Sensex firms may see weak Q2

Combined net sales and net profit estimated to drop 4.5% and 2.3%, respectively, on a Y-o-Y basis

In contrast to double-digit earnings growth estimated by some of the major brokerages a few weeks ago, analysts now expect India Inc to report a decline in both top line and bottom line for the September quarter (Q2) of 2015-16. The combined net sales and net profit of the Sensex 30 companies are expected to decline 4.5 per cent and 2.3 per cent, respectively, on a year-on-year basis.

Going by these estimates, the July-September period could be a fourth straight quarter of combined revenue declines for Sensex companies, and a fifth straight quarter of either a decline or low single-digit profit growth.

Analysts attribute their outlook to a weak demand, both globally and in the domestic market. "The demand conditions in India and abroad remained weak, as indicated by a sharp decline in exports growth, disinflationary trend in manufacturing, subdued credit growth and slowing direct tax proceeds," wrote Emkay Global's Dhananjay Sinha in the firm's earnings estimates report for the September quarter.

A Business Standard analysis of September-quarter earnings estimates by seven brokerages, including Bank of America Merrill Lynch, Kotak Institutional Equity, Edelweiss, Religare, Emkay Global and Motilal Oswal, shows that the 30 Sensex firms could report a combined net profit of Rs 55,486 crore, compared with Rs 56,820 crore in July-september 2014.

For banks and financial firms in the Sensex, net sales refer to revenues (net of interest expenses); for others, these are total income from sales of goods or services (net of indirect taxes). Net profit refers to reported net profit, including exceptional gains and losses.

The combined sales could fall to Rs 4.5 lakh crore, against Rs 4.7 lakh crore a year ago, shows the analysis. Based on these estimates, Sensex firms are now valued at 22 times trailing 12-month earnings at the end of September 2015.

Until a few months ago, most brokerages were expecting double-digit earnings growth for the Sensex companies in the current and next financial years. Analysts say forward estimates now look too ambitious and there could be earnings downgrades. For example, to meet the Bloomberg consensus 2015-16 estimate of Rs 1,560.4 per unit of the index, the Sensex companies' earnings per share (EPS) should now grow by 26.6 per cent in the second half and 52 per cent over the next year and a half to reach the 2016-17 estimate of Rs 1,874.5.

By comparison, the current EPS (on a trailing 12-month basis) for the Sensex is Rs 1,233, down from Rs 1,245 at the end of 2014-15 earnings season.

"Downgrades picked up pace after poor earnings in the previous two quarters and we expect further downgrades after the September quarter earnings season. Demand and investment remain a challenge and the recent GDP (gross domestic product) downgrades by the Reserve Bank of India indicate a continued weakness in the economy," says Nitin Bhasin, head of research at Ambit Capital.

"Barring a few sectors, we have downgraded our earnings for most stocks. And we continue to remain behind consensus in nearly all sectors except automobile, where we are in line with market consensus. We are ahead of consensus in a few like information technology, cement, engineering & construction and pharmaceuticals. We believe the consensus view of 12 per cent Sensex EPS growth and seven per cent GDP growth is misplaced," he added.

Among individual sectors and stocks, metals and energy companies are likely to report the biggest revenue and profit drops, given the low commodity prices. Tata Motors, Bharti Airtel, Sun Pharma, Lupin and Larsen & Toubro could follow.

On the brighter side, private-sector banks like HDFC Bank, Axis Bank and ICICI Bank are likely to top the charts again with double-digit net interest income and net profit growth.

Other big performers could be Bajaj Auto, Cipla, Maruti Suzuki and Coal India. Low-beta stocks from the fast-moving consumer goods and IT sectors, such as ITC, Hindustan Unilever, TCS and Infosys, are likely to be in the middle, reporting single-digit or low double-digit growth rates for top line and bottom line in the September quarter.