Warren Buffett once said: If you are not willing to own a stock for 10 years, don’t even think of owning it for 10 minutes. It is important to have a long-term view when it comes to investments. But at the same time, tracking the quarterly results can give a lot of insight regarding a company’s growth and future prospects. With the earnings season for the second quarter of FY2020 around the corner, let’s take a look at some of the expected trends this season
Drop in profits:
In a bid to revive the economy, push private investment and kickstart corporate profits, the Finance Ministry slashed corporate taxes for domestic companies from 30% to 22% bringing the effective tax rate at 25.17%. While this is hailed as a positive move, the current economic slowdown run too deep to be offset by a cut in corporate taxes.
An overall drop in Profit before tax (PBT) is expected in the second quarter of FY020 as per a report by Kotak Institutional Equities. This is primarily due to a decline in auto, metals & mining, oil & gas and telecom sectors. The report also states a corresponding decline of 1.4% in the PBT of the BSE-30 index and a 4.4% YoY decline in the Nifty50 index. The reduction in corporate taxes will not essentially translate into higher earnings because the EPS (earnings per share) has not increased significantly.
Auto sector’s woes:
The Indian auto sector is going through the worst slowdown in two decades owing to weak consumer demand. This has resulted in excess inventories and production cuts. Maruti Suzuki, India’s largest carmaker witnessed a 26.7% drop in sales in the domestic market in September. Tax cut and discount offers have not been able to boost sales primarily because consumer confidence has been at an all time low. As a result, expectations regarding auto and auto component companies are dismal at best.
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Positive outlook for banks:
The Kotak Institutional Equities report cited a 33.7% YoY growth in PBT for banks, “led by Axis Bank, ICICI Bank and SBI”. Investors and bankers are expecting a surge in the recoveries of bad loans which would improve the margins of banks. However, concerns persist as repayments exceeded fresh lending during the first six months. When lending falls behind repayments, it means banks haven’t made money. But with most banks taking major steps to tame the problem of bad loans, investors are hoping that the subsequent focus on recoveries will mean better profits. Domestic banks are expected to report a rise in quarterly profits owing to earnings from treasury gains and improvement in net-interest margins.
Pharmaceuticals in the green:
The pharmaceuticals sector is expected to see a healthy quarter with a 10-12% YoY organic growth. This comes in the wake of a strong export growth of Indian pharmaceuticals. Due to the ongoing global slowdown, many economies were turning to generic medicine to reduce healthcare costs which helped pharma exports. Data released by AIOCD-AWACS—a pharmaceutical market research organisation-highlighted the boost in sales due to monsoons leading to a 3.2% increase in volumes in the quarter ending September.
The telecom sector is expected to disappoint for the ninth straight quarter while metals, mining and oil and gas companies are expected to report subdued earnings. Consumption companies could also be under pressure due to weak rural demand and unfavourable consumer sentiments couple with flooding in some areas of the country that could have impacted distribution channels.
One related number : 20.5 percent
Sale of passenger vehicles in India drastically dropped in September by 20.5% as compared to the same month last year. Maruti Suzuki slashed production by 17.48% in September to 1.32 lakh units from 1.60 lakh units. Similarly all major automobile manufacturers have witnessed a double-digit decline in domestic passenger vehicle sales in September.
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- Tax cut won’t solve the real issue facing the auto sector: weak demand This article highlights how the cycle created by weak demand in the economy needs to be disrupted to revive the ailing auto sector.
A few links for further reading
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