Expect poor Q3 earnings: Plummeting commodity prices may hit India Inc's profits

In what could act as a further flashpoint for equities that appear to have run into nervousness of late, most analysts have muted expectations from the set of third-quarter earnings India Inc will start reporting from tomorrow. [caption id=“attachment_2029249” align=“alignleft” width=“380”]  PTI image[/caption] A perusal of a number of brokerage reports shows that analysts expect the Sensex to post nearly flat revenue and profit growth for the third quarter. Analysts see commodity sectors such as metals and oil & gas (barring oil marketing companies) – following the rout in global commodity prices – apart from usual suspects real estate and utilities putting downward pressure on earnings. On the other hand, sectors such as banks, autos and FMCG are expected to report healthy numbers. “The approx 25 percent quarterly decline in oil prices in Rupee terms (average basis), moderation in other commodities in conjunction with rupee appreciation (relative to euro and EM currencies) are likely to yield just about 2 percent top line growth for our coverage universe (ex-OMCs),” Edelweiss said in a note. Ideally, this should have been compensated by domestic-oriented sectors. “But given the weak domestic demand and probably inventory losses, domestic consumption as well as investment-oriented sectors are expected to report stable, but subdued earnings growth,” it added. Financials, which form about one-third of the Sensex’s market cap currently, are expected to be a saving grace: thanks to the rise in bond prices, which are expected to result in significant treasury gains for banks. While telecom companies too may post strong set of numbers, thanks to Q3 being a seasonally strong quarter, and with higher subscriber additions and strong growth in data and voice revenues driving earnings, according to a note by Kotak. Earnings growth for defensive sectors such as FMCG, IT and pharma is expected to be stable, analysts said. However, the muted growth in overall earnings is expected to put downward pressure on Sensex earnings-per-share estimates for the full year. EPS grew by about 18 percent in the first quarter followed by 3 percent in the second, bringing the first half growth to about 11 percent. So EPS has to grow a steep 17 percent in the second half if Sensex earnings are to grow at 14-15 percent that analysts are on average forecasting for the full year currently – which may be highly unlikely if earnings to record flat growth this quarter. The Sensex companies clocked earnings of Rs 1,350 per share in fiscal year 2014 and any downgrades in earnings for 2015 may pressure the markets going forward. “FY15 consensus forecast stands at Rs 1,550, implying 14 percent growth. However, given the poor earnings expectations in Q3FY15, earnings downgrades are likely in the quarter,” Edelweiss said. Even if earnings do grow at 14 percent to Rs 1,550 per share, the Sensex at 27,200 is trading at more than 18 times estimated earnings – slightly above-average compared to historical mean, which means room for earnings disappointment could be limited.