Edelweiss Research Report: Q4FY15 Results Expected to be a Perfect Storm

Q4FY15 is expected to be another sluggish quarter with PAT and top line of our coverage universe (ex OMCs) expected to contract 5% and 4% YoY, respectively. The last quarter of FY15 has been a perfect storm resulting in broad-based slowdown. The second consecutive quarter of INR appreciation relative to EUR and other emerging markets (EM) is expected to dent earnings of export-oriented sectors, viz., IT and pharma. Extremely weak rural demand, high corporate real rates and contraction in government spending are expected to weigh on domestic consumption and investment-oriented sectors. The only solace for corporate India is lower input price prices, which would provide some cushion to the bottomline.On the Sensex earnings front, 2-3% EPS downgrades are likely.

Earnings to extend sluggish trend in Q4FY15

Earnings momentum is expected to further moderate in Q4FY15 with both top line and bottom line of our coverage universe (ex OMCs) expected to contract by ~4% and 5% YoY, respectively. Such dismal expectations are partially exaggerated owing to a perfect storm of a lot of negative forces panning out in one quarter. The harsh winter in the Western world, accompanied by INR appreciation relative to EUR and other EMs seem to have weighed on exports. On the domestic front, the recent unseasonal rains and further deterioration in international food prices made a serious dent on rural consumption and wages (now negative). Further, tightening in monetary conditions owing to higher real rates and scale back of govt. expenditure in order to meet fiscal targets also seem to be hurting corporates and hampering deleveraging. In a nutshell, Q4FY15 witnessed deterioration of all demand levers in the economy and hence poor earnings outlook.

Consumers and private banks relatively brighter spots

Given that all key macro-economic levers slowed down simultaneously during the quarter, the earnings slowdown is expected to be broad based. Within sectors, commodity-oriented ones are expected to witness maximum hit. IT companies are also expected to log sharp slowdown, posting mere 4% YoY earnings growth. Only consumer-oriented companies and private banks are expected to record respectable double-digit PAT growth. 

Earnings outlook: Downgrades to FY15 estimates likely

FY15 consensus and Edelweiss Sensex EPS forecast stand at INR1,470 and INR1,430, respectively, implying 6-9% growth. However, given the poor earnings expectations, another 2-3% downgrade in EPS is quite likely. For FY16, consensus and Edelweiss EPS estimates are INR1,730 and INR1,740, respectively. Assuming EPS estimates are downgraded, it implies 24-25% earnings growth, which seems highly optimistic and could witness significant downgrades.

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