India Inc net profit set to show decline in first quarter of FY16-17 Y-o-Y.

After a prolonged stint of poor performance, India Inc reported numbers that offered some hope of an economic recovery in the January-March quarter. However, numbers declared so far for the April-June quarter have all but dashed that hope. "The growth in sales and EBITDA levels were good in the last quarter of 2015-16 and there were hopes that the same will carry over to the first quarter of 2016-17. However, the expected positive did not happen," says Tirthankar Patnaik, Chief Strategist and Head of Research, India, Mizuho Bank

The aggregate net profit of the 3,008 companies that have declared results so far has fallen by 3% (see table), compared to the same period last year. The first quarter numbers may turn out to be worse once the reports of all companies come in. Sebi has given an additional month to comply with new accounting standards and several large companies have decided to wait till the final deadline of 14 September.

So what are the reasons behind this less than impressive show? The fall in global commodity prices and the resultant lower input cost helped many companies report better margins. However, commodity prices are now stabilising at lower levels and the tailwind from the initial fall in prices is no longer there. Secondly, though the monsoon is progressing satisfactorily, bad monsoons in two previous years have cast a shadow on the April-June numbers. A scorching summer and water scarcity in several parts of the country hit consumption demand.

Sector-wise performance was mostly along expected lines. Though the banking sector reported a 63% cut in aggregate net profit, it was better than the 173% cut seen in the March quarter. "Though disappointment on the NPA front remains, its accretion has come down," says Sanjay Sinha, Founder, Citrus Advisors. Despite global commodities still under pressure, the metal and mining sectors reported better than expected numbers on the back of of anti-dumping duties on imports. With an aggregate net profit growth of 84% in the first quarter, cement continues to do well. While volume growth was flat for most big companies, some mid-sized companies like Shree Cement did well on that front too.

Since the stock market has already rallied by 25% from the February bottom, the most important question now is when will the earnings revival happen? Since the trend of higher margins triggered by the fall in commodity prices is over, this has to happen from expansion in volume. The general expectation is the revival in volume will happen from the third and fourth quarter of 2016-17. Good monsoon will be the main trigger for revival.

"Sectors like cement, paints, etc usually do post good monsoon," says Daljeet S. Kohli, Director & Head of Research, India Nivesh Securities. Good monsoon will also bring down inflation, especially the sticky food inflation. "Pulses and vegetables are the main causes of food inflation. Vegetable prices usually fall after monsoon. The area under pulse cultivation has increased by 35% this year and this should bring pulse prices also under control," says Patnaik.

The impact of the 7th Pay Commission is another factor that will help revive consumption demand. "Since state governments and PSUs will follow the central government's footsteps, the 7th Pay Commission may boost urban consumption," says Patnaik. Among the sectors that will directly benefit is auto. "Since this increases the affordability of higher EMI, housing sector will be another beneficiary," says Sinha.

Though there will be top line and bottom line revivals from third and fourth quarter, investors need be careful about its quantum. This is because the Sensex's consensus EPS estimate for 2016-17 is placed now at Rs 1,594, 17% above from its actual value of Rs 1,354 in 2015-16 (see chart). "We may end up with 10-12% growth for the full year, so the consensus estimate has to come down from 17% growth," says Kohli.

Gautam Chhaochharia, ED and Head of India Research, UBS, concurs. "Our published view was that the January-March quarter was more of blip (triggered by company-specific issues by some large-cap companies and was not triggered by a macro turnaround). We estimate 2016-17 earnings growth at around 10%," he says.

This means we are heading back into a period of earnings downgrades. What are the sectors that are more prone to earnings cut now? "While the earnings cuts will be broad based, it will be more in some sectors like IT, part of financial services, cement etc. Though earnings growth from cement is good, expectation from there is very high now, so they need to come down," says Chhaochharia.

Source : economictimes.indiatimes.com