Q3 earnings: What green shoots? Much-awaited earnings recovery elusive in Q3 too

Mumbai: India Inc yet again disappointed stock investors, who were looking for a recovery in corporate earnings. They were often told a turnaround was around the corner, but it never materialised.

And analysts say the trend may continue going forward, though the low-base effect may help in some cases.

For at least eight years now, analysts and investors have been waiting for the much-awaited earnings recovery. While greenshoots did show up on occasions, they did not last long enough to turn into a structural recovery, and the quarter that went by was no different.

Nifty companies reported a 2 per cent year-on-year(YoY) drop in sales, while earnings before interest, tax, depreciation and amortization (EBITDA)/profit before tax (PBT)/ profit after tax (PAT) increased 11 per cent/4 per cent/9 per cent year on year.

The performance was driven mainly by BFSI (banking financial services and insurance) firms, excluding which Nifty PBT would be down 5 per cent YoY and PAT flat.

“December quarter earnings turned out to be in line, but still modest/narrow (BFSI driven) and underscored the weak underlying operational trends,” Motilal Oswal analysts said in a note.

For Motilal Oswal’s coverage universe, sales degrew -1 per cent, EBITDA expanded 10 per cent, PBT shrank -1 per cent, while PAT grew 5 per cent YoY compared with estimates of -3 per cent, 9 per cent, 0.4 per cent, 9 per cent growth, respectively.

The brokerage pointed out that measures initiated by the government and RBI since August to revive growth are yet to reflect in macro and micro data.

“The FY21 Budget has chosen the path of fiscal prudence over short-term fiscal stimulus. This path does look sound from a long-term perspective, but does not offer any near-term respite for growth,” the brokerage said.

“High frequency indicators on both consumption and investments remain weak and have resulted in successive downgrades for FY20 GDP growth estimate,” it said.

All was not lost though. Recent pick-up in inflation and potential bumper Rabi crop offer hope for a recovery in rural consumption.

The earnings numbers disappointed most analysts.

For the 151 companies under JM Financial’s coverage that have reported earnings, PAT grew 3.4 per cent YoY (vs JM Financial’s estimates of 10.9 per cent), primarily led by private banks, chemicals and consumer sectors. Excluding SBI and corporate banks (ICICI and Axis), PAT growth remained flat YoY (compared with JM Financial estimates of 7 per cent).

Midcaps, smallcaps in worse situation

JM Financial noted that in its coverage universe, largecaps reported an earnings growth of 7 per cent YoY while mid/smallcaps reported a decline of 18 per cent, demonstrating a superior performance by the largecaps.

A study of the next 148 out of 150 stocks by market capitalisation after Nifty stocks showed Q3FY20 revenue remained flat. Excluding banks, financials, GIC and Vodafone Idea, operating profit declined by 2 per cent and net profit by 10 per cent on YoY basis, IndiaNivesh pointed out.

On an aggregate level, out of the next 300 companies by m-cap, 289 companies have reported third quarter numbers and their top-line grew by 2 per cent and operating profit by 3 per cent, while net profit de-grew 21 per cent YoY, IndiaNivesh said in a note.

What next?

For Kotak Institutional Equities, third quarter profit of its coverage universe increased 6.6 per cent YoY versus their expectation of 21 per cent expansion.

“3QFY20 results provided further evidence of the ongoing slowdown in India and, more importantly, little evidence of an imminent recovery given the subdued management commentary on demand conditions,” Kotak analysts said.

“We continue to believe the current demand slowdown reflects structural demand and productivity issues arising out of under-investment in human and physical capital. This is unlikely to change quickly. However, earnings growth may recover faster off a low base in key sectors,” it added.