Earnings season disappoints again as margins come down

Mumbai: Corporate earnings disappointed investors yet again, with the December quarter numbers showing no signs of the expected revival, which has also dampened the equity market.

An analysis of the results of major companies shows that margins have come off sharply for the firms, which in turn has weakened their earnings growth.

The sectors that have done well in the third quarter include Technology, Private Bank, Consumer Goods and Capital Goods. But Telecom, Oil & Gas and Metals have shown dismal performance.

“We could see some kind of a cut in future estimates of both Nifty and the Mid-Cap Index post-this results season. Due to lowering of this year’s base, the actual earnings per share (EPS) estimates of both Nifty and Mid-Cap Index for FY20 will also go down,” said Rusmik Oza, Head-Research, Kotak Securities.

“Sectors that have come out with good results are: Technology, Private Sector Banks, larger NBFCs, Consumer Staples, Consumer Discretionary, Capital Goods, Construction & Media. Sectors that have reported a mixed set of numbers are: Automobiles, Auto Ancillaries and Oil & Gas. Sectors that have disappointed on numbers are Telecom, Oil Marketing Companies and Metals,” he said.

The profit after tax (PAT) growth of Nifty 50 companies is at 4 per cent, which is in line with the estimates, excluding the abnormal results of Tata Motors. The Auto sector was plagued by lower festive sales and higher inventory, while Oil & Gas witnessed inventory losses and change in government pricing policy.

“We are expecting downgrade in earnings in the coming quarter given the muted results of Q3. The market was estimating 15 per cent growth in FY19 EPS for Nifty50, while the actual growth in nine months is about 6 per cent to 8 per cent.

The slowdown in the domestic economy is going to impact the market in the next two to three quarters. In Q4, performance will be led by the Banki ng and IT sectors while slower growth is expected in Oil & Gas, NBFC and Auto,” said Vinod Nair, Head-Research at Geojit Financial Services.

Nair expects the next quarter to be muted, and along with market volatility expected during the general elections, the near-term outlook for the stock market is dim. “But valuation has become attractive in many cases and this dullness will reverse, as the broad domestic economy improves in the next two to three quarters with stability in the global market,” Nair further said.

The analysis shows that among fast moving consumer goods (FMCG) majors, Hindustan Unilever and Asian Paints reported strong earnings growth, while ITC disappointed, although it managed to improve cigarette volumes. Among IT companies, TCS results were in line with analysts expectations and Tech Mahindra posted strong results. Infosys, too, posted solid operating performance, but its margins were lower than street expectations. Mid-cap IT stocks also delivered healthy operating performance.

Banks, including HDFC Bank, Axis Bank, ICICI Bank and Kotak Bank, posted good results.

“Overall the earnings seasons has seen a healthy mix of operating and financial performance across the key sectors. Saying that we haven’t seen any major signs of revival in private capex. Going ahead, while it would be too early to predict the March 2019 quarterly performance of India Inc, the consumption sector will continue to do well,” says Naveen Kulkarni, Head of Research, Reliance Securities.