Q1FY20 - BETTER OFF HAVING NO EXPECTATIONS

Expectations are as such muted but the hope is there are no major disappointments. For the market, the Budget is over and done with and there seems to be no real big trigger in the offing.

That’s how Dalal Street is viewing the Q1FY20 earnings season and the huge crash which we are seeing today is a case of huge misplaced disappointment.

The three months – March to June have not been trailblazing; in fact apart from the elections, there was nothing really great as such which happened in this first quarter of FY20. If anything, the pessimism factor rose with consumption showing a sharp drop. The delayed monsoon and the consistent drop in auto sales kept all green shoots well below the ground.

In fact, Hindustan Unilever after Q4FY19 numbers stated that its near-term outlook remains moderated based on the macro-economic indicators. And post this commentary, if anything, things have only gone down further.

The first big wig Q1FY20 performance will come from an IT company; thankfully that tradition remains intact and so does the fact that IndusInd Bank will hold the mantle of being the first private sector bank to announce its performance. But what has changed is that Infosys is no longer the first IT company; it has given up that tradition ever since Narayana Murthy left. This honour, of being first, now lay with TCS. It will be announcing its results on 9^th July with Infosys and IndusInd numbers on 12^th July.

Like in Q4FY19, expectations are pretty muted for Q1FY20 as the ground reality has not changed much. Things remain sticky and we could see some improvement probably only from H2FY20 once we see the bounty of the harvest and festive season demand.  

Q1 numbers are not crystal gazing; it is more about looking into the past three months and it is the past experience which is expected to give cues for the coming months.  Today, the moods remain despondent, much more pessimistic than what they were at the end of Q4FY19. It has also been a time of extreme global uncertainty, with China facing a slowdown and a tight liquidity scenario, Trump declaring a tariff war and crude oil remaining benign.   

The IT sector in Q1 is expected to continue showing pressure on its EBIT even though the rupee remained low as the US, the biggest market for IT in India, remained volatile. Thus expectations from this sector are pretty muted.

In the Banking sector, notwithstanding the “Bhushan” shocker of PNB today, we could see a much stronger performance. Q4 showed that the poor show had bottomed out, which is why Q1, despite poor credit offtake looks better – call it lower base effect. The sector is likely to show stable operating performance and recovery in earnings. For the first time, we will see the merged earnings of Bank of Baroda, with Dena and Vijaya and IndusInd Bank with Bharat Financial. Gross and net NPAs are expected to be better as slippages could show a decline. The NBFC debacle is a threat but we might not see the impact of this in current Q1. ICICI Bank and SBI remain the most valuable picks for this season.

FMCGs are expected to show pain as their outlook is directly dependent on monsoon. The late arrival of the rains and still remaining deficient, the first three months for this sector, seasonally too are weak. Demand will pick up only if monsoon remains normal and farmers see a rich harvest. The Budget really did not give any sops as such so now everything depends on the raingods for this sector.

One sector which will show a booming performance is aviation – with Jet gone off the skies, Spicejet and Indigo are sure to show some new highs.

Two sectors which will reflect the ongoing pessimism will be automobile and NBFCs. Poor monthly sales and cut in production is sure to show the impact on the Q1FY20 performances of almost all automobile companies, more so in Maruti, Tata Motors though M&M and Bajaj Auto could remain stable. Auto ancillaries will automatically show the reciprocal impact.

Cement is expected to show a muted performance as construction activates remained low due to the impending elections but now with out of the way and the Budget giving sops to infra build and affordable housing, the coming months could see some improvement.

Realty companies too could show poor numbers but sale of assets by many could keep the bottomlines from getting dunked in the red.

Agro based companies, especially fertilizers, especially gas based and pesticide companies usually have the best performance in Q1 and Q2. Capital goods companies are expected to remain muted – though order intakes have been pretty robust and one only hopes that execution has also kept pace. In commodity specifically, watch out for results of rice and tea companies. Telecom remains like a dull pain overall infra sector performance will remain muted but road project could throw in a surprise as one saw an increase in road projects project during the quarter, ahead of the elections. And while on elections, media companies will show great numbers as all gained from the election ad blitzkrieg of the political parties.  

Oil and gas would be another significant sector. With crude prices going up during the quarter, OMCs might show pressure on their bottomlines while upstream would show a benefit. In the same vein, all crude and crude derivative dependent sectors – those using this as major raw material will show pressure on the margins – paint companies and lubricant companies.

Bottomline – Q1 will remain muted. Thus it is best to nurture no great expectations.