Nifty firms set for blockbuster quarter; commodity prices to boost top line

Corporate earnings for 2018-19 (FY19) are expected to start on a strong wicket for India’s top listed companies, driven by higher commodity and energy prices and a low base last year as companies were recovering from demonetisation and also preparing for the new regime of goods and services tax (GST) from July 1. 
 

The combined net profit of India’s top 50 listed companies that are part of the Nifty50 index is estimated to rise by 14.2 per cent on a year-on-year (YoY) basis during April-June 2018, the best in the last nine quarters. 

The index companies’ combined net sales are estimated to grow by 20.7 per cent YoY during the first quarter, growing at the fastest pace in at least the last four years (See chart). 
 

The analysis is based on April-June 2018 quarter (Q1FY19) earnings estimates by stock brokerages, including Elara Capital, Emkay Global, ICICI Securities, and Kotak Institutional Equities.

For banks and non-banking financial firms, net sales are gross revenues net of interest expenses, while for others, they are total income from sales of goods and services (net of indirect taxes). Estimates were available for 49 out of 50 Nifty companies. No estimates were available for Indiabulls Housing Finance and the company is not included in this analysis. 

The index companies’ combined quarterly net profit is estimated to grow to Rs 870 billion — the third highest in the last four years, while quarterly revenues are estimated to grow to Rs 9.45 trillion during the first quarter of FY19. This translates into a net profit margin of 9.2 per cent, down from 10 per cent during the first quarter (Q1) of 2017-18. 
 

Earnings and top-line growth, however, would have been much lower for index companies if financials, oil and gas, metals and mining were excluded. 

The combined net profit of Nifty companies (ex-financials, energy, metals and mining companies) is likely to grow by 9.2 per cent YoY in Q1, a sharp turnaround from the 8.2 per cent decline during the corresponding quarter last fiscal year. Net sales of non-financial, non-commodity firms are expected to grow by 11 per cent, 

up from 0.4 per cent growth in Q1 of the last fiscal year. 

Earnings and the top line for domestic market-focused companies were depressed in the June 2017 quarter due to the combined effect of demonetisation (announced in November 2016) and the GST roll-out. 

Among individual index companies, Oil and Natural Gas Corporation is expected to be the single-biggest contributor to the Nifty’s incremental earnings growth in Q1 (up 60 per cent YoY), followed by Coal India (up 73.2 per cent YoY), Tata Steel (112 per cent), and Bharat Petroleum Corporation (188 per cent), while Tata Consultancy Services is expected to post 17.2 per cent net profit growth. 

Together these five companies are expected to account for 74 per cent of the incremental growth in Nifty companies’ net profit in Q1. This list of the Big Five together accounted for a quarter of index companies’ combined net profits in the March 2018 quarter. 

 

At the other end of the spectrum, State Bank of India (SBI), Tata Motors, Axis Bank, ICICI Bank, and Bharti Airtel are expected to be the biggest laggards, with a likely YoY decline in net profit during the quarter.

While the Street expects SBI and Bharti Airtel to report losses during the quarter, the other three are expected to report a sharp dip in their earnings during the quarter. Brokerages are betting on consumption demand, including retail credit, to drive earnings growth in the quarter. 

“The momentum in consumption demand is likely to sustain in Q1FY19, with strong numbers coming in from consumer staples, durables, and auto sectors. The banking sector credit growth rising to 13 per cent also underscores gradual improvement on the back of increasing retail lending and rising sales growth of companies,” wrote Emkay Global’s head of research Dhananjay Sinha in his earnings estimates for the quarter. 

Kotak Institutional Equities expects flat growth for its universe of companies but sees strong earnings growth in consumer and commodity space. “We expect strong growth in the net income of automobiles (strong volume growth on low base and operating leverage-led margin expansion); consumers (continued volume-led sales growth and margin expansion); metals and mining (higher domestic realisations) and pharmaceuticals (led by domestic formulations and stabilisation of US 

businesses) sectors,” said Sanjeev Prasad in Kotak’s June 2018 quarter earnings estimates report.