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Pre-GST knock likely for corporate earnings in Q1


Net profit growth of Nifty companies likely to be lowest in nine quarters
The goods and services tax (GST) is estimated to have taken a toll on corporate earnings for the April-June quarter of financial year 2017-18 (FY18) even before it was implemented from July 1. Brokerages have said earnings growth of the 50 Nifty companies in the June quarter could be one of the worst in the past nine quarters.

The combined net profit of the 50 companies is estimated to decline by 2.6 per cent on a year-on-year (y-o-y) basis — worst since the March FY-15 quarter when it contracted by 41.7 per cent y-o-y. In comparison, the combined net profit of the 50 companies was up 49.6 per cent in the March FY17 quarter, while it was down 2.1 per cent in the June FY17 quarter.

The decline in profitability is likely to be led by slowdown in top line growth, inventory losses by oil marketers due to a sharp fall in crude oil prices and lower operating profit margins in the manufacturing sector. The analysis is based on estimates by Kotak Securities, Edelweiss Securities, Deutsche Bank, IDBI Capital and Motilal Oswal Securities, among others. For banks and non-banking financial companies (NBFCs), net sales are gross revenues net of interest expenses. For others, it is total income from sales and goods and services (net of indirect taxes).

Net profits may exclude exceptional gains and losses as estimated by brokerages.The combined net sales of the 50 companies is estimated to grow by 8.7 per cent during the June quarter, compared to a 14.1 per cent y-o-y growth in the March FY17 quarter and one per cent decline in the June FY16 quarter. Earnings look even weaker if cyclical sectors are excluded.

The combined net profit of Nifty companies excluding metals, oil and mining, and banks and NBFCs, is estimated to decline by 14.4 per cent y-o-y during the June quarter, compared to a 7.1 per cent y-o-y growth in the year-ago period and a 0.6 per cent growth in the March FY17 quarter. The combined net sales growth at 3.3 per cent y-o-y for these firms is estimated to be the lowest in six quarters. “For our coverage of companies, we foresee weak earnings growth, subdued top line growth and moderation in margins.

And, it would look weaker still, if you strip out the more cyclical metals and banks,” Prateek Parekh of Edelweiss Securities wrote in his report. He estimates a 2 per cent y-o-y decline in the combined net profit of his universe of 225 companies, driven by a 262-basis point decline in margins. One basis point is one-hundredth of a per cent.

Kotak Institutional Equities (KIE) expects an 8 per cent y-o-y decline in the net income (net profit for its universe of companies). “We foresee earnings decline in our coverage universe, including automobiles (inventory clearing due to GST), downstream energy, pharmaceuticals (disruption in domestic formulation businesses, again due to GST) and telecom (hyper-competitive sector activity),” Sanjeev Prasad of KIE wrote in his report.

Earnings growth is likely to be led by Tata Steel, which is expected to post net profit against a net loss for the same quarter a year ago. It is expected to be followed by Dr Reddy’s Laboratories, Vedanta and Tata Power. Brokerages are also expecting strong net profit growth from State Bank of India, Hindalco, Kotak Mahindra Bank, Larsen & Toubro and Eicher Motors, among others. At the other extreme, Indian Oil Corporation is expected to be the biggest fall in earnings growth for the June quarter, with a 63.8 per cent y-o-y decline in net profit, followed by Bharti Airtel, Bharat Petroleum, Lupin and Sun Pharmaceutical.

Going forward, some expect sequential improvement in earnings. “While the annual growth momentum appears muted, macro indicators are suggesting a sequential stabilisation in growth momentum. The demand environment seems to have normalised further, post the demonetisation drag seen in the fourth quarter of FY17,” Abhay Laijawala of Deutsche Bank wrote in his report.

In all, 28 out of 50 index companies are estimated to report a y-o-y growth in net profit for the June quarter. In comparison, 25 index companies had reported a y-o-y improvement in earnings during the March FY17 quarter and 37 companies had done so a year ago.

Business Standard, New Delhi, 10th July 2017

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