Few surprises in Q3

Cement, pharma likely dark horses; capex-linked sectors to drag Sensex.

The best part about the third quarter earnings season is that the market has mostly factored in the downsides by now. While the high interest costs and a weak rupee will eat into earnings, the slowing economic growth is expected to hit sales. Most of this is known and the market has downgraded earnings expectation for the third quarter, accordingly. Given that downsides are mostly known and priced in, the market would have little appetite for negative surprises, claim analysts.

Despite factoring in the known negatives, analysts seem to be divided, even in their pessimism. At one end of the spectrum is Edelweiss Financial Services, projecting a year-on-year profit after tax (PAT) growth of 3.3 per cent for the Sensex companies, as against 12.1 per cent in the second quarter. On the other hand, Motilal Oswal is projecting Sensex PAT to grow nine per cent y-o-y. The brokerage says: “The average growth in Sensex PAT for the last four quarters has been nine per cent, the lowest ever, except during the global crisis.”

Despite the macroeconomic headwinds and the overall slowdown, select sectors will continue to hold up, both in terms of sales and profits. For instance, the quarter is expected to be good for cement, information technology (IT) services, fast moving consumer goods (FMCG) companies and pharmaceutical majors. While FMCG companies are expected to report double-digit growth in sales, driven by calibrated price increases, the software sector is expected to reap the benefits of a margin uptick, thanks to an 11 per cent fall in the rupee.

This quarter, the cement sector is expected to be another dark horse. Through the quarter, realisations and volumes have risen, despite sluggish demand and high raw material prices. According to ICICI Direct, demand is expected to grow nine per cent y-o-y in the third quarter, as dispatches grew 10 per cent y-o-y in October-November. and are expected to grow nine per cent y-o-y for December. Cement prices have also grown by Rs 20/bag in the third quarter sequentially. Cement and pharma are the only two sectors where analysts expect Ebitda to grow faster than sales.

Most other Sensex companies are expected to mirror the sombre mood in the economy. According to Edelweiss Financial Services, “The revenue trajectory continues to moderate, even as the top line is expected to grow 19 per cent annually (ex–oil marketing companies), compared to 21 per cent in the second quarter and way below the 25.2 per cent recorded in the first.” Analysts say sectors linked to capital expenditure are likely to be the worst hit, as the investment cycle has nearly come to a standstill. The capital goods sector has seen new order inflows shrink substantially, especially from power companies, hurting revenue visibility. From metals to real estate, the imprint of macro headwinds would be visible in the Q3 numbers.