Q4FY19 Results Hits And Misses

How well the market performs in the long run depends on the earning growth. Thus, it is essential that investors track the quarterly earnings. Yogesh Supekar highlights some of the outstanding performances, while DSIJ Research Team analyses the sectoral performance this season. Read on to see the outstanding performances and surprises of this earnings season 



While market swings like a pendulum, taking cues from the US-China trade war, the earnings season is quietly getting discounted and impacting the investment behaviour. Broadly speaking, the Q4 results so far reflect average performance of corporate India, but the story remains mixed with glimpses of outstanding results catching investors' attention. Good performances by the cement companies and private banks remain the highlight of this season for the bulls, while the auto companies' continuing their poor performance this season too has grabbed the attention of the bears. Several private banks have declared very positive results and are trading close to their 52-week highs, reflecting relative strength in the markets. DCB is 2 per cent away from its 52-week high, Axis Bank – 7 per cent, HDFC Bank – 3 per cent and RBL Bank – 8 per cent. 



If we consider the results for Nifty 50 stocks, the season has been mixed. We can say that so far it has been good when compared to the previous 4 to 5 quarterly performances. Out of the 34 companies in the Nifty 50 basket that have reported their earnings till now, 7 companies have beaten the market estimates, while 20 companies have delivered results in line with market estimates. At least 7 companies have missed estimates this season. These numbers are not disappointing at all.

The earnings are getting a good support from a weak base of financials this season. This is important because the financials have the highest weightage in Nifty 50. HDFC, Bharti Airtel, Ultra Tech Cement, Tata Steel, Bajaj Finance, Dr. Reddy’s Labs and Bajaj Auto have beaten the market estimates among the Nifty 50 lot. While Infosys, HCL Technologies, ITC, HDFC Bank, Kotak Mahindra Bank Hero Motocorp, HUL, L&T, TCS, Britannia, Titan, SBI, Axis Bank, ICICI Bank, Wipro, Vedanta, Bajaj Finserv and RIL are the index constituents that have delivered in line with the market expectations. The one that have missed the market consensus estimate are Indiabulls Housing Finance, Asian Paints, Yes Bank, Bharti Infratel, Eicher Motors, Hindalco and Maruti Suzuki. While growth in profits is seen in more than 50 per cent of the Nifty stocks that have declared results so far, clearly there is margin pressure across the sectors, impacting their profitability. 



From the list of the Nifty 50 stocks, out of the 34 stocks that have declared the results so far, we find that the average profit margin is 12.22 per cent in the current quarter versus 13.06 per cent in the previous quarter and 13.33 per cent in the similar quarter previous year.

HLL, HDFC, Infosys, ITC and Kotak Bank are among the few stocks that have shown improvement in sales, profit after tax and margins on both QoQ basis as well as YoY basis. HCL Technologies, HDFC Bank, ITC, TCS and Tata Steel are the ones where we saw growth both on QoQ basis as well as on YoY basis when it came to sales and profit after tax. However, these companies have seen a dip in margins, either on YoY basis or on QoQ basis.

If we consider all the 862 companies that have declared results so far, we find that the sales have increased by a mere 0.71 per cent while the PAT has declined by 2.43 per cent. The sales for the large-caps (106) that have declared results has come down by 0.01 per cent, while that for the mid-caps (190) the sales have increased by 1.12 per cent. The sales for small-caps (566) have increased by 6.39 per cent.

Vineeta Sharma, Head of Research, Narnolia Securities

"The median sales growth for our coverage companies, ex-financials, is 10% YoY, while EBITDA growth has been 9% YoY. The poor Q4 earnings have resulted in sharp downgrades of FY19 Nifty EPS. Pre-Q4, Nifty EPS for FY19 was expected to grow at 9.9%, whereas post Q4 results till date, the Nifty EPS growth for FY19 is downgraded to only 6.5%. Also, till date, only 5% of the companies under our coverage have reported sales better than our expectations, which suggest that there are possibility of more downgrades post Q4 results. The good thing for financials, especially the banking space, is that pre-provisioning profits have grown at an average of 21% YoY. Also, the provisioning coverage ratio has sharply improved. Apart from corporate banks and cement, select infra companies have reported better numbers."



Vivek Ranjan Misra, Head of Fundamental Research, Karvy Stock Broking 

"In general, the earnings season is panning out as expected, with a majority of the companies reporting numbers in line with expectations. However, some companies have been below expectations, while some are above, and the number of companies above expectations exceeds the number below expectations slightly. The quarter has been overall subdued due to lower revenue growth and margin pressure due to impact of higher commodity costs which the companies have been unable to pass on to the customers. One sector which has done well is banks, as most of them have reported improvement in asset quality. The consumption-related sectors have disappointed with low volume growth."

Q4FY19 Sectoral Preview

Pharma Sector



The Indian pharma sector possesses some distinctive traits that are worthy of mention. It accounts for 10 per cent of the global pharma production in terms of volumes and 3 per cent in terms of value. About 70-80 per cent of its retail market is composed of branded generics. The early investments and formulation development capabilities strengthened the position of the local players. Public healthcare spending is on the rise, patient awareness is increasing and insurance coverage is expanding. Traditional growth sources are being replaced by newer methods, with greater focus on expansion of the market coverage. Affordability as well as market access is improving. In terms of volumes, India is likely to be in the top league as penetration levels improve. However, the sector has attracted some negative attention as well. With multiple US FDA investigations being made, the sector now has to endure a US lawsuit for alleged cartelisation as well as inflated pricing. If the companies are found guilty, then the ramifications could wipe out many years worth of profits. Furthermore, intensifying competition and rising cost of business has resulted in declining pricing power.

For the quarter ended March 2019, the average net sales of the sector increased 2.84 per cent YoY and 3.06 per cent QoQ. Meanwhile, the average PAT declined 20.88 per cent YoY, but improved 92.78 per cent QoQ. However, in FY19, the average net sales posted a YoY growth of 12.31 per cent, while the average PAT declined 24.85 per cent. The companies that registered remarkable sales performance in Q4FY19 include Bharat Immunologicals & Biologicals Corp., Piramal Phytocare, Sequent Scientific, Fervent Synergies, Kopran and Aarti Drugs, posting sales growth of 225.66 per cent, 121.30 per cent, 112.76 per cent, 104.06 per cent and 48.11 per cent, respectively, on a YoY basis. However, the sales of Piramal Phytocare, Fervent Syneries and Kopran declined 33.98 per cent, 69.66 per cent and 6.04 per cent, respectively, on a QoQ basis. In terms of PAT,  the companies that emerged as the best performers include Venmax Drugs & Pharmaceuticals, Dishman Carbogen Amcis, Morepen Laboratories, Lupin and Bharat Immunologicals & Biologicals Corp., registering PAT growth of 1193.75 per cent, 152.40 per cent, 124.52 per cent, 85.59 per cent and 71.67 per cent, respectively.

For the year ended March 31, 2019, the companies that recorded the highest PAT growth include Kopran, Biocon, Dishman Carbogen Amcis, Fervent Synergies and Alembic Pharmaceuticals, with YoY PAT growth of 175.57 per cent, 106.58 per cent, 51.09 per cent, 48.50 per cent and 4.84 per cent, respectively in FY19. Meanwhile, the companies that reported the most de-growth in PAT include Smruthi Organics (down 313.57 per cent), Piramal Enterprises (down 266.25 per cent), Wockhardt (down 219.27 per cent) and Mangalam Drugs & Organics (down 140.38 per cent).

In the last couple of years, Indian pharma companies have lost incentive to do business in the US. This is due to the struggle associated with getting speedy drug approvals and regulatory clampdowns. However, since revenues from the US businesses increased steadily and constitute 40-50 per cent of total revenues, Indian companies cannot consider withdrawing from the US market. 

FMCG



The consumption story in India has weakened over the last six months, led by the lower rural income and weak demand affecting the performance of the FMCG sector. The results of some top performing FMCG companies for the quarter ending March 2019 have added to the worry of this sector. The volume figures depicted the weak demand scenario. HUL's volumes grew by only 7% as against the double digit growth recorded in the last few quarters. Dabur's volumes grew by a mere 4%, whereas Godrej Consumers' volumes were up by measly 1%. As per the Bloomberg data analysis, the growth in FMCG sector Q4FY19  has declined to 13.6% during March 2019 quarter, as compared to 16% growth in March 2018 quarter.

Under the FMCG sector, there are various sub-segments catering to various consumers' categories. While some subsegments have performed well, other sub-segments have been under pressure. Food and beverage companies are performing better, while the consumption-based personal and hygiene product companies are facing demand pressures. Some of the companies such as Titan, ITC, Britannia and Asian Paints revenues grew by more than 10% in March 2019 quarter on a YoY basis. The net profit of Britannia was up by 11.6%, HUL by 13.8%, ITC by 18.7% and Titan by 13.6% yoy. Some exceptional growth in PAT margin was seen in companies like Godrej Consumer Products (38.2% vs 24.3%) and Marico (25.2% vs 12.3%) in March 2019 quarter as against March 2018 quarter.

In FY19, the revenues of companies like Asian Paints, Britannia, Dabur, Titan grew by 12.1%, 10.8%, 10.1% and 22.5%, respectively, while the net profit of these companies were up 9.5%, 15.2%, 6.5% and 25.9%, respectively. Net profit of HUL and ITC too grew by 15.9% and 11.6%, respectively.

Thus, so far, the results of FMCG companies have been mixed, with some companies meeting the market estimates, while others giving a miss. Britannia Industries' March quarter profit rose, despite the higher costs incurred towards new launches. HUL's volume growth fell to lowest in the past six quarters, where the home care segment performed well, but the personal care division reported disappointing numbers. ITC's operating margin contracted and the cigarette segment performed well. Leading paints company Asian Paints reported strong volume and revenue growth, but its net profit missed the estimates, led by contraction in margins. However, Titan's strong performance in the quarter covered up the weakness in other segments to some extent.

A period of 4-6 months will be required to see some recovery in the sector, i.e., H1FY20 would deliver muted performance and H2FY20 will see some overall pick-up across all FMCG companies.

IT



To analysis the performance of information Technology industry, we have considered financial results of 34 listed companies. The aggregate net sales of these 34 companies grew marginally by 3 per cent to Rs.79,106 crore over preceding quarter. However, the net profit of these companies dipped slightly by a per cent to Rs.16,712.2 crore as compared to the previous quarter. The India's largest IT service provider TCS reported strong set of numbers as new contracts from Europe, Middle East and India aided performance. For FY19, the company signed TCV of US$ 21.9 billion. The second largest software company Infosys' performance was mixed, and the management has guided for constant currency revenue growth of 7.5-9.5 per cent, with EBIT margin guidance of 21-23 per cent for FY20E. However, Wipro reported disappointing numbers in Q4FY19, with its revenue largely remaining flat at Rs.12,321 crore.

The US listed Cognizant, which had earlier given revenue guidance of 7 to 9 per cent in constant currency during the beginning of the year for 2019, has now changed its guidance to around 3.6 to 5.1 per cent. The reason cited by the company is slower growth in financial services and healthcare segment. Thus, going forward, the growth in banking and financial, which is a key vertical for all major IT firms (Wipro-~32 per cent of revenue, TCS-~31 per cent, Infosys-~32 per cent), would decide the direction for these firms. The uncertain macro condition in two major markets, i.e. US and Europe, are resulting in slow and low spending from the banking and financial players. Till now, the demand has not been impacted by key macro factor challenges, but concerns over visa renewal and increasing onsite costs may impact Indian IT firms' profitability in the foreseeable future. Another factor that is going to be the key factor which would determine the IT firms' profitability is currency fluctuation. Presently, the INR is trading below 70 against USD, which might deteriorate profitability of IT firms as majority of their revenue comes from overseas. Recently, the IT stocks have rallied and, presently, the BSE IT index is trading at 15,490 mark, which is close to its all-time high of 16,300. On the valuation front, the P/E of the IT index index is 20.6x. Thus, we can say that investors should be selective while investing in the IT space. 

Auto Industry 



Presently, the auto industry is going through a bumpy ride. In FY19, the growth of passenger vehicles and two-wheelers witnessed slowdown to 3 per cent and 5 per cent, respectively.

In April 2019, the sale of passenger vehicles dipped 17.10 per cent yoy, while during the same period, the sales of commercial vehicles segment declined 5.98 per cent yoy. Also, the twowheeler and three-wheeler sales decreased 16.4 per cent and 7.4 per cent yoy, respectively. It seems that this slowdown in the auto industry is likely to stretch for a long time as India's market leader in passenger vehicles Maruti has lowered its production by nearly 10 per cent across all its plants. The car sales in the last ten quarters have been declining consistently. Also, key players like Hero Motocorp and Honda Motorcycle have slashed production by nearly 15 per cent during FY19. The key factors that will have significant impact on the rural demand is monsoon, which is likely to be below average, which might weigh on the auto players' performance, especially the two-wheelers and tractors.

Some of the additional factors that are weighing on the auto industry are liquidity issues of the NBFCs, weak demand, higher fuel prices, higher ownership cost, etc.

To analyse the performance of the auto industry, we have considered financial results of seven listed companies. The aggregate net sales of these seven companies grew marginally by 1 per cent to Rs.6357 crore from the corresponding quarter last year. However, the net profit of these companies dipped by 5 per cent to Rs.653 crore from the corresponding quarter last year. During this challenging situation, Escorts was the only player that reported double-digit revenue growth of 14 per cent on a yoy basis. In terms of PAT, Bajaj Auto registered a strong ~21 per cent PAT growth for Q4FY19. Bajaj Auto during the quarter managed to regain its market share in motorbikes to 25 per cent, which was last seen in March 2016. The company that got severely punished by weak industry growth was VST Tillers Tractors, whose revenue dipped 26 per cent while the net profit tanked nearly 63 per cent yoy.

Going ahead, the monsoon and liquidity position of the NBFCs are likely to be the key factors that would influence the industry demand. However, as major auto players are cutting their production, there seems to be no major revival in the offing in the next 2-3 quarters. 

Banking Sector



Indian banking system, which went through a lot of turmoil for most part of FY18 and FY19, showed some signs of comeback in the fourth quarter of FY19. The performance of major public sector and private sector banks have surely enthused investors. India's largest public sector State Bank Of India reported profit of Rs.840 crore for Q4FY19 as compared to the loss of Rs.7719 crore for the same period last year. The major highlight in the numbers was the improved asset quality. Gross NPAs stood at 7.53 per cent, which contracted from 8.71 per cent YoY. Banking major SBI can be considered as very positive as the management too gave optimistic guidance in its commentary.

The private sector lender HDFC Bank continued its asset quality and lowered the provision figure. The net profit stood at Rs.5885 crore, which rose by 23 per cent YoY. The country's largest private lender reported NII at Rs.13090 crore, higher by 23 per cent over same period last year. The gross non-performing assets (GNPAs) stood at 1.36 per cent as against 1.38 per cent, while net NPAs improved to 0.39 per cent from 0.42 per cent. Among other leading names in the banking industry, Axis Bank's CASA and retail term deposits together were up 21 per cent YoY, but slippages stood at multi-quarter low. ICICI Bank's gross slippages rose, while high provisions dragged the fourth quarter earnings. Yes Bank saw many negative news flows, such as RBI objections and management issues, till the third quarter of December 2018. The changes in management and steps taken to improve the overall situation of the bank created pressure on the numbers for the fourth quarter. The bank suffered loss as against expectation of profit. The bad loans and provisions surged. The net loss of the bank stood at Rs.1506 crore. Gross NPAs rose to 3.22 per cent from 2.1 per cent YoY. Yes Bank has outstanding loans worth Rs.2,528 crore from various entities of the IL&FS Group. Of this, it has classified loans worth Rs.2,442 crore as non-performing assets.

We think that the scenario for the banking sector is encouraging. The sector is still being led by private banks such as HDFC Bank, ICICI Bank, etc. Among public sector lenders, the SBI made huge provisions in the fourth quarter of FY201819. Overall, for the banking sector, the revenues rose by 16 per cent and profits showed improvement of 19 per cent, which is largely on the back of performance of private sector banks. 

Mayuresh Joshi
Portfolio Manager, Angel Broking Ltd


"Macro pressures are visible on some of the key sectors"

How do you analyse the Q4FY19 results?

If you look at the results of Indian companies, exclusive of the financials, the following key trends emerge:

For non-financials, the total sales revenues are up by 10.1% as compared to March 2018. This despite the obvious topline pressures faced by companies in the FMCG segment.

The gross profits in the fourth quarter are up by 6.7%, but with growth lower than the sales, the gross profit margin is down from 13.5% to 13.1%, largely due to higher input costs.

Interest costs are up by 16% on a YOY basis, which can be largely attributed to the higher cost of funds that corporates have faced post the IL&FS crisis last year.

However, the exceptional items and other incomes have helped the net profits of Indian companies to show a four-fold jump, leading to the net profit margins (NPM) improving to 7.1% from just 2%. However, the situation could look very different if the profits of PSU banks are also considered.

Which sectors have surprised positively and which ones have disappointed?

The results have been largely mixed, with macro pressures visible on some of the key sectors. The consumer demand appears to be the underlying story in this quarter. .

Cement companies :
There have been some positive cues from the cement companies, with 11% growth in topline and 17% growth in operating profits. The cement companies (predominantly in the South) benefited from a more favourable pricing environment. The inputs are expected to remain stable, and the recovering demand will lead to a better pricing environment and leverage benefits should start kicking over the next few quarters

Metals and mining :
This has been one major disappointment in the latest quarter. The sales revenues are down by 4% and operating profits are down by 23%. Metals have faced pressures from two sides. With the lurking trade war and the slowdown in Chinese demand, the prices of most of the LME metals are under pressure. At the time, ore prices have been moving up across the board due to supply constraints putting a dual squeeze on metal companies. However, with input cost pressure easing, it will be interesting to observe how the EBITDA performance will pan out over the next few months. Also, the hope of demand recovering in the fragile global background and its repercussions on LME pricing is to be seen.

Telecom services :
Telecom companies are still reeling under the pricing onslaught of Reliance Jio, but they have been able to expand topline sales by 29% in this quarter. However, the sector has dipped deeper into loss, largely driven by huge capex and Opex requirements. Telecom is also one of the most indebted sectors in India.

Of course, we have not considered oil stocks as most of the results are yet to be announced. However, the broad theme for the quarter appears to be pressure on the topline from incremental demand and the pressure on bottomline from input cost pressures.

Conclusion 


While India has been performing in line with other emerging markets globally in past one year or so, India has under performed in earnings, thus leading to stretched valuations in relative terms. Such stretched valuations may be unsustainable unless earnings growth picks up. This earnings season at best can be said to be a disappointing one when it comes to broader markets. However, when it comes to index stocks, the performance has been one of the best among the previous five earnings seasons. The FIIs in recent quarter have increased their relative exposure in the Indian markets and that shows their faith in the long-term growth story of India.

The fact that 10 stocks drove 75 per cent of the Nifty returns since the lows of February in 2019 suggest the narrow list of out performance. The opportunities may get thinner if the market throws a negative growth surprise and the situation gets worse on the fiscal slippage side, which may be influenced by the rise in crude oil prices.

At the moment investors can focus on those sectors that have shown growth in sales and profits on YoY as well as on QoQ basis, such as auto ancillaries, private banks, cement and housing finance companies. In the case of sectors that have shown concern on the growth front, such as telecom equipments, metals (non-ferrous), capital goods, auto (2 & 3-wheelers), investors are advised to wait for another quarter to revisit their performance. 

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