Q3 Results Report Card

This earnings season (Q3FY19), the performance of Corporate India has got nothing that can disturb the investors, but there is also very little to cheer them up. Corporate India has failed to live up to the expectations of the growth investors once again in the December quarter. The robustness in earnings was missing, which is required by the growth investors to pump in money into the Indian equities. The previous few quarters provided excuses such as demonetisation and GST for the sluggish growth. This quarter, the markets expected a much smarter growth from India Inc.


One can surmise that the IL&FS saga and the impact of higher crude oil prices weighed on the markets in the previous quarter. The higher borrowing cost and increased raw material prices impacted the latest quarterly performance of the companies. While the sales grew by a healthy 20 per cent for Nifty companies, the net profits adjusted for one-time exceptional items grew by a mere 4 per cent. This goes to reflect how tough the competition is getting for the Indian businesses. Poor profitability was also due to the increase in raw material prices.

Chetan Nayani, who has been tracking earnings of listed stocks for almost 10 years now, says “Honestly, the earning have not met growth expectations of investors since last five-odd years. Every year, in the beginning of the year, there is hope built into the investors' expectations of healthy growth in earnings. It has not been coming since last five years, and the recent performance, while it is not bad, does look like it is not good enough to cheer up growth investors. Growth has to pick up for stocks to meet investors' expectations.”

Indeed, most of the companies that declared results showed flattish growth. To be precise, almost 1414 companies have come up with flat growth in the earnings this season. A good 983 stocks have declared positive results, while 682 stocks have declared negative results. This means that almost half of the listed stocks have declared flattish results, while close to 22 per cent have declared negative results. This goes to explain why we are seeing a very narrow list of stocks pushing the markets higher.

Sensex stocks performance :
The table below highlights the growth in sales and profits on both Q0Q and YoY basis for sensex stocks. We can see that, on an average, the sales have grown by 20 per cent on YoY basis and by 4 per cent on QoQ basis.



Large Caps Vs Mid caps Vs Small caps

Out of the 1035 companies that includes 91 large cap stocks, 104 mid-cap and 840 small caps filtered for observations based on market capitalisation we find an impressive 76 per cent of large-caps posted growth on QoQ basis. Only 59 per cent mid-caps declared growth in sales on QoQ basis, while 56 per cent of the small-caps announced growth in sales on a quarterly basis.

Similarly, we find that almost 54 per cent of large-caps that declared results have shown growth in PAT on a quarterly basis, even as 49 per cent of mid-caps have been able to do so. Among small-cap companies, we have 46 per cent companies that have declared growth in profits on a QoQ basis. 



Looking at the table above, we can say that, on an average, higher percentage of large-caps have posted sales growth on QoQ basis when compared to mid-caps and small-caps. However, when we look at the profitability record, there is not much of a difference between the large-caps, mid-caps and small-caps. But when we consider operational performance, we find that large-caps fare better than mid-caps and small-caps.

Ms. Vineeta Sharma
Head Of Research
Narnolia Financial Advisors Limited.

"Also, banking specially, corporate lenders which has the maximum lever for Nifty’s earning growth should report high profits growth in FY20 as NPA provisioning decline and core profits before provisioning continue with growth above 12%."

The index has corrected more than 30% at a stretch only four times in a span of last 20 years, i.e in year 2000- 2001 (~50%), 2004 (~33%) , 2006 (~ 30%), 2008 (~60%). In year 2013, 2015 and 2018, the correction was 13%-18%. Since year 1999, the index has multiplied by 12.3 times in 20 years from 890 in 1999 to 10,800 in 2019. One year forward growth estimates for these years were either negative or lesser than previous year's growth figures. The average PE of Nifty ranges in the band of 12 to 22 times, averaging around 18x. Interestingly, the highest trailing PE of Nifty has been as high as 60 times (in 1992).

Historically, PE is nothing but market price divided by earnings. As earnings keep growing, the market re-adjusts the price according to the growth. A higher trailing PE is sustainable if the earnings appear sustainable. Nifty EPS CAGR since 2001 to 2008 was 21%. Since 2009 to 2017, the Nifty CAGR was 4.5% only. In fact, since 2014, Nifty EPS has grown by a mere 4%. In FY14, Nifty EPS was 407, while in FY17, Nifty EPS was a mere 423. From FY18, we are seeing a sustainable growth of 8-10% in Nifty. In 2018, Nifty earnings grew by 8%, while in 2019, Nifty is expected to grow by 11%. For FY20, Nifty earnings are expected to grow by 20%+ and this has caused the high trailing PE to sustain. The sales growth of Indian companies are seeing robust 20%+ growth, while the net profits have shown muted growth owing to GST implementation, demonetisation and several global and domestic macro changes. We believe as sales are sustainable, it provides a strong base for net profit growth.

Sectoral Performance

Private Banks
Private banks reported an average sales growth of 23 per cent and average PAT growth of 19 per cent on a YoY basis. The average PBIDT growth rate for the sector came in at 21 per cent. RBL Bank reported the highest sales growth of 42 per cent, whereas the lowest sales growth of 1 per cent was seen by Karur Vysya Bank. Axis Bank saw a turnaround and reported a jump in profit by 131 per cent. The worst net profit was also reported by Karur Vysya Bank as its profits sank by 70 per cent.

 

Auto
The auto sector witnessed a slowdown in Q3FY19 due to lower demand. The average growth rates in sales, PAT and PBIDT for the sector stood at 11 per cent, 14 per cent and 2 per cent, respectively. The PAT margin for the industry remained flat at 9.23 per cent and registered a de-growth of -0.37 per cent. The standout performer in a difficult quarter for the industry was Escorts, which reported a sales growth of 37 per cent and a PAT growth of 52 per cent. The highest PAT growth, however, was reported by Force Motors at 87 per cent.



IT
The Q3FY19 was a strong quarter for the IT sector. The sector recorded average growth rates of 20 per cent in sales and 21 per cent in PAT. The PAT margins for the industry were largely flat and the average PAT margin stood at 16.14 per cent, a de-growth of -0.69 per cent YoY. Larsen and Toubro Infotech recorded the highest sales growth rate at 31 per cent, with Mindtree coming in second at 30 per cent. Wipro’s growth rate was the lowest among its peers at 10 per cent. Infosys results disappointed the markets as the company registered a de-growth of 30 per cent YoY in its profits.



FMCG
FMCGThe FMCG sector continues to remain steady. The average sales growth for the sector stood at 11 per cent YoY, with the PAT growth also coming in at 11 per cent. The margin for the industry stood at 14.64 per cent, down by 0.64 per cent YoY. The highest sales growth in the sector was recorded by Procter & Gamble Hygiene & Health Care Ltd at 16 per cent, with ITC and Marico coming in a close second at 15 per cent. Godrej Consumer Products registered the lowest sales growth among its peers at 4 per cent YoY.



Conclusion 
While the growth is visible in corporate earnings, it is not enough for the stock prices to be re-rated. It looks like the PAT growth will be driven by banks in the coming quarters. Banks will be the biggest beneficiaries of lower G-sec yields and robust trading income. For a change, it does look like the PSU banks will contribute heavily to the earnings growth going forward. The IT, capital goods and FMCG sectors can be expected to contribute positively, while there is a possibility of contraction in auto, pharma, NBFC and cement sectors. Investors should focus on those sectors for investment where there is good earnings growth visibility.