Q2 review: Nearly 45% of corporate results are above expectation

The review for Q2 of FY18 is good with improvement in H2FY18 & beyond

The June quarter of the financial year 2017-18 (Q1FY18) was a disaster due to de-stocking measures. However, the September quarter (Q2) was anticipated to be better given the low base and re-stocking activities. We thought that de-stocking was largely over but how much will be the revival is still yet to be known. Economic activities had started to improve and procedure of GST was getting better day by day. So on a Q-o-Q basis, we were anticipating about 5% to 7% growth in profit after tax (PAT) for main indexes. Important economic data was showing an uptick in Whole Price Index (WPI)-based inflation, Purchasing Managers' Index (PMI) and Index of Industrial Production (IIP) from the recent lows. So organised sectors were likely to do better off but the broad economy was still under stress with the additional burden of a slowdown in exports. Hence still on a YoY basis, earnings growth was anticipated to be subdued and there was a risk for a further downgrade in earnings.

But the market was hoping for better number on a year-on-year (YoY) basis with PAT growth of 6%, 14% and 13% for Sensex, Nifty50 and BSE100 respectively on a YoY basis. If we take off one-time extraordinary cases, the actual growth is about 5%, 10% and 14% respectively. These are very good numbers in spite of economic pressure and it is telling us that economy is adjusting better. Nearly 45% of the results are above expectation while bad results are for those, which were already under poor expectations. Given the positive outlook by most of the management and also an improvement in the real economy, we are bound to engage in a better period ahead. We may even see some marginal increase in H2FY18 and especially for the FY19 forecast.

The result tells us that Goods and Services Tax (GST) has not heavily impacted the broad sector than seen in Q1, but the impact was seen in consumer-oriented sectors like discretionary, durables, electronics and ancillaries. Rebound in business led by re-stocking explains a portion of this revival. At the same time uptick in infrastructure spending, reduction in interest cost, increase in commodity prices and restructuring in NPAs have provided an upsurge in the business. The sectors which have done well with surprises are finance, chemicals, cement, auto, infra and metals, whereas neutral performers were FMCG and oil & gas, while the poor performers are power, telecom, pharma and IT.

The recent decision to cut GST rate will certainly be a big beneficiary to the traders and consumers, as volumes increases, margin expands while cost reduces. In terms of companies, significant benefit is seen in FMCG, consumer discretionary, building materials and restaurants. The GST council reduced items under 28% slab to 50 items from 178 items earlier, 13 items have been reduced to 12% from 18% while 2 items to 12 % from 28%. 6 items have been brought into 5% from 18%, 8 items have been cut to 5% from 18% and 6 items have been lowered to 0% from 5%. Further, there is an expectation that some more items under the highest slab of 28% are likely to come down in near future.

The market seems to have largely factored in the intermediary dip in earnings and discounted the scenario of FY18. It is looking to and beyond FY19 given increased spending plan, ease of GST disruption & beneficiary to the organised sector and global demand.

Vinod Nair is Head of Research, Geojit Financial Services

Vinod Nair, Head of Research, Geojit Financial Services