2QFY20 Earnings Estimate: Continued Weakness; tax cut impact to be watched

13 OCTOBER, 2019

Citi analysts expect Nifty earnings to grow 14% year-on-year (YoY) in FY20, excluding the impact of the recently announced corporate tax rate cuts. This reflects an 8 percentage point downward revision in earnings expectation vis-à-vis June 2019 estimates. While corporate earnings are expected to benefit from lower taxes, weak macros are likely to continue to pose downside risks to earnings forecasts. For FY20, Citi analysts now expect the boost from lower taxes to be less than the 8-9% estimated earlier, in light of additional clarifications on MAT credit availability, DTAs revaluation, etc.

Citi analysts roll forward their Sensex target by 6 months and set it at 40,500 for September 2020, lowering the 1-year forward P/E multiple to 17x (down from 18x earlier).

2QFY20 Earnings Expectations:

Citi analysts expect 2QFY20 earnings to be in line with the prior quarter on a Profit Before Tax (PBT) basis, i.e. excluding the benefit of lower corporate taxes. Nifty and Sensex earnings (pre-tax) are expected to decline by 3% YoY and 4% YoY respectively, as ‘base benefit’ for Financials (from lower provisioning expenses in PSU Banks), is expected to be offset by weak volume/pricing trends in auto and metal sectors.

Citi Universe 2Q Earnings Estimate

Source: Company reports, Citi Research estimates; Note: 2QFY20E is based on PBT growth

Sectoral Drivers:

Auto: Citi analysts believe that the top line will continue to be under pressure given weak volumes, while higher discounts may drag margins further.

Consumer: While some companies may see tax-cut driven improvement in net profits, Citi analysts expect modest sequential growth due to higher discounts/promotional spends (e.g. soaps, home insecticides, hair oils, etc.).

Liquidity challenges continue to impact dealers and distributors as both rural and urban markets witness subdued volume growth trends.

Commodities: Citi analysts expect lower realizations across steel, metals and coal sectors, however, lower input prices (coking coal) may help steel companies. Oil Marketing Companies should see stronger sequential growth given higher Gross Refining Margins (GRM).

Cement: Weaker realizations, partly offset by lower petcoke prices, may result in lower EBIDTA (Earnings Before Interest, Depreciation, Taxes and Amortization).

Financials: Slower loan growth of 10% YoY in 2QFY20 (vs. 12% YoY in 1Q) may put pressure on the Net Interest Income (NII). Citi analyst expect Profit Before Tax (PBT) to grow +130% YoY aided by lower provisioning for PSU banks.

Pharma: Continued inventory correction in domestic markets and deterioration in exclusive/semi-exclusive sales in the US may result in a weak quarter.

Capital Goods: Citi analyst expect government orders to drive bulk of the inflows, as private orders continue to remain subdued.

Investors may continue to stick to their strategic asset allocation as per their risk profiles and ensure diversification in investment portfolios. For more details and implications for your portfolio, please contact your relationship manager.

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