A third of Sensex companies may report drop in profits

Nearly one-third of Sensex 30 companies are likely to report a drop in fourth quarter profits, the Bank of America Merrill Lynch (BofA-ML) has said. The brokerage expects the aggregate earnings of Sensex companies to grow by 7.1 per cent year-on-year (y-o-y) in the fourth quarter of FY17. The growth will be led by commodity companies. Excluding commodity companies, the growth will be 2.7 per cent, it said. The broader market performance, however, is expected to be better by virtue of good performance of state-owned banks on a low base.  “Broader equity sets are likely to grow faster: Led by financials (due to a favourable base of PSU banks) and commodities, the wider BofA ML Universe (of 86 stocks) is expected to grow at 19.5 per cent y-o-y,” the brokerage said.  “These growth rates will be in sharp contrast to much weaker trends in FY15 and FY16; yet, given where valuations already are, and that much of this growth is an arithmetical (base effect) phenomenon, markets may not applaud the ‘turnaround’ further,” it says.     

The brokerage doesn’t see too much of an impact of demonetisation on earnings in the March quarter.

“While Q3 (December 2016) results were impacted by demonetisation, bottom-up analysis by BofA ML analysts suggests this could be much more muted in Q4FY17. Most domestic consumption-focused companies are expected to deliver strong growth in Q4FY17,” the brokerage says.

In terms of y-o-y profit growth, the brokerage expects banks, pharma and commodity companies to do well. On the other hand, it expects a deceleration in profit growth at telecom, industrial and select pharma and consumer companies.

BofA ML expects aggregate profit growth for the Sensex to recover in FY18 and FY19 to 12 per cent and 14 per cent, respectively. “Consensus forecasts of 16 per cent and 20 per cent growth for FY18 and FY19 (respectively) seem too optimistic; implying further earnings cuts,” the brokerage says.

Possibility of earnings downgrades coupled with high valuations make the current risk-reward unfavourable, it said.

Currently, the market trades at around 17.3 times its one-year forward earnings multiple, much higher than the long-term average of 15.5X times.

BofA ML retained its December 2017 Sensex target of 29,000.