Incipient signs of recovery in the economy notwithstanding, the Q2FY18 earnings season is unlikely to throw up any big surprises. The re-stocking of inventories post the rollout of the GST on July 1 and the early arrival of the festive season would no doubt have boosted sales especially of automobiles, but in some sectors such as FMCG, the pace of re-stocking has been relatively slow.
Analysts say wholesale channels are still under pressure as is rural demand. Meanwhile, telcos remain bruised, embroiled as they have been in a tariff war, post the entry of Reliance Jio last September.
While the headline aggregate numbers might reveal a reasonably good increase in the top line, a good part of this would be the result of a spike in prices of commodities and the large adventitious gains for downstream oil marketing companies. Exporters will benefit from the fall in the rupee towards the end of the quarter but the full impact of the depreciation in the currency will be felt in Q3FY18.
As such, sectors such as IT and pharmaceuticals are expected to turn in very ordinary numbers; tech firms are fighting for market share amidst a global slowdown while drug firms are grappling with regulatory issues. Crisil Research believes the aggregate top line should have grown by about 6-8 per cent y-o-y much like it has in the last six quarters.
Operating margins for India Inc would have likely contracted due to rising input costs and the lack of pricing power though companies that receive input tax credit benefits will do well. The last rabi harvest was a good one but rural demand may have been muted with farmers not getting good realisations for their crop; agri GVA grew just 0.3 per cent in the three months to June.
Nonetheless, a combination of farm loan waivers and higher minimum support prices (MSP) for crops would have boosted farm incomes to some extent. The strong tractor sales, up 13 per cent y-o-y in the April-August period, are a sign there is a fair amount of purchasing power in the hinterland.
Kotak Institutional Equities (KIE) expects net profits to grow at around 5.7 per cent y-o-y for its universe of firms. For the Sensex set of companies, the brokerage estimates profits will fall by 4 per cent y-o-y; for the 50 Nifty firms, profit growth has been pegged at 8.4 per cent y-o-y.
Although volumes may have risen about 4-5 per cent y-o-y, cement companies may see operating profits under pressure due to higher costs — diesel, pet coke and slag — that could not be passed on to customers owing to seasonality factors. That’s despite a rise in realisations of anywhere between 2-10 per cent year-on-year depending on the region. “Given the low utilisation levels of around 70 per cent, the peak ebitda/tonnes is unlikely to be realised before FY21-22,” analysts at ICICI Securities wrote recently. FE
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