Rupee, oil to impact earnings

Mumbai: Rupee depreciation and the flare-up in oil prices would be dominant themes in the second quarter corporate earnings, possibly distorting projections made by the analysts earlier.

The rupee weakened to Rs 72.51 a dollar on September 30, 2018, the last day of the quarter, from Rs 68.46 to the dollar on June 30, 2018, the end of the first quarter, marking a 5.91-per cent fall.

Brent crude oil price, in the same three months, moved up 6.80 per cent from $77.45 a barrel to $82.77 a barrel.

The second quarter, like the first, may come up with good results from IT companies and consumer-oriented sectors like FMCG and consumer durables.

Upstream oil and gas companies and pharma firms may also report improved earnings, taking advantage of the higher crude oil and weaker rupee.

Analysts are not confident of India Inc’s overall good performance in the July-September quarter, as the waning GST and demonetisation impacts, the factors that helped in the previous quarter, have now been replaced by headwinds like a weaker rupee and higher crude oil prices.

“Margin pressure, emanating from rising input costs and the sharp depreciation of the rupee, has emerged as the top concern for most sectors ahead of the Q2FY19 result season. This appears to be affecting sectors such as Auto, Cement, Telecom, and Building Materials more adversely than the others. Top-line momentum for most of the consumer-oriented sectors, such as Media and Retail, is expected to slow due to the delayed festive season this year. The fading out of the beneficial base effects present in Q1FY19 is also expected to impact realisation growth in Q2,” said Dhananjay Sinha, head, institutional research, Emkay Global Financial Services.

IT

IT services companies are expected to do well as Q2 has traditionally been a strong quarter for them. According to Motilal Oswal, “Revenue for Tier-I vendors (like TCS, Infosys) is likely to increase by 9.4 per cent YoY in constant currency terms (compared to 7.8 per cent in 1QFY19 and 6.8 per cent in 2QFY18), taking further strides toward entering a double-digit growth trajectory.

“Margins at the same time would be uplifted by the depreciation in INR versus the USD, while also getting support from the improving performance. Polarisation in performance continues at two levels, within the Tier-I, where TCS is expected to outperform the rest of the pack, and between Tier-I and Tier-II, where the latter would deliver materially higher YoY numbers.”

Oil

Emkay Global said it is building higher core grosss refining margins (GRMs) for PSU refiners quarter-on-quarter due to lesser price lag impact and Q1 being exceptionally weak. “HPCL and IOCL's refining volumes are expected to improve QoQ on better utilisation and no major shutdowns. We foresee significant marketing inventory gains as product prices closed much higher at QoQ end. We expect BPCL-HPCL to report higher earnings QoQ due to inventory gains although for IOCL it would be negatively affected by a larger processing cycle.”

The brokerage estimated RIL's standalone Ebitda to be flat as lower GRM (estimate $9.8/bbl) would be offset by steady petchem earnings and a weak rupee. “PAT may see a slight decline due to higher forex losses in interest. We expect a slight increase in consolidated numbers due to higher Jio earnings,” it said.

Metals

Metals are also expected to please the market with good earnings during the quarter with the weaker rupee helping in an export earnings surge.

JM Financial said its expects metals, chemicals and industrials to record the highest earnings growth, whereas Telecom, Aviation, Autos, Banks and Cement are likely to have the highest negative growth.

“Metals, industrials, textiles could witness the highest expansion in operating margin while that of aviation, telecom and cement decline,” JM Financial said.

However, like in IT, in the metal sector too mid-cap companies are expected to throw up higher growth numbers.

Centrum Research expects a sequential drop in earnings for the large-cap metal companies, led by seasonal weakness in realisations and higher raw material cost while mid-caps are expected to deliver solid growth led by higher volumes and improved cost structure.”

Sinha of Emkay Global said the Metals & Mining sector is likely to outperform in terms of Ebitda margin and adjusted profit after tax growth owing to improved performance from ferrous companies.

Auto

The Auto sector is likely to report a subdued quarter as the volume growth has been a mixed bag during the quarter, with the passenger vehicle segment disappointing with a decline and two-wheelers witnessing slower growth. Commercial vehicle players are expected to do well with high volume growth.

According to Emkay Global “Due to the delayed festive season and lower sales in Kerala, aggregate revenue growth may taper to 9 per cent compared with average growth of 20 per cent in the past three quarters. The delayed festive season has affected volumes in passenger vehicles, two-wheelers and tractors, while lower sales in Kerala state has adversely affected volumes in passenger vehicles and two wheelers.

Capital Goods

For Capital Goods and Engineering sector, the absence of private capex may prove a drag on its second quarter performance.

“Capacity utilisation in the economy has increased from 60 per cent to 70-75 per cent and the bulk of capex is driven by spending by the government on roads, ports, metro projects and transmission& distribution of power (T&D). We believe that private capex is still sometime away, which will continue to be a drag on growth in Capital Goods and Engineering segments,” said Amnish Aggarwal, head- research, Prabhudas Lilladher.