Fall in rupee, spurt in sales could buoy St this earnings season

The second quarter earnings season, which starts off this week, is expected to be much better than the last two quarters.

The second quarter earnings season, which starts off this week, is expected to be much better than the last two quarters.

Going by analysts, the earnings of Sensex companies, after witnessing near flat growth in the last quarter, are likely to see 5-7% growth during the September quarter, led by export-oriented sectors that benefit from a sharp appreciation in the dollar.

Lower input costs and better sales growth, too, are likely to aid recovery in earnings growth.

Rajat Rajgarhia, director-research at Motilal Oswal Securities, believes that though the second quarter earnings would show a large divide in earnings growth for export- and domestic-oriented companies, the secular sectors will again do better than the cyclicals.

“The sharp 13% year-on-year depreciation of the rupee against the dollar is expected to boost profit after tax (PAT) growth of dollar-denominated sectors such as technology, healthcare and metals. Within the Nifty, the dollar-denominated companies’ PAT is expected to grow 19% on-year, whereas for others, PAT is expected to decline 5% on-year, resulting in Nifty earnings growth likely coming at 4%,” Rajgarhia said in a note on Saturday.

For Sensex companies, revenue growth is expected to come in at 11-12% on-year, led by export-oriented sectors like IT (up 29-30%) and healthcare (up 23-24%), along with autos (up 17-20%) and media (up 14-17%), according to analysts polled by dna.

Lower input costs and a slight improvement in operating leverage on account of higher sales growth could see operating margins inch up by 10-30 basis points on-year but contract 20-35 bps on a sequential basis. The sharp rupee depreciation seen during the quarter would more or less negate the positive impact of falling input costs on the margins. Profit margins are also likely to fall to new lows on persistently high cost of funds and mark-to-market forex losses.

Among the sectors, metals, auto, IT, healthcare and consumer are likely to report strong double-digit earnings growth, while cement and capital goods would likely be laggards with a negative PAT growth of over 25%.

Though experts see signs of improvement going forward, the earning downgrades may continue for a while on account of weaker performance from cyclicals.

“The earnings recovery indicator has stayed in the negative zone all through this year, implying more downgrades than upgrades. Sensex EPS estimates have been cut by nearly 9% since the start of fiscal 2014, with the street currently expecting around10% earnings growth. We expect downgrades to continue with our top-down earnings growth estimate at 5% for FY14,” Tirthankar Patnaik, Prerna Singhvi and Saloni Agarwal, analysts at Religare Capital Markets, wrote on Friday.

Angel Broking believes that cyclical headwinds from slower pace of economic growth, elevated interest rates owing to concerns on inflation, and the political overhang of upcoming elections are expected to continue to weigh on corporate earnings.

Rajgarhia said that though Sensex earnings have been cut by 3% for this fiscal and by 4% for the next – which is likely to result in an EPS growth of 11% for fiscal 2013-15, there are some positives too. “Sales growth and operating margin growth are showing signs of turnaround and are likely to be much better in the second half. Also, the profit growth distribution is showing early signs of improvement with the number of companies reporting strong growth increasing and those showing degrowth decreasing.”

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