Q2 results shine on lower base effect

Even as GST continues to drag earnings growth in the second quarter, there could be some positive surprises in certain pockets like auto, cement, and metals and mining in the upcoming earnings season.

According to analysts, Q2 results are expected to be better than Q1FY18 given the sharp lower base effect. Domestic companies reported dismal numbers in Q1 as there was a bigger than anticipated de-growth in earnings. This was imminent as the start to the financial year was with a disruptive Q1 given de-stocking before the implementation of GST and the after effect of demonetisation. Sensex and Nifty PAT growth for Q1 was -6.5 per cent and -9.0 per cent respectively compared to -1 per cent and -5.5 per cent anticipated.

From the market perspective, the last quarter was a strong quarter for Indian and global indices, with both BSE midcap and smallcap indices registering 5 per cent return with the huge domestic liquidity finding its way into the equity market leading to multiple expansions across sectors and ideas.

“De-stocking is largely completed and economic activities have started to pick-up as the procedure of GST is securing day by day. So on a QoQ basis, we can expect about 5 per cent to 7 per cent growth in PAT for main indices. On the economic factors, positive signs include uptick in WPI inflation, PMI and IIP from the recent lows.

So, organised sectors are likely to be better off but the broad economy is still under stress of slowdown in exports and unorganised sectors, which will continue to impact the growth of the economy over the next one-to-two quarters. Hence, on a year-on-year (YoY) basis, earnings growth will be subdued and risk for further downgrade in earnings is still on,” said Vinod Nair, head of research, Geojit Financial Services.

 PAT growth

In spite of the slowdown, the market expects 3 per cent and 9 per cent YoY growth in PAT for Sensex and Nifty respectively. Since the start of FY18 market has done about 5 per cent to 7 per cent cut in earnings forecast, Nair said.

Among the sectors, cement is expected to report double digit volume growth, which coupled with stable pricing will lead to healthy earnings growth amongst the larger players.

However, the pharmaceutical sector is likely to report subdued numbers due to GST implementation and pricing pressure in the US generic market. Similarly, GST is expected to impact both broadcasters and print players as FMCG, retail and real estate companies cut advertising spends.

Even the banking sector is expected to report modest growth in both NII (net interest income) / PAT (profit after tax) following weak loan growth, NIM (net interest margin) compression, lower other income (both fees and treasury gains) and accelerated provisioning.

 Outlook on the metals and mining universe to continue to remain positive on the back of uptick in volumes, realisations and lower raw material costs. The banking sector is likely to report modest growth in both NII / PAT following weak loan growth, NIM compression, lower other income (both fees and treasury gains) and accelerated provisioning.

The market is still hopeful assuming that a large portion of the detrimental domestic factors are discounted and earnings will revive soon. Other than core industries, some sectors which are supporting the market are finance, metals, mining, infra, defence and chemical. The market expects improved financial for banks given the restructuring from NPA (non performing assets) problems, reduced interest cost and improvement in consumer financing. At the same time, government spending and change in policy procedure is benefiting infra and defence sectors. And as the global economy has improved in US, Europe and China, sectors like metals and mining and chemical are doing well due to increase in commodity prices and procurement within and outside India. While, the worst performing sectors for Q2 will be healthcare, telecom, real estate, cement and IT.


“Against the backdrop of a slew of downgrades led by muted guidance for revenue and profitability due to slowdown in their business model, after a long-time the IT sector is showing early signs of reduction in the extent of earnings downgrade. Though industry is likely to remain muted for FY18, earnings are expected to grow by 11 per cent YoY in FY19. Outlining the industry’s annual guidance in June this year, Nasscom had said the Indian IT exports would grow by 7-8 per cent this fiscal, same as the previous fiscal, while the domestic Infotech industry would expand at 10-11 per cent, Nair of Geojit said.

For Q2, the market expects revenue to grow by 4 per cent. However, PAT growth is expected to remain muted on a YoY basis. Margin is expected to reduce by 40bps on a YoY basis. Historically, the average PE of IT index during the last fiveyrs was 16x while currently it is trading at 15x in which TCS and Infosys are valued at 16x and 15x respectively.

“We expect net income of the BSE-30 Index to decline 4 per cent YoY while that of the Nifty-50 Index to increase 8.4 per cent YoY, led by strong earnings growth in the downstream companies. We estimate EPS of BSE-30 Index at Rs1,439 for FY2018E and Rs1,812 for FY2019E. Our EPS estimates for Nifty-50 Index for FY2018E and FY2019E are Rs468 and Rs582,” Kotak Securities said.

Ashwin J Punnen