Q3FY16 - WHAT TO EXPECT?
By Ruma Dubey
The earning season for Q3FY16 “officially” kicks in from tomorrow; though we have had some small and mid cap companies declare their numbers, the first big wig is tomorrow – TCS. Just as Infosys has lost its mantle of being the most favored IT stock to TCS, it has given up that lead in declaring results also to TCS.
Tomorrow we also have two banks – IndusInd and Federal Bank declaring their Q3FY16 numbers.
Q2 numbers were very disappointing to say the least. The numbers were dismal and muted. And given this “low base effect” the expectations from Q3 are not all that optimistic as nothing much has changed on the ground level from Q2. Yes, commodity prices are down and we could see, like in Q2, improvement in margins.
The good news now is that second half could be much better given the lower interest rate benefits which companies might start seeing. Crude oil prices are down and raw material, commodity prices have been down and there was the festive season too. Thus we could some good numbers from auto, consumer durable and FMCG companies. But at the same time, we need to remember that the Chennai floods will affect the performance of auto, IT and engineering companies, many of which had to be shut down for around 10 days due to flooding.
Crisil has put out its report and the outlook is pretty muted – it expects revenues to grow by a marginal 2% (YoY) in Q3 and that is also thanks not to increased demand but due to tumbling commodity prices, weak investment demand and flagging rural consumption. This would be the sixth consecutive quarter of single-digit increase in top line for leading Indian companies taken together.
In terms of sectoral performance, Crisil has stated that telecom, cement, petrochemicals and FMCG are likely to outperform while steel, housing, IT services and pharmaceuticals sectors are likely to see a decline in EBITDA margin. It expects power generation companies to see a healthy growth of 7-8% led by commissioning of several projects in the last few months, coupled with a gradual improvement in offtake.
Sectors which are expected to benefit from the crude oil price drop, mainly those who use crude by-products might wipe off the benefits of lower oil prices against inventory stocked at higher prices. Coal India might surprise us with better numbers as many power projects have taken off and production has also been ramped up.
Metal sector will continue to suffer and the “China” syndrome, which had an effect on this sector in Q2 will persist in Q3 too. Paper companies are expected to show better margins. Hotel industry could be a bag of surprises as Q3, seasonally is the best and reports suggested that occupancies have been good.
Many expect IT companies to report bumper numbers because of appreciating dollar against the rupee but when there are cross currencies, the gain in more muted. The bigwigs have already prepared us for a subdued Q3, including TCS – we just have to see how much would be the impact. Once again, tomorrow, pay attention to the guidance.
Cairn India will be amongst the big losers in Q3 with crude price falling while the gainer could be aviation due to lower fuel prices with no major reduction in passenger fares. Private sector banks are expected to do well while PSU banks will be a mixed bag. Cement does not look good now but it could see better growth from Q4 and prices, QoQ remain higher. So despite lower demand, we could see higher margins. Construction companies like JP Associates and NCC could continue to be impacted by higher interest burden though road projects have taken off. We could see the effect of these completed road projects percolating into earnings only in Q4.
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, tea and coffee companies. Textile firms could actually pleasantly surprise us.
Thus Q3 will be a mixed bag of sorts. But we should probably look ahead, beyond Q3 and expect things to only get better. The overall sentiments have improved and some reforms have got the go-ahead. It’s best to hope that after Q3, we will see the green shoots we all so desperately want to see.