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Earnings Preview (July-September 2019) - Pain to persist despite tax rate cut

Sustenance of deflationary environment, weak spending support and feeble pricing power continue to mar corporate performance in Q2. NIFTY companies are expected to see earnings decline of 3.6%. on the back of flat sales growth (Nifty PAT increased by 8.4%yoy in Q2FY19). This is despite the support of tax cuts. The consumer goods sector is expected to post robust growth, while select banks will also outperform. Major drag will come from metals and auto space. Interestingly, excluding Autos, Nifty PAT is expected to grow 1%yoy and EBITDA is expected to grow 7.1%yoy.

Ex-financials and ex-Tata motors (TAMO) PAT is expected to decline 5.7%yoy, while revenue is expected to go down 0.6%yoy. Owing to operating leverage, ex-financials and ex-TAMO PAT decline is expected to be much sharper than EBITDA decline at 1.5%yoy as the slowdown continues to impact manufacturing segment significantly

Corporate tax rate cuts bring a little respite as Nifty 50 ex-financial companies see a revenue decline after 15 quarters: Recent corporate tax rate cut also fails to bring much respite to earnings growth as demand slowdown and weakness in commodities are leading to a significant decline in top line of the impacted sectors, which in turn is leading to a significant PAT decline in these sectors, despite corporate tax rate cuts. Nifty50 commodities companies are expected to see a 4.3% decline in revenue while Autos companies sales are expected to decline 13.8%yoy with a sharper PAT decline in both the sectors.

On the positive side, Consumer goods is expected to see maximum benefit from tax rate cuts as the sector continues to see revenue growth and most companies in the sector were paying full taxes (without any rebate).

Discretionary consumption slowdown much starker than that of staples: Two legs of consumption are expected to exhibit dichotomous results, similar to last few quarters. While Autos are expected to post a whopping 47%yoy decline in PAT led by significant decline in volumes over the quarter, FMCG companies are still expected to see volume growth albeit moderate.

Commodities companies to suffer as a result of deflationary environment:  Metals as well as Oil & Gas are expected to lead to weakness in commodities companies results, primarily led by weak demand (volume growth) and deflationary environment for commodities. Consequently, Nifty 50 companies EBITDA and PAT, both are expected to see a 11%yoy decline, despite expectations of strong results by Reliance.

Nifty50 Financials to post 7%yoy PAT growth: Indian financial sector continues to brave challenges that started with NPA resolution followed by NBFC crisis last year. Consequently, there is expected to be a significant divergence of performance with in the sector with Yes bank, ICICI Banks and Axis bank expected to post a sharp earnings decline while HDFC twins are expected to post strong earnings growth.

Broader IDFC universe to exhibit similar trends: The broader IDFC coverage universe should exhibit a similar trend (in line with Nifty50), with commodities as well as IDFC Autos universe expected to see a PAT decline ~49%yoy. IDFC coverage universe (ex-financials) too is expected to post 1.6%yoy decline in revenue, similar to Nifty50. Overall, IDFC universe is expected to see an 11%yoy decline in PAT.

IDFC Nifty picks: From Q2FY20 results perspectives, we like HUL, HDFC Bank, Asian Paints and Ultratech with in Nifty.​