Depreciating rupee, rising crude, tight liquidity to dampen Q2 show

Most analysts have turned cautious on India Inc’s Q2 performance. TCS is the first major company to declare its quarterly results on Thursday, while Bandhan Bank reported a strong performance on Wednesday. Its net profit zoomed 47 per cent for the quarter ended September 30, 2018. However, analysts fear depreciating rupee and rising crude oil prices will impact the corporate’s performance.

Edelweiss Capital expects a tepid Q2FY19, with year-on-year profit growth for its coverage universe likely to rise by 3 per cent and for coverage ex-commodities and corporate banks to contract by 1 per cent. “This weakness is attributable to rising base and headwinds from input prices and interest expenses rising ahead of growth cycle,” the report said, and added: “The slowdown in profit growth is broad-based with INR, interest rates and input prices being the swing factors.”

Dhananjay Sinha, Head, Institutional Research, Economist and Strategist, Emkay Global Financial Services, said: “Topline momentum for most of the consumer-oriented sectors, such as media and retail, is expected to slow down due to the delayed festive season this year. The fading out of the beneficial base effects present in Q1FY19 is also expected to impact realisation growth in Q2.”

Downgrade potential

According to a report by Motilal Oswal, rising crude prices and sharp depreciation in the rupee have impacted investor sentiment of late. Recently, the fear of tight liquidity and higher interest rates are adversely impacting several domestic-oriented sectors, which were the key to FY19 earnings recovery. “NBFCs, in particular, will see downgrades after many years of strong growth, in our view,” it added.

“Evolving trends suggest that our reflationary recovery thesis has peaked out due to the emergence of domestic and global headwinds; hence, we believe that FY19 consensus EPS growth of 23 per cent is fairly optimistic and can be subject to further downgrades,” added Sinha.

Prabhudas Lilladher believes rising crude, falling INR/USD and liquidity crunch can lead to lower growth rates and cut in earnings in the coming quarters. “We expect muted performance from auto, pharma and PSU banks. Demand is showing divergent trends as Q2 has also seen impact of Kerala floods, delayed festival season and high crude prices.”

According to Ambit Capital, Q2FY19 result outlook for banking, consumer discretionary, agri & chemicals, media, and utilities is positive. “While depreciating rupee is negative for players importing coal, it is positive for export-led players like agri exporters, two-wheeler manufacturers, IT, etc,” it said, and added: “Our FY19 estimates for most companies in banking, media and telecom are lower than consensus, while higher for building materials, capital goods and utilities.”

Eye on announcements

With just a few months to go for the General Elections, investors should watch out for government’s announcements pertaining to inflation, sops (especially for farmers), crude prices and exchange rate, Ambit Capital said.