CHENNAI: With companies readying to present quarterly financial results for the second quarter, analysts and brokerages are cautious about the pace of the recovery in earnings. Most have stuck to year-on-year profit growth estimates for firms they cover at a muted 5-9 percent. Most of this growth is expected to be driven by oil & gas firms, commodity majors and banks, with consumer goods firms seeing GST and demand-related headwinds abating.
Citi Research, one of the few brokerages that have maintained a higher profit forecast for Indian firms, expects Indian firms to post 13 per cent earnings growth in the quarter. In a research note, it admitted that while GST-driven disruptions were losing strength, some impact might still be felt. Commodities (particularly metal) and financial firms are expected to do well, and oil & gas firms are set to reap bumper refining margins. However, “earnings trends to remain weak in IT/healthcare despite cross-currency tailwinds in the former and domestic growth recovery in the latter post GST”.
According to analysts, if banks, financial firms and oil & gas players are excluded, profit growth would fall significantly. “Excluding these, the profit is likely to contract by nine percent YoY (for Edelweiss universe), the same as in the past two quarters. The weakness is fairly broad-based and is a function of weak demand as well as rise in input costs,” Edelweiss Securities’ noted in its earnings estimates. Analysts say that of the 50 companies in the Nifty50 index, 31 are expected to report a rise in net profit during the quarter. “Ideally, by this time, earnings should have benefited from pent-up demand in the economy. The impact of GST seems to be weighing much longer than anticipated,” Edelweiss added.
Operating margins in the ex-BFSI and oil & gas segment are also set to contract compared to last year, with ICICI Securities projecting a 0.18 percent contraction in operating margins. “Earnings are expected to grow 6.7 percent year-on-year,” it noted.
IT firms are expected to continue their run of bad luck with market leaders TCS and Infosys expected to report reductions in net profits and single-digit revenue growth. “Higher government spending and an increasing focus of states and the centre to revive the ailing rural economy have somewhat improved the demand. With fiscal expansion, rise in commodity prices, gradual recovery from the GST dislocations and fading of the demonetisation impact, domestic growth is likely to improve during the second half of the current fiscal year,” observed Emkay Global Securities.