Post a weak Q2FY20 due to overall slowdown in the economy, we expect the Q3FY20 earnings season to be no different. However, certain sectors that had witnessed weakness (Auto, FMCG and Capital Goods) are likely to report some improvement as demand picks up marginally (but still growth is negative in certain cases) on a QoQ basis. Contrary to this, the sectors that had witnessed strong growth momentum (Banks, IT and Consumer Durables) are likely to moderate in Q3PY20 as they face the brunt of ongoing slowdown. Nonetheless, lower commodity prices and reduced corporate tax rate is likely to enhance profitability for most companies (ex-banks). For Nifty 50, after nearly 5% growth in H1FY20 which was led by lower taxes, we do not expect this to meaningfully improve in this quarter and therefore expect a flat growth for Nifty 50 companies.
Let’s look at each sector in detail
The volume growth continued to remain subpar even as the festive season failed to lift the sentiments. Except for Maruti Suzuki all the other listed OEMs reported a decline in volumes in Q3FY20, however, it was better when compared to the slide seen Q2FY20. On the margins front, we expect a better margin profile from all OEMs led by lower input cost and cost-saving initiative by most OEMs. The important thing to look out for the Auto sector would be BS-VI transition, as inventory management would be crucial ahead of the implementation of the new regulatory norm. Further, the outlook on demand would also be one of the important factors. The Auto-Ancillary space is also expected to report subpar numbers due to lower demand from OEMs and sluggish exports.
The banking sector is likely to report moderation in loan growth due to lower offtake from corporates amidst slowdown. Further, led by a soft festive season, the retail loan growth for banks and NBFCs is also likely to moderate in Q3FY20. The asset quality concerns have definitely alleviated with recent resolution of some large stressed names, however, these are far from over. Therefore, the important factor to look out for banks and large NBFCs would be the asset quality whether there are any new accounts added to the NPA list. Further, the growth on outlook would be an important factor to look at for BFSI companies.
Lower ordering from the government and muted private capex would impact the order inflow for these companies. However, in terms of performance, we expect decent top-line growth and much-improved profitability led by reduced tax rate. The important thing to watch out for would be guidance order and if there are any signs of increase in government spending.
The volume growth continued to remain sluggish due to extended monsoon in some parts of India and on-going economic slowdown. Nonetheless, on a YoY basis, we expect flat growth for cement companies led by higher realizations. Further, profitability is also likely to see a marked improvement due to lower input cost pressures. The key thing to watch out for would be margins and the demand outlook for Q4FY20.
After a strong run in the last year, we expect consumer durables space growth to moderate in O3FY20. Nonetheless, the profitability for most companies is likely to see a strong jump led by cost-saving initiatives leading to better margins and reduced corporate tax rate.
The growth in this sector has been consistently decelerating over the past few quarters, mainly due to rural slowdown. We expect the trend would continue in Q3FY20 and expect low single-digit volume growth. The profitability is also likely to be impacted by lower volume offtake in Q3FY20.
Q3FY20 is a seasonally weak quarter for IT companies. However, currency tailwinds are likely aid growth for large IT companies. The margins and profitability are also likely to remain stable for most companies. However, more than the results, the market participants are likely to keep a watch on the guidance on growth and margins.
We expect yet another disappointing show from the metal space mainly due to volume growth in Q3FY20 and lower LME prices. However, all is not bad for these companies as metal prices have started to inch higher and we are seeing some traction in volume growth.
Oil & Gas
The gas companies are likely to continue to its strong earnings momentum led by healthy volume growth and better margins. The OMCs are also expected to report a healthy set of numbers led by inventory gain in Q3FY20.
Given the regulatory uncertainty, it would be better to look at these companies individually. Our overall view would remain cautious as we do not expect strong earnings growth this quarter by some prominent pharma company.
Therefore, in conclusion, the earnings growth for Nifty so has been sub 8% levels over the last four years. FY20 will be no different as muted show in 9MFY20 likely to drag Nifty earnings growth to 5-8% for FY20E.