JM Financial)- Top-line deceleration to continue: Across Emkay coverage universe, our team expects growth trends to weaken further from Q1 levels, with the decline led by Auto, Telecom Power, IT services and Pharma sectors. On a positive note, Cement (positive pricing trends yoy), Engineering/Cap goods and Media/Entertainment (subscription and multiplex footfalls growth) could see an acceleration in top-line growth trends.
Softer commodity prices should help margins of input-cost
dependent sectors: Cement, FMCG, Durables, etc. Strong GRMs/marketing mix
should lift margins for refiners/OMCs. However, margins should decline for Auto
(low volumes) and Pharma (step up in R&D investments).
Many companies for which the path to move to the new tax regime
is clear cut should be making the move in Q2 itself. In fact, some companies
may report some write-backs of excess taxes paid in Q1, leading to a lower than
25% ETR. Overall PAT growth for Emkay universe should be flat ~-1% (up from -4%
for Q1FY20). PAT growth should be led by Cement, BFSI and FMCG, while sharp PAT
declines are likely for Auto and Mining sectors.
H1FY20 Nifty PAT growth should come in at -5% yoy vs. 15% yoy
growth expected for the Nifty for FY20 – implying room for cuts in the Nifty
earnings estimates.
- Watch out for early signs of greenshoots. However, we also highlight some greenshoots that could be seen across sectors during Q2, setting up stage for longer-term positive trends: Auto sales decline could be nearing the bottom and commodity pricing trends are expected to support margins across sectors. (Emkay Global Research)
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