Investors in Indian shares, who enjoyed their best week in 3-1/2 months, will be focused on quarterly results in the coming days as the earnings parade rolls in amid a mixed outlook for companies.
Software bellwether Infosys Ltd will kick off its July-September report card on Monday, followed by industry leader Tata Consultancy Services the next day and mid-cap firm Mindtree is scheduled to unveil its results on Thursday.
“We expect India IT stocks’ outperformance relative to Sensex to continue as revenue growth momentum continues in the September quarter. However, any major 2016-17 EPS (earnings per share) upgrades backed by rupee depreciation will depend on clarity around 2016 demand environment amid a volatile global macro setting,” analysts Parag Gupta and Gaurav Rateria at Morgan Stanley said in a report.
In a nutshell it means that fund managers would be looking for comments from company executives on their reading about the outlook, rather than the past quarter numbers which are generally expected to be better for the export-focused software services sector.
“On Infosys, while street expectations for 2015-16 revenue growth are gradually gravitating towards the higher end, we believe the company may choose to maintain its constant currency revenue guidance and adjust US dollar revenue growth due to incremental cross currency headwinds,” the analysts wrote.
Infosys, TCS and their peers get about 90 per cent of their revenue from exports, with the United States contributing the bulk of the business. An improving US economy should bolster the outlook for new orders, but the big catch is aggressive bidding and pricing pressure. To combat this companies are moving up the value chain.
Harit Shah at HDFC Securities expects Infosys to report September quarter revenue growth of 4.1 per cent in US dollar terms, compared with April-June, while Tata Consultancy Services should notch 4.2 per cent rise. Both the companies’ margins would be pepped up by 138 basis points thanks to the rupee’s depreciation and growth leverage.
The biggest gainer, according to him, would be mid-sized Mindtree whose revenues are seen jumping 12.7 per cent quarter-on-quarter, helped by acquisitions.
“Our sector top picks remain Infosys [Target price: Rs1,330], Mindtree [TP: Rs1,632 vs Rs1,410 earlier] given industry-leading dollar revenue growth, along with high exposure to SMAC, eClerx [strong non-top 5 client growth, earnings CAGR over 25 per cent, TP: Rs. 2,190] and Hexaware [TP: Rs. 315],” Shah said in an earnings preview.
SMAC refers to new enterprise IT model that blends social, mobile, analytics and cloud technologies to improve business competitiveness.
Some missteps seen
With many sectors still struggling, the overall earnings for Indian companies are unlikely to provide succour. Twelve out of the top-30 Sensex companies are expected to report a contraction in profits, according to DSP Merrill Lynch.
“Excluding financials, aggregate profit is expected to fall by 3.7 per cent, aggregate sales for Sensex companies is expected to contract for the fourth consecutive quarter at minus 9.1 per cent — the first-ever such occurrence,” the securities firm said.
Sales growth, even after excluding beaten-down commodities, is expected to remain muted at 3.5 per cent, which should be of particular concern, it said.
Companies tipped to lead earnings growth include Tata Steel, Cipla, Coal India, HDFC Bank and State Bank of India, DSP Merrill Lynch said.
Automobiles are expected to fare better, with some exceptions. Mihir Jhaveri and Siddharth Vora at securities house Religare forecast quarterly EBITDA (earnings before interest, tax, depreciation and amortisation) to leap 39.2 per cent compared with the year-earlier period for the companies it covers, on revenue growth of 9.8 per cent.
“While margins are likely to improve quarter-on-quarter for most two-wheeled players, four-wheeled would see mixed trends with sharp margin expansion for Ashok Leyland but a decline for Jaguar Land Rover [controlled by Tata Motors],” the analysts wrote in a report.
“The earnings momentum would be led by Ashok Leyland, Eicher and Maruti Suzuki, whereas Mahindra and Mahindra and JLR would be laggards.”
Looking ahead
The big reduction in interest rates by the central bank on September 29, a 50 basis points slash in the repo rate that took the total cut to 125 basis points since mid-January, should percolate through the system and bolster consumer spending as well as revive confidence among businessmen to invest in new capacities.
So, the outlook for companies is better than what it was a few months ago. With festival demand seen upbeat earnings in the December quarter are expected to accelerate by about 11 per cent.
The stumbling block for investors is the uncertainty about when will the Federal Reserve raise US interest rates. The minutes of the September rate-setting meeting show that there is no imminent danger of the “lift-off” happening in 2015 because of the troubled world economic conditions. A US rate rise would trigger an outflow of cash from riskier emerging markets.
Still, the consensus among market gurus is that after initial pull-outs India would likely see a return of the cash as the country is well on the path to top global growth table.
This was also the main driver behind the stocks rally that lifted the Sensex 3.3 per cent in the week to Friday, its best weekly performance since mid-June. At 27,079.51, it was the benchmark’s highest close since August 21. The broader 50-share Nifty index rose 3 per cent during the week to 8,189.70.
Riding on the stocks gains, the rupee strengthened 1.2 per cent this week to 64.7350 a dollar.
Brokerage Edelweiss said it was sticking with its forecast for the Sensex to reach 32,400 by next March, a potential upside of 20 per cent.
The writer is a journalist based in India.
