Q1 earnings review: Banks shine, auto, consumer disappoint; how much Nifty profits may grow in FY21

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The economic expansion plunged to a five-year low of 6.8% in FY19. (Represnetational image)


The economic expansion plunged to a five-year low of 6.8% in FY19. (Represnetational image)

Even as a majority of Nifty Index firms have reported their Q1FY20 numbers, Kotak Securities notes that the strong performance of banks in the quarter helped to offset declining profits in the automobiles & components and oil, gas & consumable fuels sectors. According to the research firm, net profits of stocks in its universe increased 2.3% on-year led by strong performance of the banks (low base in 1QFY19 due to large losses in several banks), which offset marked decline in profits in the automobiles & components and oil, gas & consumable fuels sectors. “Net profits of the Nifty-50 Index increased 1.8% yoy, 0.8% above expectations while EBITDA declined 3.4% although it was 3.1% above expectations due to positive impact of Ind-AS 116 implementation from 1QFY20,” Kotak Securities said in a report. 

Also read: Fitch Ratings raises Reliance Industries’ outlook to positive, expects Jio to continue strong growth

Kotak Securities expect net profits of the Nifty-50 Index to grow 15% in the current financial year FY2020, down as compared to 24% at the beginning of the results season. However, further downgrades to earnings cannot be ruled out in (1) domestic consumption and investment sectors (automobiles, capital goods, construction materials, consumer durables) due to continued subdued demand conditions and (2) global commodity and IT sectors due to global economic slowdown, noted the firm. “We expect net profits of the Nifty-50 Index to grow 19% in FY2021,” said Kotak Securities.

Given the recent correction, while India’s broad market valuations may look reasonable the market offers little in terms of investment inputs currently, even less than usual given large price-value distortions across the entire valuation spectrum, said Kotak Securities. The threat of further earnings downgrades (large cuts in 1QFY20 results season), uncertain global and domestic macroeconomic conditions and super-high multiples of consumption-related stocks reduce the investment appeal of the Indian market. Further, low global interest rates have sustained price-value distortions for long periods of time, thereby making investment decisions harder, according to the report.

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