Even as India Inc’s performance in Q1FY16 slipped once again, which was in line with expectations, the worst times may be nearing an end, early estimates of brokerages suggest.

 

The recent IIP data, especially on the capital goods front, showed continued double-digit growth in commercial vehicles and benign food prices despite expectations of a sub-normal monsoon for the second consecutive year, which gives confidence and conviction.

 

Reserve Bank of India Governor Raghuram Rajan said at the State Bank of India conclave today that there was a pick-up in the economy.

 

Motilal Oswal expects recovery from the second half of FY16 based on its interactions with managements and estimates 22 per cent earnings growth in FY17. In both cases, recovery is expected to be by cyclicals.

 

Nomura also sees limited risk to further downgrades in sales estimates due partly to low expectations and lower commodity prices to boost earnings in the forthcoming quarters.

 

The Japanese brokerage firm maintains its positive stance on the Indian markets and the year-end December target for the Sensex at 33500. It is overweight on cyclical sectors such as financials, automobiles, industrials and technology.

 

However, rupee depreciation could be a key headwind though the Indian currency has been the best performer among the emerging market peers.

 

Volatility and pressure on the currency is seen as a bigger risk than an errant monsoon, which affects a significant part of the Indian population.

 

Q1FY16: Woes continue

 

The corporate performance once again disappointed in Q1FY16, led by cyclical sectors such as cement, metals, infrastructure, capital goods, public sector banks, and select automobile companies and companies exposed to the global macroeconomic environment.

 

Companies forming part of the S&P BSE Sensex significantly lagged expectations on key parameters, namely, sales, operating profit and net profit.

 

According to Motilal Oswal estimates, Sensex companies’ sales fell for the third consecutive quarter — 5% year on year — in Q1FY16 compared to expectations of a 1 per cent dip. Profitability improvement also lagged behind considerably, with operating profit growth of a mere 2 per cent and flat net profit.

 

The domestic brokerage has cut its Sensex FY16 earnings estimate by 3 per cent and expects earnings to grow 12 per cent at Rs 1,515 per share.

 

However, lack of a major negative surprise across sectors is in itself a relief.

 

Bank of America Merrill Lynch said in its note: “The good news is that after sharp disappointments in the previous three quarters, earnings were slightly ahead of our expectations of 0.3 per cent for the Sensex companies.”

 

Way ahead

 

Going ahead, low commodity prices and inflation has raised hopes for a rate cut.

 

However, dollar strengthening beyond a certain level is not seen as a positive by the market experts and may restrict RBI to adopt an accommodative monetary policy.

Motilal Oswal sees room for further correction in rupee.

 

Slippages in the monsoon are no doubt a concern for India Inc. But the current benign food price data or the negative territory has not raised alarm bells yet, the brokerages said.

 

Nevertheless, good monsoons will be a bonus for economic growth as rural demand would get stronger, Rajan said.

 

 

CLSA sees risk of more earnings downgrades in the capex cycle plays via capital goods, cement and public sectors banks.

 

Nevertheless, consensus estimate sales and net profit CAGR is pegged at 9 per cent and 15-18 per cent respectively between FY15-17.

 

Published on August 20, 2015