Results preview: Nifty companies may see over 25% profit drop in Q1

Revenues set to take a similar hit

The April-June 2020 quarter is likely to have been a washout for India Inc as economic activity reduced significantly during the period owing to lockdown imposed by the government to slow the spread of the Covid-19 pandemic.

Leading brokerages expect a 27.3 per cent year-on-year (YoY) decline in the combined net profit (adjusted for exceptional gains and losses) of the country’s top 50 companies, which make up the Nifty50 benchmark index. The index companies’ combined net revenues are estimated to fall 27.1 per cent YoY in the June quarter.

In comparison, the combined adjusted net profit was down 13.2 per cent YoY during the fourth quarter of 2019-20. This analysis is based on adjusted net profit and not the reported profit to make a comparison possible. Several companies took a hit on the bottom line in Q4 on account of large one-time losses due to asset impairment and inventory losses, which have not been considered.  

Most brokerages expect banks and other lenders to perform better, while manufacturing companies are expected to suffer the most.

In all, eight index companies, including Tata Motors and Tata Steel, are expected to report losses at net level during the first quarter. At the other extreme, Bharat Petroleum Corporation, Britannia, State Bank of India, and UPL are likely to lead the earnings charts with strong double-digit growth in net profit in Q1.

The combined adjusted net profit of the index companies excluding banks, non-bank lenders, and insurers is estimated to decline by 39 per cent YoY during the June quarter, while net sales are likely to shrink by 30.6 per cent.

“We estimate MOFSL Universe’s profit before tax/profit after tax to decline 52 per cent/49 per cent YoY in Q1FY21 with companies in autos, telecom, metals, capital goods, and retail posting losses. Private banks and public sector banks are the only sectors likely to post marginal growth, while technology is expected to remain flattish,” wrote Gautam Duggad of Motilal Oswal Financial Services in his earnings estimate note.

The firm expects a 30 per cent YoY decline in Nifty companies' sales, while the net profit may decline by 41 per cent in the June quarter.

Anjali Varma of Phillip Capital is more optimistic and expects rural market-facing firms to perform better during the quarter. “In the June 2020 quarter, Philip Capital universe revenues are estimated to decline by 27 per cent YoY, while net profit is estimated to de-grow by 35 per cent,” wrote Varma in her earnings estimate report.

The analysis is based on earnings estimates for the April-June period by equity brokerages that include Motilal Oswal Financial Services, Philip Capital, Emkay Global, Spark Capital, Antique Securities, and Elara Capital. Net sales is total income from sales of goods and services (net of indirect taxes) for all firms except banks and non-bank finance companies, where it is net interest income. Net sales and net profit for the current quarter are based on brokerage estimates and exclude exceptional gains and losses. The March quarter had seen lockdown of seven days, while for the June quarter it has been of a varying period. That’s why analysts say forecasting earnings estimates in such a scenario is challenging. 

“Given the lack of information one cannot be sure about the extent of the lockdown and its impact on a company’s supply chain. Earnings estimates have also become challenging due to a collapse in commodity prices, which is a double-edged sword for India Inc,” said Dhananjay Sinha, head of research at Systematix Institutional Equities.