As TCS, Infosys, IndusInd Bank and Avenue Supermarts kick start the earnings season, the September quarter numbers are expected to be muted and uneventful, though there will be some support from the corporate tax rate cut.
The demand slowdown is expected to continue to hit earnings, though there could be improvement in some cases, largely on the back of low base in the year-ago quarter.
It has been a year since the IL&FS crisis erupted, but its effects are still being felt, especially in financials, which are facing asset-quality concerns.
The slowdown was for all to see in the first quarter GDP growth, which fell to a six-year low of 5 percent. Recently, the Reserve Bank of India also cut its full-year growth forecast from 6.9 percent to 6.1 percent.
"The second-quarter earnings-report season will be more of the same-tepid and uneventful. Underlying demand slowdown in the domestic economy and weak global commodities prices are expected to take a toll on the earnings, with very few bright spots, if any," Motilal Oswal said.
Reliance Securities also said that the September quarter was marked by weak operating trends discernible in slowdown in revenue growth across sectors.
"Whilst the quarterly earnings are not comparable with that of Q2FY19 and Q1FY20 owing to lower corporate tax rate, reported earnings will grow by 11 percent for our coverage universe. Aggregate operating profit growth for the quarter will remain muted," it said.
Motilal Oswal expects its universe's PBT to grow 2 percent year on year (YoY) but PAT to decline 6 percent YoY, dragged by automobiles and metals. The difference between profit before tax (PBT) and profit after tax (PAT) is exaggerated because of the deferred tax adjustments in financials, it said.
The brokerage feels it is important to look at this quarter's numbers from a PBT perspective, as the reduction in the corporate tax rate would result in several adjustments in this quarter's tax numbers (eg large corporate banks will make deferred tax adjustments).
Ex-financials, Motilal Oswal expects its universe's PBT/PAT to decline 14/8 percent YoY. Private banks, consumer, cement and capital goods, however, might offer some respite.
According to Reliance Securities, banking (ICICI Bank, Axis Bank and SBI) on low base, building materials, pharmaceuticals on low base and consumer companies are likely to deliver decent results.
While IT sector was likely to see a good revenue traction, sectoral margin could remain under pressure, it said, adding automobiles and infrastructure sectors would see a significant decline in EBITDA.
Considering the decent growth in select pockets, brokerages bet on these 15 midcaps in the September quarter.
Motilal Oswal's top picks are Indian Hotels, Mahindra & Mahindra Financial, Ashok Leyland, Aditya Birla Fashion Retail, Oberoi Realty and Colgate Palmolive.
Reliance Securities' bets among midcaps are Federal Bank, DCB Bank, Hexaware, Sonata Software, JK Cement, Alkem Labs, Torrent Pharma, Mahanagar Gas and Petronet LNG.
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