Virus adds downside risk to earnings

Weak Q3 earnings had already dented firms’ capex, hiring

The third quarter of the current financial year has proved to be lacklustre for companies in terms of earnings as many reported a fall in top-line while holding back on capital expenditure (capex) and hiring amid overall economic slowdown.

More importantly, market participants are now expecting further downside risks to the earnings in the current quarter with the economic slowdown accentuated by the COVID-19 outbreak.

According to Edelweiss, the third quarter ended December 31, 2019 was a weak one with the overall top-line of companies under its coverage shrinking 1% and the profit rising by a meagre 3%.

The domestic brokerage, which has a December 2020 Nifty target of 12,300, further said that about 40% of the companies reported a top-line contraction even as businesses across sectors curtailed “costs/conserving cash, causing delays in capex and supressing employee expenses” — a “vicious macro loop” that can only be addressed by sustained export recovery or the government managing its deficit in a better way.

As per the brokerage, the net profit for the first nine months of the current fiscal grew at only 1% year-on-year despite the tax cuts, hinting at clear downside risks to the fourth quarter estimates by more than 30%.

In a similar context, Japanese major Nomura stated it was a muted results season and risks to the market estimates continue to remain.

Nomura analysed the results of 127 companies, representing key sectors and found that the aggregate net sales — excluding financials — declined by 3.7% year-on-year (y-o-y). Further, excluding financials and oil marketing companies, which benefited from inventory gains, the EBITDA growth shrunk 1.5% y-o-y, which was a multi-quarter low.

Nomura has revised its Nifty target to 12,840 from the earlier 13,070 – signifying a gain of less than 9% from the current levels.On Tuesday, the Nifty lost 31.50 points to close at 11,797.90. Incidentally, Nomura is of the view that there is limited upside to market valuations even as further risks could emerge from the COVID-19 outbreak.

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Printable version | Apr 2, 2020 12:17:51 AM |

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