Corporate earnings may worsen in Q3, but profits could get tax-cut boost

Banks, OMCs are expected to bring most of the incremental growth

Corporate earnings during the October-December 2019 quarter (Q3FY20) are likely to give a contrasting picture. Analysts expect an improvement in net profit growth, thanks to the gains from the cut in corporate tax and a better showing by retail lenders, but the contraction in revenues is likely to get worse, indicating a further weakness in aggregate demand in the economy. This, analysts say, rules out a quick growth recovery, presenting a fresh challenge for corporate planners.

The combined net profit of the Nifty 50 companies is expected to grow by 6.7 per cent year-on-year (y-o-y) during Q3FY20, as against 19.3 per cent growth in the second quarter. This translates into a combined net profit of Rs 1.01 trillion compared with Rs 0.95 trillion a year ago.

In contrast, their combined net sales (net interest income in the case of lenders) are expected to decline by around 2 per cent y-o-y during the third quarter, as against 0.2 per cent decline in the second quarter of the current fiscal year, making it the worst slowdown for the country's top-listed firms in many years.  Companies are expected to report the combined net sales of Rs 9.30 trillion for Q3FY20, as against Rs 9.45 trillion a year ago.

The above analysis excludes Tata Motors, which reported a one-time net loss of around Rs 27,000 crore during Q3FY19 on account of the write-down of its equity in JLR. 

Including Tata Motors, the Street expects, the Nifty50 companies’ combined net profit would jump by 50 per cent y-o-y. Analysts expect Tata Motors to report a modest net profit during Q3FY20, as against a net loss in the past two quarters, thanks to a better showing by its JLR subsidiary.  

The earnings estimates of the individual index companies suggest that the slowdown and the resulting financial pain could get worse for non-financial companies, especially manufacturers.

The analysis is based on the Q3FY20 earnings estimates by equity brokerages including Narnolia Financial Advisors, Kotak Institutional Equities (KIE), Motilal Oswal Financial Services, ICICI Securities, Emkay Global, Reliance Securities, and HDFC Securities. For banks and non-banking financial firms, net sales are net interest income, while it’s total income from sales of goods and services (net of indirect taxes) for others. Net sales and net profit after tax for the current quarter are based on brokerage estimates and may exclude exceptional gains and losses.

The combined net profit of the index companies, excluding banks and financials, is expected to decline by 5.8 per cent YoYduring Q3FY20, a sharp decline from 15.6 per cent YoY growth during Q2FY20. These companies’ combined net sales are expected to contract by 3.4 per cent YoY, as against 3.1 per cent YoY decline in revenues during Q2FY20.

“With the Nifty near all-time highs and FII flows at a five-year high, one wouldn’t be too amiss to conclude that India is in the midst of a major bull market. However, the reality is different. Economic growth momentum has decelerated, while corporate earnings have remained tepid for the past two years,” writes Gautam Duggad of Motilal Oswal Financial Services in the earnings estimates for the third quarter.

He says the corporate tax cuts have prevented a further slide in earnings estimates, but the FY20 earnings story is all about financials, with Nifty ex-BFSI earnings expected to decline 2 per cent for the year.

Kotak Institutional Equity (KIE) is little more optimistic, but remains sanguine about the growth prospects of the non-financial sector. “We expect net profits of the KIE coverage universe to increase 21 per cent y-o-y in Q3FY20, led by the banking and diversified financials’ sector. Excluding the banks and financials, we expect net income of the KIE universe to increase 6 per cent YoY. We expect YoY double-digit growth for most of the sectors, except for media, metals and mining (decline in realisations on a YoY basis), and transportation sectors,” write KIE analysts, led by Sanjeev Prasad, in their earnings report for Q3FY20.

Among individual index companies, ICICI Bank, Indian Oil Corporation, Bharat Petroleum, Housing Development & Finance Corporation (HDFC), and State Bank of India are expected to top the earnings charts with more than 100 per cent y-o-y jump in net profits during the quarter. Together these five companies are expected to add Rs 12,000 crore to their net profits during Q3FY20 over Q3FY19.