High expectations from Q4FY17 earnings may not materialise

Monsoon and impact of GST implementation are key for FY18 earnings growth, analysts say

With the companies gearing up to report March 2017 quarter (Q4FY17) and financial year 2016 - 17 (FY17) earnings soon, market participants believe the expectations from the upcoming corporate results season are high, given that the economy is still recovering from the demonetisation impact.

The December quarter for India Inc was a mixed bag, with the impact of the note ban being partially offset by gains from higher commodity prices and treasury gains from rally in the domestic bond market.

An earlier analysis by Business Standard suggests that the combined net profit (adjusted for exceptional gains and losses) of 1,660 companies across sectors was up 27.7% on a year-on-year (y-o-y) in Q3FY17, growing at the fastest pace in at least two years. Combined revenues (including operating and other income) for these companies rose 9.2% during the quarter - the fastest pace of growth in at least two years.

This performance, according to some market experts, was possibly buoyed by sales selectively being brought forward in November and December 2016.

"We believe reported Q3 FY17 company results did not necessarily reflect the underlying business activity in the quarter and results were possibly buoyed by sales selectively being brought forward in November and December 2016. What also matters, in our view, is the extent of the second-order impact from negative feedback loop and prolonged adverse demand effects, which may be felt in Q4 FY17 and Q1 FY18," says Gautam Chhaochharia, head of India Research at UBS Securities in a co-authored report with Sanjena Dadawala.

"Our survey and other indicators confirm demand is still recovering (not yet normalised), which suggests Q4 FY17 earnings expectations are too high. We expect 12/17% year-on-year (y-o-y) earnings growth in FY18/19E (on a base of 5% growth in FY17E), which implies a further 9% cut in FY18 consensus estimates ahead," they add.

In the two years it has taken the Nifty50 and the S&P BSE Sensex to reclaim 9,000 and 30,000 levels respectively, the underlying macro backdrop has undergone a sea change. Demonetisation and GST, analysts say, have been the two most significant macro developments.

Thus far in calendar year 2017 (CY17), the markets have already run up over 12% on the back of strong liquidity. Foreign institutional investors (FIIs) and domestic institutions (DIIs), put together, have pumped in close to Rs 45,500 crore thus far in CY17, data show.

S Naren, executive director and chief investment officer at ICICI Prudential AMC does not see any news-based improvement in earnings in the near-term but expects growth to kick-in over the next two years instead.

"I don't think we are in for a news-based improvement in earnings, at least in the near term. However, we continue to believe that over the next two years, earnings growth can come in. For the March 2017 quarter, banking and telecom sectors are likely to be laggards, while sectors like information technology (IT) will be under pressure as the currency may impact negatively. Meanwhile, metals may show an improvement on year-on-year (y-o-y) basis," he says.

Mid-caps (market-cap less than $4 billion), however according to a Citigroup report, are expected to deliver earnings growth of 56% in FY17E. They expect this to decelerate slightly to 40% in FY18E, although top-line growth is also expected to accelerate.

Besides the impact of demonetisation and how the monsoon plays out, analysts are also keeping an eye on the impact of GST (goods and services) bill implementation on the economy, and in turn, FY18 corporate earnings. In this backdrop, any revision in earnings projection for FY18 while announcing Q4FY17 results will have to be closely watched, they say.

"I am slightly cautious towards the implementation of the goods and services tax (GST) bill in July 2017. There can be execution related issues. We need to wait and watch for at least a couple of quarters to see how things work. GST will be a big disruptor; corporates and markets will take time to assess the impact," cautions Vaibhav Sanghavi, co- chief executive officer at Avendus Capital.

Going into FY18, the risks to the bottom-up NIFTY consensus earnings growth expectations of 18% y-o-y, according to Citigroup, are emanating from slower-than-expected consumption demand recovery from demonetisation in FY18; slower-than-expected recovery in credit growth; and the near-term impact on demand after GST implementation.