Better days ahead for India Inc
The new year is set to begin on a positive note for India Incand its shareholders. The top companies are likely to report faster growth in earnings in the third quarter than during the first half of FY14. According to earnings estimates by the leading seven brokerages, the combined net profit of Sensex30 companies is likely to grow 11.5 per cent in the December quarter. In the first half, Sensex earnings had grown six per cent.
Earnings of Nifty companies, however, are expected to grow 5.1 per cent in the December quarter of the current financial year over the same period last year.
The lower earnings growth for Nifty is due to the differences in composition of the two indices. The Sensex has higher weightages of out-performing sectors such as information technology, pharmaceuticals and automobiles. The Nifty is broader and has higher exposure to laggards such as banking, financials, infrastructure, capital goods and realty.
Export-driven companies in IT, pharma and auto are again likely to drive the show, due to the continued weakness in the rupee and faster export growth, on the back of economic recovery in North America and Europe. Investment and domestic demand-driven sectors such as capital goods, infrastructure, cement, oil & gas and banking are likely to underperform, due to the Indian economy’s continued weakness and weak industrial growth. “Banking and energy sectors will be the biggest drag on earnings growth. Automobiles, pharma and technology will likely report steep increase in net profits on a year-on-year basis. We expect large losses for the public sector oil marketing companies, from huge under-recoveries. In the banking sector, mark to market (MTM, revaluing at current prices) provisions and staff expenses will hurt government-owned banks, while slowing revenue growth and high credit costs will affect most private sector banks,” writes Sanjiv Prasad of Kotak Institutional Equities, in his report on third quarter earnings estimates. He expects Sensex companies’ earnings to grow 13 per cent y-o-y and 3.1 per cent quarter-on-quarter.
In terms of earnings growth, the top five performers are likely to be Tata Steel (loss to profit), Bharti Airtel (+210 per cent), Dr Reddy’s Lab (+50.1 per cent), Sun Pharma (+50 per cent), Tata Motors (+44.7 per cent) and TCS (32.7 per cent). The top laggards will be BPCL (-128.7 per cent), Jaiprakash Associates (-78.5 per cent), DLF (-67 per cent), BHEL (-40.6 per cent), UltraTech Cement (-34.1 per cent), State Bank of India (-25.9 per cent) and Punjab National Bank (-31.4 per cent). Our analysis is based on the average earnings estimates from seven leading brokerages — Kotak , Edelweiss Securities, Motilal Oswal Securities, Bank of America Merrill Lynch, Angel Broking, IDBI and Antique Broking.
Nitin Jain of Edelweiss Securities agrees with the broader sectoral trends in earnings growth but, on the whole, expects more positive surprises than negative shocks. “The earnings season will not disappoint, given the already low expectations. The worst seems behind India Inc but there could be significant outperformance and underperformance. Some of the positive earnings surprises will be in the mid-cap space,” he says.
Others expect an upside from the deleveraging and asset divestments many are doing in debt-laden sectors. “This will provide earnings support in the short term and help them improve financial performance in the medium to longer terms,” says Alex Mathews , head of research at Geojit BNP Paribas Financial Services. Overall, he expects nine to 10 per cent earnings growth for Sensex companies.