December quarter earnings season is here, and these quarterly numbers are going to guide Dalal Street in the coming weeks. After disappointing Q2 earnings, Nifty50 companies are projected to post good profit growth on a lower base a year ago, the corporate tax cut and better performance by select banks and finance companies amid lower provisioning. The top line growth, however, is expected to be modest amid demand slack and higher base a year ago. Here’s a sum-up on how the sectoral landscape looks like from an earnings point of view.
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2/9
Auto downward bottoming out
Volume growth appears to be bottoming out for the passenger vehicles segment, but the pressure has continued for two-wheelers and commercial vehicles. The realisations are likely to be subdued due to the record festive discounts and high promotional activity. This will weigh on the revenue of the automakers, while profit growth is likely to be supported by the corporate tax cut.
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3/9
More pain in banking & finance
Select private sector banks are likely to report lower bad loan growth. ICICI Bank and Indusind Bank are expected to report higher profit growth. State Bank of India may report fresh slippages in the aftermath of the DHFL bankruptcy. Non Banking lenders including HDFC and Bajaj Finance are expected to report robust bottomline growth.
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4/9
Capital goods largely mixed bag
The order activity and execution has moderated owing to lower capital expenditure by the states and the Union Government. The orders from the state governments which were prime drivers for the pick-up in the execution earlier have turned wobbly following order reviewing activity of some of the state governments including Andhra Pradesh and Maharashtra. The management commentary of L&T regarding the order growth guidance which is currently 10-12% for FY20 will be keenly watched by the Street.
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5/9
Cement may see high revenue growth
Cement prices increased by 4% year-on-year in December 2019 quarter to ₹337 per 50 kg bag. Since the fall in cement prices was higher in FY19 than in FY20 till date, cement companies may record higher revenue growth in comparison with last year’s December quarter. Large companies such as Ultra-Tech Cement, Ambuja Cements, ACC, and Shree Cement are expected to record 7-16% growth in revenues in the December 2019 quarter. Lower per coke prices are likely to help these companies to report 85-96% growth in their earnings.
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6/9
FMCG to maintain profit margins
While the topline growth will be impacted by the low sales volumes, the bottomline growth will continue to be healthy — aided by cut in the corporate tax rate. The volume growth will be subdued despite the festive demand boost in consumer buying given the slowdown in rural demand. Despite this, most FMCG companies are likely to maintain their profit margins due to rationalisation of expenses and lower corporate tax.
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7/9
IT sector holds suspense
Top IT companies are expected to report 1.5-3% growth in dollar-denominated revenue. Wipro and Tech Mahindra will benefit from the inorganic revenue stream and may report better revenue growth than peers. The management commentary on the demand trend in the banking and financial vertical, which is a major source of revenue for Indian IT companies, will be critical. Infosys is expected to revise its FY20 revenue guidance upwards.
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8/9
Green shoots in metals
Metals companies are expected to post a strong quarter after weak first half of FY20. After a consistent fall in the first six months of the fiscal, domestic steel prices have risen by 10% since its lows in September. In addition, the benefit of fall in raw material (iron and coking coal) prices in the second quarter will benefit the companies in the current quarter due to lag effect. This is positive for JSW Steel, Tata Steel, JSPL and SAIL. The trend is similar for aluminium as well, a positive for Hindalco. Aluminium prices are up 7% in the past three months. However, zinc prices remained flat, which may lead to a flat set of numbers for the largest zinc producer, Hindustan Zinc and Vedanta, its parent company.
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9/9
Pharma sector still ailing
Pharma companies are likely to post subdued growth in the quarter to December. Pricing pressure in the US generics market, price control concerns in the domestic market and USFDA regulatory woes will continue to impact the performance. Measures such as cost cutting, rationalisation of R&D expenditure and exiting from low-margin products are likely to aid margin growth.
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