Mid-caps worst hit as analysts see 24% dip in Q1FY20 PAT for India Inc

A lockdown to contain the pandemic is now eased, but companies are still struggling to get back on their feet. Puneet Wadhwa explains what to expect from companies in terms of revenue

Economic activity in most of the April-June quarter of financial year 2020-21 (Q1FY21E) came to a standstill when India locked down to contain the spread of the coronavirus pandemic. The lockdown hampered manufacturing, disrupted supply chains and froze demand, leading to significant revenue loss for India Inc.

Companies responded by cost-cutting and liquidity-boosting measures, but profitability in the quarter could see a significant dent because of the revenue loss, analysts say. The lockdown has eased, but restrictions limiting hours of operations and higher operating cost deter companies from utilising their resources optimally.

A glimpse of what could be in store came last week when information technology major Tata Consultancy Services (TCS) reported a 13.8 per cent year-on-year (YoY) fall in net profit at Rs 7,008 crore for the period under review. On a sequential basis, net profit was down 13 per cent. Net sales/revenue, however, came in at Rs 38,322 crore, up 0.4 per cent YoY.

Raw material and labour, the key factors in production, remain under pressure due to restrictions on the movement of raw materials and people. Migrant workers moving to their home states in the lockdown pose challenges, particularly for the construction industry, analysts say. Consumers stuck to buying essential items in the lockdown and avoided discretionary spending on products like air conditioners or cars.

Analysts at Antique Stock Broking expect the auto, paints, retail, and consumer durable and investment-linked sectors like industrials, logistics, infrastructure, cement and metals to be the key drag on overall numbers. On the other hand, banks, non-banking finance companies (NBFC), information technology (IT), pharma, fast moving consumer goods (FMCG), utilities, oil marketing companies OMCs and agrochemical companies are expected to report relatively better results in a quarter of disruptions.

“Nifty Q1FY21 profit after tax (PAT) is likely to decline by 24 per cent year-on-year (y-o-y) and 13.8 per cent quarter on quarter (q-o-q) to Rs 31,573 crore. At the aggregate level, sales and earnings before interest, taxes, depreciation and amortisation (EBITDA) is likely to drop 23.2 per cent YoY to Rs 3,41,264.7 crore and 10.4 per cent to Rs 89,763.7 crore, respectively,” wrote Dhirendra Tiwari, head of research at Antique Stock Broking, in a July 10 co-authored note with Pankaj Chhaochharia.

Net profit of the BSE-30 Index, according to another domestic brokerage, could dip 19 per cent YoY to Rs 561 billion and that of the Nifty-50 Index drop 30 per cent YoY to Rs 602 billion. They peg earnings per share (EPS) of the BSE-30 Index at Rs 1,568 for FY21 and Rs 2,045 for FY22 and of the Nifty-50 Index at Rs 447 for FY21 and Rs 618 for FY22.

At the aggregate level, Pradeep Kumar Kesavan, senior vice-president for equity strategy at Elara Capital, expected Nifty EPS to drop 16 per cent q-o-q to Rs 89 in Q1FY21, sales to drop sharply by 22.4 per cent q-o-q and EBITDA to fall by 8 per cent q-o-q. Mid-cap companies, he believes, will be the worst hit in this pandemic.

“We expect Nifty EPS at Rs 426 for FY21E and Rs 634 for FY22E, down 27 per cent q-o-q and 11 per cent q-o-q. In our coverage universe (209 companies) comprising large cap (74) and mid-and small-cap (135), the former compares are likely to do well compared to the latter in terms of bottom-line, while the latter will likely fare slightly better in top-line. The contraction in sales, EBITDA and PAT for large-caps is expected to be 29 per cent, 11 per cent and 28 per cent, respectively, whereas contraction for mid-caps in sales, EBITDA and PAT is expected to be 27 per cent, 41 per cent and 98 per cent, respectively,” Kesavan wrote in a July 9 co-authored note with Anushka Chhajed.

About the mid-and small-cap segment, Bhavesh Chauhan, assistant vice-president for mid-cap research at IDBI Capital, said companies' management commentary and outlook for rest of FY21, cost containment measures and curtailment of capex would be closely monitored in post-result conference calls.

“Luggage and building material companies from the mid-cap segment are likely to see sharpest falls in sales/net profit. VIP Industries and Safari Industries, for instance, could see sales plummet 50 – 65 per cent y-o-y due to the adverse impact of Covid-19 on travel and tourism industry. Both these companies are likely to resort cost saving measures and are expected to report marginal profits during Q1FY21,” Chauhan said.

Gautam Duggad, head of institutional research at Motilal Oswal, expected earnings recovery to be pushed back by at least a year. Markets, he said, are looking beyond FY21 numbers and the road ahead will be guided by global recovery and gradual return to normalcy. He has cut FY21 / FY22E Nifty EPS estimates by 9 per cent / 6 per cent to Rs 454 / Rs 637 (earlier: Rs 499/ Rs 677).

“Amidst the overall challenging macros, one silver lining is the rural economy, which has seen lesser damage from the Covid-19 pandemic. Drivers for rural income remain robust with the strong start to monsoons, robust Kharif sowing, and sharp hike in allocation to MGNREGA. Near-term earning predictability has been impaired and hopes have now shifted to potential FY22 earnings recovery,” Duggad said, referring the government's rural employment scheme.