Citi Does Not Expect Earnings Upgrades For India Inc. After Q1

Any upward earnings revision for India Inc. is unlikely due to volatile markets and mixed first-quarter earnings as margin compression persisted despite better revenue growth, according to Citi Group Global.

“At a headline level if you take the top 100 or BSE 100 companies, the numbers have been broadly in line with expectations of Ebitda level," Surendra Goyal, head of research at Citi Group Global Markets India, told BQ Prime’s Niraj Shah. The margin contraction was not much different from what was anticipated by the team, he said.

The "more important" point, according to Goyal, was that the street saw two-thirds of these 100 stocks being downgraded. However, he said, such earnings misses are not "significant" as they are fairly usual in a quarter.

Yet, Citi Group is conservative in its estimates, Goyal said, with its earnings forecast for Nifty in fiscal 2023 around 10% below consensus.

According to Saurabh Handa, the group's research analyst for oil and gas and telecom, the losses incurred by oil marketing companies were not as bad as feared.

Most city gas companies posted upbeat margins and higher-than-estimated volumes in the first quarter ended June, he said, lifted by strong CNG conversions. Handa, however, flagged uncertainty in the near-term earnings for the oil and gas sector.

Over the last month, oil prices and product cracks have cooled, which makes lower refining margins slightly positive for fuel retailers, he said. "Still, we expect a loss from the marketing side."

The market will be observing signs of further cooling or compensation and reliefs from the government such as duty cuts or resumption of price hikes, Handa said.

When the local gas price revision takes place, Handa said, gas companies could potentially see higher prices offset savings from increased domestic gas allocation in October.

According to metals and cement analyst Raashi Chopra, India's cement sector performed well in the first quarter. Until May, companies were aggressively taking price increases along with better cost management, she said. But with rising inflation, cement makers were forced to ease on their cost-hiking spree, Chopra said. "This could create some pain in the second quarter."

The key metric to observe for the Indian banking sector in the coming quarters will be the net interest margin, according to Aditya Jain, research analyst for India financials with the group. This will be a "key driver" of relative performance in the coming quarters, he said.

The asset quality was "pristine" across all lenders except Mahindra & Mahindra Financial Services Ltd., while operating costs disappointed last quarter, Jain said.

The coming quarters should see the impact of loan repricing as the effect comes with a lag of a quarter, Jain said. This is fundamentally positive for the sector as it would witness a material increase in the lending rates, at least on the floating-rate loans, he said, while the deposits are yet to see any large increase in rates.

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