Q3 Earnings: An Exhaustive Analysis of Six Key Sectors

As a shareholder you must be anxious to know what causes a stock’s price to rise or fall. There are number of triggers such as broker upgrades, bad news for competitors, new products i.e. when a company announces a new product or an anticipated product’s release date, securing a new large contract, change of management, etc. Apart from these triggers there is one significant trigger which shareholder looks forward every quarter is the quarterly earnings published by companies. This helps shareholder to know what’s happening in the company whose shares you hold and how it has been performing.

Quarterly result is the window made accessible to the general public to understand the performance. These are produced in a predefined format that a company must adhere to.

Quarterly results are early pointers of the company’s progress towards its anticipated yearly profit targets. Be that as it may, the October-December quarter earnings will be hugely significant from another perspective as it will mirror the effect of the government’s demonetisation measure.

On November 8, 2016, the Government of India announced the demonetisation of its Rs 500 and Rs 1000 bank notes in a bold effort to fight against corruption and black market activity. In the days and weeks that followed, the government was faced with complaints and protests as the cash shortages that resulted created economic disruptions. The stock market was not safe either as the Nifty 50 fell 6 per cent the day after the sudden announcement. Economists revised downwards their estimates for GDP growth and inflation as the widespread understanding was that there simply would not be enough cash to go around.

While obviously disruptive to the economy in the short term, there were many who came out in support of the move after its announcement. The obvious supporters were those who championed the cause of curbing black money and illegal activities as that was the primary motivation for the decision.

Even as the demonetisation drive was in full swing during the months of November and December, it was predicted that the cash crunch caused by the demonetisation drive will suppress liquidity, subdued demand and force a downside in the overall business cycle. As data finally started to emerge, a lot of the brouhaha over the demonetisation seems to have been largely exaggerated or perhaps, the likely outcome was never really understood.

In this special report, we will look into the Q3 results of the companies under BSE200. Of the total 200 companies of BSE200, 139 companies have reported their third quarter earnings, i.e. October-December 2016 quarter earnings, comprising about 70 per cent of the constituents. Moreover, we have identified sectors/industries in which almost all the companies have declared their current quarter results. The quarterly results up to February 7, 2017 have been considered for analysis.

From the capital goods segment, there are seven stocks in the BSE 200 Index, ABB India, Bharat Electronics Ltd, Bharat Heavy Electrical Ltd, Siemens Ltd, Thermax Ltd, Larsen & Toubro Ltd and Cummins India Ltd. The capital good sector reported a decent set of numbers in the quarter ended December 2016. Aggregate revenues of the capital goods firms in the BSE200 Index stood at Rs 41,916 crore, an increase of 5 per cent on YoY basis and an increase of 2 per cent on Q-o-Q basis. Operating profit stood at Rs 5,391 crore as against Rs 2,713 crore, as compared to the same period year ago, which is an increase of 99 per cent YoY basis. EBITDA margins for the quarter ended December 2016 stood at 13 per cent, as against 7 per cent in the same quarter a year ago. The combined PAT of these seven companies in this quarter stood at Rs 2,268 crore, as against Rs 757 crore, which is a nearly three-fold jump on YoY basis.  The performance was led by industry bigwigs Bharat Heavy Electricals Ltd (BHEL) which reported a PAT of Rs 93.54 crore for the quarter ended December 31, 2016, as against a net loss of Rs 1,084.95 crore for the same quarter last year. Bharat Electronics (BEL) reported 37 per cent YoY jump in its revenue at Rs 2,191 crore.

Demonetisation had a role too in the capital goods sector as new investment proposals worth Rs 1.25 trillion were seen during the quarter ended December, 2016. This is low as compared to the average Rs 2.36 trillion worth of new investment seen per quarter in the preceding nine quarters of the Modi government. Demonetisation has hit the pace of announcement of new investment proposals during the quarter ended December 2016. A total of 227 new investment proposals worth Rs 818 bn were announced during this quarter till November 8, 2016. In comparison, only 177 investment proposals worth Rs 437 bn were made between November 9 and December 31, 2016 as per the data tabulated in a report compiled by Prabhudas Lillader.

As the capital good sector is of strategic importance for the economy, the Modi government has been giving a critical push to the sector as it is still not broad-based. While companies have appreciated efforts taken by the Centre, the pace of recovery is slower than expected. However, most corporates remain buoyant on medium-term growth prospects, given the various initiatives take by the government. The continued government focus on revival through increased infrastructure allocation is widely expected to drive growth in the sector.

For quarterly earnings review, we have taken sixteen companies from BSE 200 index. This list comprises of the major FMCG companies like ITC, Hindustan Unilever, Marico, Procter & Gamble Hygiene, Dabur, Gillette India, Colgate-Palmolive and Consumer Discretionary and Consumer Staples. FMCG sector was expected to take a hit due to demonetisation as the flow of cash is critical for this segment, especially in the wholesale channels. The retail consumers spending reduced due to liquidity crunch during the initial days. The aggregate sales of sixteen companies stood at Rs 37,376 crore for quarter ended December 2016, as against 36,984 crore, which denotes a muted growth of 1 per cent on YoY basis. It is evident that demonetisation did hit the FMCG sector in the third quarter. Most of the companies registered a fall in both sales and profit due to the impact of withdrawal of high denomination currency notes by the government. Hindustan Unilever sales stood at Rs 7706 crore, a decline of 1 per cent on a YoY basis, as in the same period of the previous year, the company reported sales of Rs 7764 crore. ITC reported sales of Rs 9248 crore in the quarter ended December 2016, a rise of 4 per cent on YoY basis. Gillette India sales stood at Rs 389 crore as against Rs 439 crore in the same quarter last year which is a drop of 11 per cent on a YoY basis, whereas operating profit slipped 5 per cent on a YoY basis, Colgate-Palmolive was not too far behind, as sales declined 9 per cent on a YoY basis. It was followed by Marico and Dabur which reported decline in sales by 7 and 6 per cent, respectively.  

After a roller-coaster ride due to demonetisation, the FMCG sector is expected to revive in the coming quarters as things are coming back to normalcy as the currency flow is back in the market along with digital modes of payments.  Additionally, increased focus on rural areas will boost incomes, which in turn will provide better growth prospects to FMCG companies. Also, better infrastructure facilities will improve their supply chain. If FMCG players are able to grow awareness among their customers, they would be able to generate higher growth in the near future.  

In auto and auto ancillary segment, there are eleven companies which came out with their results for the October-December 2016 quarter. This list includes names like Bajaj Auto, Eicher Motors, Ashok Leyland, Hero Motocorp, TVS Motors, Eicher Motors, and among auto ancillary, names such as Apollo Tyres, Exide Industries, MRF and Amara Raja Batteries. Before the demonetisation step, the auto and auto ancillary was in the top gear on the back of good monsoon and the Pay Commission boost given by the Centre. However, demonetisation has had a huge impact on the sales. In the month of November itself, the bookings were down 50 per cent. The month of December 2016 was no different as the pain intensified and showed a picture that was not less than a nightmare as vehicles sales in India were down to a 16-year low. For December 2016, vehicle sales declined to 1,221,929 units, an 18.66 per cent fall. India last reported these kind of vehicle sales back in December 2000. In rural areas, most buyers prefer to purchase vehicles by paying in cash, but due to cash crunch post demonetisation, sales took a hit and the luxury car market too took a hit as prospective customer deferred purchases. On a consolidated basis, the total revenues of the auto and auto ancillary companies stood at Rs 48,180 crore, an increase of 5 per cent on YoY basis, however, there was a drop of 7 per cent on QoQ basis which was largely attributed to the impact of demonetisation. The combined PAT of these eleven companies stood at Rs 5,135 crore, an increase of 10 per cent a YoY basis, while a 21 per cent drop was witnessed on a QoQ basis.

Auto companies registered stressed performance in sales volume during Q3FY17, except for Eicher’s Royal Enfield, Tata’s Tiago and few models of Maruti (Breeza, S-cross & Baleno), which have high waiting period. The total revenue for Eicher Motors stood at Rs 1,835 crore which is a surge of a whopping 43 per cent on a YoY basis and 5 per cent on QoQ basis. The PAT stood at Rs 399.48 crore, an increase of 62 per cent on YoY basis, Maruti Suzuki also registered 47 per cent increase in PAT on YoY basis.  Another stand out performance was by Apollo Tyres, the company reported a 6 per cent increase in PAT to Rs 296 crore for the December quarter, riding on robust sales across domestic and overseas market.

There are five companies under the cement sector in the BSE 200 index namely ACC, Shree Cement, Ramco Cements, Ultratech Cement and Grasim Industries. On a consolidated basis, the aggregate revenues stood at Rs 20,140 crore in the quarter ending December 2016. These companies’ revenues remained muted as compared to the quarter ended December 2015. Their operating profit stood at Rs 3,913 crore, an increase of 3 per cent on YoY basis. The aggregate PAT of these five companies stood at Rs 1,952, an increase of 6 per cent on YoY basis. The cement sector was supposed to be among the worst hit by demonetisation and if we see the performance on a QoQ basis, all the five cement companies have posted a decline in PAT as per QoQ basis. However, on a YoY basis, Ramco Cements a flagship company of the Ramco Group based in Chennai, registered growth of 30 per cent in PAT YoY basis. It was followed by Grasim Industries, which registered 11 per cent growth in PAT on a YoY basis.

The impact of demonetisation was more profound on ACC’s performance during December quarter, as consolidated PAT declined 48 per cent YoY basis to Rs 52.03 crore on the back of lower realisation and a fall in sales volumes. However, the significant reason which dented the bottomline was the exceptional item-provisions made for advances and other current assets relating to a subsidiary company to the tune of Rs 38.59 crore.

The Union Budget 2016-17 was a silver lining in a dark cloud for the cement companies on account of government’s focus on infrastructure and housing in the Budget. Finance Minister Arun Jaitely raised the allocation for roads from Rs 57,976 crore in 2016-17 to Rs 64,900 crore in 2017-18, with a stress on laying 2,000 km of coastal roads. 30 per cent of the cost of laying a road and the budgetary allocation would translate into a Rs 19,470 crore opportunity for the sector. Another vertical likely to boost cement off-take is housing, which contributes 45 per cent to the cement industry’s annual sales. With allocation to build 10 million houses by 2019 under the PM Awaas Yojana and raising the allocation from Rs 15,000 crore to Rs 23,000 crore, we expect a surge in the demand for cement.

There are altogether twelve companies in the BSE 200 Index. Once termed as a defensive sector, but lately this sector has witnessed a bumpy ride due to several concerns. As far as IT sector is concerned, there was no direct impact on this sector due to demonetisation. The list includes names like HCL Technologies, Hexaware Technologies, Info Edge, Infosys, Mindtree, Mphasis, Oracle Financial Services Software, Tata Consultancy Services, Tata Elxsi, Tech Mahidnra, Vakrangee and Wirpo. The aggregate sales for IT sector stood at Rs 86,446 crore, an increase of 9 per cent YoY basis. Last year during the same period, sales stood at Rs 79,006 crores and on sequential basis, i.e. Q2FY17 sales stood at Rs 85,301 crore, which is almost flat. The operating profit for the twelve companies stood at Rs 21,006 crore, an increase of 9 per cent on a YoY basis and 3 per cent on a QoQ basis. The PAT for the twelve companies stood at Rs 16,510 crore, an increase of 8 per cent YoY basis. Their EBITDA margins climbed 42 bps as average on QoQ basis (USD v/s INR) for Q3FY17 came at 67.7, as compared to 66.9 for Q2FY17.  

Out of twelve companies in the list of IT sector, Mindtree and Wipro reported degrowth of 27 and 6 per cent in PAT on a YoY basis. TCS reported 11 per cent increase in consolidated net profit on a YoY basis and 9 per cent growth in revenue on a YoY basis. Tech Mahindra reported 11 per cent YoY increase in net profit and 13 per cent increase in revenue on a YoY basis. Infosys, India’s second largest software services exported, reported 7 per cent YoY increase in net profit and 9 per cent increase in revenue on a YoY basis. HCL Technologies reported 7 per cent YoY increase in net profit and 14 per cent growth in revenue. 

On the guidance front, which is key for IT firms, Infosys narrowed the range for its full-year revenue growth guidance-the third time in a row that the IT firm has tweaked its FY17 target and said it was putting in place steps to mitigate the impact of protectionist visa rules. HCL Tech maintained its full-year guidance.

In the analysis, we have covered total seventeen banks out of which ten are private banks and seven are public sector bank. In the private sector banks out of ten banks, four banks have registered a decline in their net profit in the quarter ended December, 2016. Axis Bank, the country’s third largest private sector lender, is leading the pack as its net profit declined 73 per cent on the back of slow growth in net interest income and higher provisions dented its profitability, followed by Karnataka Bank which reported a decline of 29 per cent in its net profit on a YoY basis. IDFC Bank registered a decline of 21 per cent in net profit and ICICI Bank, the country’s largest private sector lender, reported a decline of 19 per cent as asset quality worsened to a 13-year low and growth in core interest income slowed down. On the other hand, Kotak Mahindra Bank clocked 33 per cent increase in net profit on a YoY basis, followed by Yes Bank, Federal Bank, HDFC Bank and South Indian Bank. Their aggregate net interest income, the difference between interest earned and interest paid, stood at Rs 25,945 for the October-December quarter, an increase of 12 per cent on a YoY basis. From the pack of public sector banks, there are seven banks whose aggregate net interest income stood at Rs 33,160 crore, almost flat at -0.1 per cent on YoY basis. However, there is sharp decline in net profit which is largely attributed to poor performance of IDBI Bank and Central Bank of India. IDBI Bank reported a net loss of Rs 2,255 crore in the reporting quarter ended December 2016, as against Rs 2,184 crore in the year-ago period. This was due to higher provision towards bad loans and depreciation on investment. Central Bank of India reported a net loss of Rs 606 crore for the reporting quarter ended December 2016.

Demonetisation was a bold move by the Government to eradicate black money and fight against corruption. After this move was announced, Indian markets did witness panic sell-off resulting in correction of about 5-6 per cent in quick succession. Many stocks corrected over 20-30 per cent as it was difficult to gauge the impact of demonetisation. A major challenge with demonetisation was the absence of a comparable template from another country where such a radical reform was undertaken.

As most of the companies from the BSE 200 Index have reported their earnings for quarter ended December 2016, some sectors have felt the pinch of demonetisation, but overall the earnings were in line with expectations.