This week began with a positive statement that the monsoon is expected to be good in this kharif season.
El Nino has shown signs of weakening during the past 1-2 months and may turn neutral by May-June. Hence, monsoon related sectors like Agro, Auto, FMCG and consumer durables are moving up in expectation of traction in earnings growth over next 6 months. Also, better than expected CPI & IIP numbers are providing the much-needed support for a gradual pickup in the domestic economy. Well, the actual impact of monsoon will be known only after the season emerges over the next 2-3months.
Meanwhile, there are two factors that are providing additional edge to this momentum; firstly a global consensus that the US rate hike is likely to be delayed at least in the near-term and secondly, a sea change regarding domestic earnings outlook.
Consensus (Bloomberg) expects a sharp rebound in PAT growth at 15.1% YoY for the Sensex compared to only 1% growth in 9MFY16. One of the important reasons for the strong uptick in profitability is the low base impact of Q4FY15. In Q4FY15, the PAT of Sensex had witnessed a YoY reduction of -14.5%, which is also a QoQ reduction of -5.4%.
It is believed that this was largely due to a sharp drop in Wholesale Price Index (WPI) and lag impact of reduction in global & domestic economic growth. Having said that it is encouraging to note that consensus expects a 8% increase in Sensex PAT on a QoQ basis.
This highlights that companies are expecting traction in business and earnings. Sales are expected to improve by 3.6% on a QoQ basis. One important factor for the improvement in profitability is the stabilisation of WPI from –2.33% in March 2015 to -0.9% in February 2016, providing an edge to top-line growth led by volume growth whereas cost continues to be subdued since inflation remains muted.
(Disclaimer: The views expressed here are of the individual analyst, and not that of Sunday Express)