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The first quarter of FY20 is expected to be subdued due to several factors, including slowdown in the economy, non-banking financial companies/liquidity crises, inflation et all.
As we enter into the first quarter’s earnings season of FY20, analysts have built in all macros and micro factors in their earnings estimates. The first quarter of FY20 is expected to be subdued due to several factors, including slowdown in the economy, non-banking financial companies/liquidity crises, inflation et all.
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Financials are expected to drive the Q1FY20 earnings and analysts across the street are expecting Nifty Q1FY20 earnings to increase in the range of 7-10 percent. Barring financials, lower earnings are expected across the board, except for commodities.
Key highlights of the quarter
Inflation was largely stable and the Reserve Bank of India (RBI) has cut the benchmark repo rate twice by 25 basis points each, totaling to a cut of 50 bps during the quarter. Global commodity prices were on declining trend and during the quarter average rupee to dollar exchange rate appreciated a marginal 0.6 percent QoQ.
Crude prices were also stable during the quarter. Current Bloomberg consensus for FY20 and FY21 Nifty EPS is expected at 617 and 723 respectively.
A weak quarter is expected largely on lower monthly sales reported across the board. Other factors driving the lower earnings include liquidity crises, weak rural demand, higher inventory levels and companies cutting their production targets. Analysts expect tepid demand to continue at least until the next quarter. Two-wheeler makers are expected to report better earnings compared to four-wheeler manufacturers in Q1FY20.
Banks and Financials
Robust increase in net income is expected. Lower credit cost, improving NIMs and steady loan growth will drive the growth for Q1FY20. Liquidity pressure remains a concern and is expected to impact the first quarter earnings. Banks having strong capital will continue to gain market share. Vehicle finance companies and housing finance companies (HFCs) are likely to take a hit due to liquidity issues.
Due to the Lok Sabha elections in the first two months of Q1FY20, general economic slowdown was seen during the quarter leading to lower demand. But on the other side cement prices surged 9 percent QoQ and benign fuel cost could further aid quarterly earnings. Realisations per ton is expected to improve for the quarter.
The first quarter is expected to be weak for IT sector, largely on yearly wage hikes, rise in H-1B visa costs and rupee appreciation. Management commentary on growth rates and deal size in digital, attrition rate and demand will be worth keeping an eye on.
Earnings are expected to grow over 15 percent on year-on-year basis led by some outliers. US sales is likely to grow by around 19-21 percent on YoY but expected to remain constant sequentially. Domestic businesses are likely to grow around 8-9 percent as underlying demand remains weak. Also, a lack of launches is likely to aid lower earnings.
Consumer sentiments continue to remain subdued during the quarter due to general elections. Rural growth has further moderated, at par with urban growth. Crude beneficiaries may see some margin improvement as crude prices were steady during the quarter. Slowdown in volumes is likely to sustain.
Infrastructure and capital goods
Order inflows from the National Highways Authority of India (NHAI) remained subdued in the first quarter of FY20. But order inflow in other segments such as buildings and urban infrastructure was substantial. EPC revenue is expected to grow 15-20 percent YoY aided by growing momentum in project execution. For capital goods, negative operating leverage will drag the margins. Domestic orders continue to remain tepid.
Rising temperatures will likely help beat the slowdown in the economy with the air conditioner industry expected to clock strong sales growth in the quarter. Cooling segments (ACs and refrigerators) of white goods companies are expected to grow around 15 percent in Q1FY20 on a low base quarter.
Oil and Gas
Brent price was down 8 percent year on year but up 9 percent compared to last quarter. Earnings growth for gas players to remain robust while petchem and marketing margins will be on lower side.
Across the board the first quarter revenue is expected to be flat. Advertisement revenue growth is likely to remain under pressure due to Telecom Authority of India's (Trai) new tariff implementation. Subscription revenue growth is likely to remain mixed for the top players. Multiplexes will likely see slightly lower earnings due to weak content, fewer releases because of the Indian Premier League, the ongoing Cricket World Cup and the recently-concluded elections.
Print media government ad rate hike is likely to be offset by loss in government advertising and cutback in ad spends from key sectors due to economic slowdown. DTH and MSOs are expected to get some relief on demand pick up due to the World Cup and the IPL.
Sources: Edelweiss, Kotak securities and DB – Q1FY20 earnings previews
First Published: Jul 8, 2019 10:21 PM IST