The Second Quarter Results Preview Stands Mixed

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Now that the second quarter ended on the 30th September, the Street has its eyes set on the results. After a disappointing show in the previous quarter result, India Inc is likely to report a bounce back in revenue and net profit for the September quarter. The revenue has witnessed a series of fall in five quarters and is now expected to grow for the third consecutive quarter, reflecting a steady enhancement in demand. However, the growth is not going to be broad based. It will mainly be led by selected companies in certain sectors such as automobiles, cement, consumer goods, oil and gas, and pharmaceuticals.

According to the estimates of experts, consolidated revenue of companies in the Nifty50 is seen growing by 4.6 per cent yearly and net profit by 3.2 per cent for the September quarter. This compares with the reticent 0.6per cent growth in sales and 4.3per cent decline in net profit in the previous quarter.

The Benchmark Nifty50 Equity Index consists of the 50 large and commonly traded stocks and largely represents companies across major sectors in India.

The operating margin of the group is likely to improve by 350 basis points yearly and by 90 basis points successively to 23 per cent for the September quarter. The margin expansion expected to be supported by a sharp leap in operating profit before depreciation relative to sales growth of companies such as Ambuja Cements,Bosch, Asian Paints, L&T, Bharat Heavy Electricals, Hindalco, Tata Motors, Lupin, and Tata Steel.

Regardless of the expectation of a better aggregate growth, disquiet over the passive performance of the core sectors will linger. Companies in Banking, Metal, Capital Goods, Power, and Telecom sectors may report murky numbers for the quarter.

Preview of the Sectors:

AUTO

Companies in Auto Sector may report better numbers on robust volume growth and inventory build-up by dealers ahead of festivals. Nifty Auto has been the top three gainers in past quarter rising almost 17 per cent. Excluding Bajaj Auto, vehicle makers have registered 12-31 per cent volume growth. Higher utilization may perk up operating margins by 50-120 basis points. Eicher Motors, Maruti Suzuki, and Mahindra and Mahindra may report healthier numbers.

BANKING AND FINANCE

Treasury gain due to falling bond yield is likely to neutralize the impact of bad loan provisioning by Banks partially. The Industry-wide loan growth and, consequently, Net Interest Income growth, may remain restrained. Net interest margins may not decrease at the tempo observed in the last two-quarters as Banks have not reduced base rates in the quarter. In spite of higher other income, Net Earnings of bigger private lenders like ICICI Bank and Axis Bank are likely to be lower because of the incremental slippages from the stressed portfolio. Bank Nifty has grown 7.68 per cent in past quarter as compared to the 4.50 per cent growth in the benchmark Index Nifty.

CAPITAL GOODS

The holdup in project execution and rising competitive intensity will continue to spoil the earnings of capital goods companies. There has been some increase in order inflows in segments such as roads and transportation, but it is yet to fully mirror in earnings growth due to slower execution. L&T will probably report a year-on-year recovery in revenue growth, while BHEL may show lower revenue.

CEMENT

Big cement companies are estimated to show improved growth in earnings due to the overall moderation in costs, low base effect and 4-5 per cent improvement in cement volume. Companies such as ACC, UltraTech Cement, Ambuja Cements, and Shree Cement are anticipated to show revenue growth of 5-11 per cent year on year. Realizations have increased due to marginally higher cement prices over the past few months. Net profit of big cement companies is expected to grow 50-71per cent.

FMCG

There were no signs of the rally in consumer demand during the September quarter. Hopes are now affixed on the festive December quarter. The average volume growth is likely to be around 5per cent for most companies. With raw material cost slowly increasing, some companies have increased prices to protect operating margins.

The delay in orders from some top clients and adverse cross-currency movements are expected to restrain the revenue growth of top IT companies. Also, salary increases will affect the operating margin. The dollar-denominated revenue is expected to increase by 1-2per cent for the top companies. Investors will probably closely track the revenue guidance by Infosys for FY17.

METALS

Nifty Metal has been the top gainer in the past three months rising by almost 20per cent. Prices of base metals, including aluminum, zinc, and copper, have increased by 10-40 per cent so far in 2016. This will probably benefit Hindalco, Vedanta, and Hindustan Zinc. Steel companies will report good earnings growth due to 10-20per cent jump in product prices as well. Tata Steel’s profit may show a decline on the yearly basis since it sold a unit in the previous quarter. Due to a heavy monsoon, mining companies, including Coal India may show lesser profit compared to the last year’s corresponding quarter.

PHARMA

No key strong trigger is seen in for Pharma companies in the September quarter. Nifty Pharma is one among the only three losers in past three months. Business in the US continues to be affected by price erosion for most players. This will most probably affect operating margins in the Q2 result. The high volumes in the domestic market may be some compensation. Commentary on the resolution of USFDA issues and pickup in material drug approvals will be the things to keep an eye on.

It looks like the second quarter results are going to be mixed but better than the results of the first quarter. The second quarter outcome will be inciting both the emotions of happiness and disappointment in the investors of Dalal Street as they keenly watch for the companies to unveil their numbers for the quarter ending 30th September 2016. In time, it will be out in the open that who have made the most of the second quarter of financial year 2017.

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