The results season is progressing smoothly. Though we need to take the first set of numbers cautiously— usually companies with good numbers report results early— the aggregate results till now have been better than expected.
For the 1,048 companies that have reported results so far, aggregate revenue and net profit have grown by 12% and 58% respectively. “The results that have come so far are good. If you rate them on a scale of 1-10, they will fall between 7 and 7.5,” says ogesh Nagaonkar, Fund Manager, Bonanza PMS.
Earnings’ estimates continue to fall
Sensex EPS estimates for 2017-18 have fallen by more than 28% in two years.
The 2017-18 EPS estimates may fall further, EPS is likely to see 10-11% gain this year.
Source: Bloomberg
Two major factors have contributed to this good performance: The impact of demonetisation was much less than expected in the fourth quarter. Since the remonetisation exercise was completed only in the second half of the fourth quarter, market participants were expecting a bigger negative impact. The second factor was the significant fall in net losses of some global companies such as Tata Steel.
Sectoral analysis
As expected, the onslaught of Reliance Jio has hurt the performance of the other telecom companies. While the sector’s aggregate revenue fell moderately to Rs 35,641 crore from Rs 39,747 crore year-on-year (y-oy), the industry reported an aggregate net loss of Rs 118 crore, compared to an aggregate net profit of Rs 1,660 crore in the fourth quarter of 2015-16.
Among listed players, Idea Cellular was the worst hit. It reported a net loss of Rs 328 crore compared to a net profit of Rs 576 crore in the fourth quarter of 2015-16. Bharti Airtel, however, has been able to show profit, though its net profit crashed 64% y-o-y. The telecom industry’s pain will continue for some more time, say experts. “Telecom companies will remain under pressure at least for the next 2-3 quarters,” says Andrew Holland, Chief Executive Officer, Avendus Capital Alternate Strategies.
Export-oriented sectors such as IT have also fared badly due to the industry-wide slowdown and appreciation of the rupee. Since several big pharma companies have not yet declared results, it is too early to take a call on this sector. However, several export driven manufacturing sectors like auto ancillaries have done well and the trend is expected to continue in the coming quarters as well. “While we are bearish on sectors like IT and pharma, manufacturing exports like auto components, chemicals, etc., should do well in the coming years,” says Holland.
Banking sector has been a mixed bag. “While some PSU banks were able to reduce their non-performing assets (NPA), the others saw a jump in NPAs,” says Nagaonkar. IDBI Bank, in particular, stands out for the spike in its NPAs. The bank’s net loss widened to Rs 3,200 crore from Rs 1,736 crore a year ago. But retail-oriented private sector banks reported decent growth—HDFC Bank, saw 18% jump in its net profit. “Private sector banks and housing finance companies, especially the ones focusing on affordable housing segments, should do well in the coming years as well,” says Holland.
Among sectors that did well, metals need a special mention. The quarterly net profit of Hindustan Zinc moved up from Rs 2,149 to Rs 3,057, an increase of 42%. Tata Steel also did well and its losses came down from Rs 3,214 crore in the fourth quarter of last year to Rs 1,168 crore. Despite the demonetisation blues, domestic consumption-oriented sectors did well. FMCG major Hindustan Unilever increased its net profit by 9% to Rs 1,183 crore y-o-y. Consumer non-durables, including auto, also performed reasonably well.
However, the two-wheeler segment was hit by demonetisation. Bajaj Auto and Hero Motocorp reported a fall in net profit of 13% and 12%, respectively, y-o-y. “While the increase in metal prices is helping metal companies, it will continue to put pressure on margins of consumer non-durable companies,” says Amit Nigam, VP and Head, Equities, Peerless MF.
Outlook for 2017-18
Two years ago, the 2017-18 consensus earnings per share (EPS) estimate for the Sensex was Rs 2,331. It has come down to Rs 1,668. It may come down further, say experts. However, the cut won’t be as sharp as in the past. “For the past three years, we have started with a 15-16% growth expectation and have ended up with 0% growth. Though we are are starting with similar expectations again, we may end up with only a small cut this time,” says Nigam.
This means 2017-18 could see 10-11% EPS growth. Domestic growth should remain buoyant due to positive factors like a good monsoon, implementation of the GST, etc. A pick-up in global growth and stability in commodity prices will continue helping Indian multinationals, such as Tata Steel, Hindalco, Tata Motors, among others.
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