Q2 Results A Mixed Bag

Q2 Results A Mixed Bag

Q2FY20 results gain prominence as the market discounts a slowdown in the economy. DSIJ Research team analyses the quarterly results performance, highlighting the hits and misses of this season.

Equity investing requires knowledge and acumen to read and analyse the financials of a company. The ability to analysis financial numbers, ie the balance sheets, profit and loss and cash flow statements, with fair accuracy, is a combination of art and science. An earnings season is exactly the time when these skills are put to test. 

The Q2FY20 results season bears significance as the positive impact of corporate tax cut starts reflecting in this quarter. Another important aspect to note is that there is a definite improvement in market sentiment after almost 18 months of pessimism. 

This season threw some positive results, some negative, and some flat results, as is usually the case with results across seasons. Several small cap companies and micro cap companies were seen reporting high profitability jumps. 

In the large cap space, the HDFC twins once again managed to impress. Particularly HDFC has outperformed earnings estimates. 

Among pharma companies, Dr Reddy's and Cipla managed to surprise investors positively. 

Several pharma companies declared positive results for Q2FY20. Investors can finally hunt for opportunities in the pharma space with earnings getting revived for pharma companies across market capitalisations. 

Nifty: Q2FY20 

In the Nifty basket, 28 companies have declared results as we go on print. Out of these, 10 declared growth in net sales and net profits on both QoQ as well as YoY basis. 

Nifty has inched up 12.8 per cent over the last 1 year period, while the average return of these set of 10 Nifty stocks with growth in net sales and net profits has been of 25 per cent.

 

Mid caps 

In the mid cap space, we identified eight stock that have grown consistently. On an average, these stocks have shown a growth in net sales and net profits on both QoQ and YoY basis and have generated 11 per cent returns whereas the BSE Midcap index is up by a meagre 1.11 per cent. 

Small caps : 

We find that out of all the results declared for small caps there are nearly 46 small cap funds which have shown consistent performance. The below table consist of small cap stocks where the net sales and net profits has increased on both QoQ and YoY basis. We find that the average 1-year return for these small cap stocks has been 18 per cent, while the BSE Small Cap index posted a negative 5.44 per cent return for the same period.

Real estate sector 

The real estate sector is facing quite a challenging time. In the second quarter of the current fiscal year, project launches continued to decline. Also, real estate developers’ attempt to arrest the decline in home sales has failed to yield the expected results. During the quarter, home sales also fell by 25 per cent compared to the same quarter of the previous fiscal year. QoQ comparisons suggest a decline in both, sales and launches, pointing a fall of 23 per cent in home sales and 32 per cent in new launches. Despite the government’s efforts for a solution to the ongoing NBFC credit issue, which has dried up financing for real estate developers as well as buyers, the sales numbers fell as buyers postponed their purchases to time it with the festive season. During Q2FY20, 61679 fresh units were launched, of which, 33,883 were new homes. Of these, 41 per cent fell under the affordable housing category, ie units priced at Rs. 45 lakhs or below. A maximum numbers of these units were launched in Pune and Mumbai. 

In the real estate sector, PSP Projects reported positive results for Q2FY20. On a consolidated basis, the company's net sales for the quarter stood at Rs. 312.11 crore, which is an increase of 47.18 per cent as compared to net sales of Rs. 212.06 crore in Q2FY19. For Q2FY20, PSP Projects clocked a 87.77 per cent rise in net profit to Rs. 32.46 crore as compared to Rs. 17.29 crore in Q2FY19. Growth drivers for the sector come from low-cost housing, smart cities, and commercial realty 

Anuj Puri
Chairman - ANAROCK Property Consultants 

The top 9 real estate developers listed at the stock exchange have beaten the housing sector’s downturn blues. Their FY 19 data reveals that they not only successfully weathered the slowdown period of FY 2016-17 with a 159% jump in housing sales but also surpassed the market's peak years of FY 2014-15 by 63%. The total sales value achieved by these players in FY 19 was approx. INR 228 bn. 

The top listed developers considered for analysing trends include DLF Ltd., Sobha Ltd., Puravankara Ltd., Prestige Estates, Brigade Enterprises Ltd., Mahindra Lifespace Developers Ltd., Godrej Properties Ltd., Oberoi Realty Ltd. & Kolte Patil developers. 

ANAROCK research reveals that these companies together sold approx. 44 mn sq. ft. of housing in FY 2019 as against approx. 17 mn sq. ft. in FY 17 (DeMo period) and 27 mn. sq. ft. in FY 15. Their sales have collectively grown by 63% since the housing market's peak years of FY 15. 

Banking Sector 

The banking sector, which is seggregated into private and public categories, is a key indicator of the state of the economy. The sector, though, in the last three fiscal years, faced issues of toxic loans. Banks' non-performing assets (NPAs) increased and recovery was low. This led to higher provisioning and stressed net profit figures. In recently concluded Q2FY20 banks reflected a sign of improvement with a few surprises on account of lower NPAs. For example, ICICI Bank reported a decline of 37 per cent in provisions and a contraction of 217 bps in gross NPAs. 

The private banks showed a mixed trend during the quarter under review. The biggest positive came on account of improved asset quality. ICICI Bank, Dhanalaxmi Bank, Axis Bank, Bandhan Bank, AU Small Finance Bank etc showed a declining trend in NPAs. 

The largest private sector in terms of market capitalization, HDFC Bank, reported robust profit growth of 61 per cent on a YoY basis. Its gross NPAs stood at 1.33 per cent as compared to 1.29 per cent in the earlier quarters. Kotak Mahindra Bank's reported gross NPAs stood at 2.32 per cent as against 2.19 per cent in earlier quarters. While provisions stood at Rs. 408 crore against Rs. 316.8 crore (QoQ) and Rs. 354 crore (YoY). the CASA ratio rose substantially to 53.6 per cent from 50 per cent on a YoY basis, which can be positive for its credit cost. 

The banking sector, during the quarter also were subject to change in tax brackets, after the recent corporate tax cut by the finance minister. ICICI bank saw 28 per cent YoY fall in net profit due to change in DTA changes, but the asset quality of the bank, though, improved substantially. The bank's gross NPA stood at 6.37 per cent, which came down from 8.54 per cent in the corresponding quarter of last fiscal. Yes Bank continued with its deterioration in asset quality. Its gross NPA rose to 7.39 per cent from 5.01 per cent in the previous quarter. The bottom line was impacted due to a jump in provisions of Rs. 1,336 crore from Rs. 939 crore on a YoY basis. It reported a net loss of Rs. 600 crore as against a profit of Rs. 964.70 crore during the year ago period. 

In case of public sector banks, SBI came up with robust results for the second quarter of FY20. Improvement in asset quality and strong growth in advances in comparison to previous quarter is the biggest take away from the quarter. The bank's NIM stood at 2.73 per cent, which increased from 2.47 per cent during the sequential previous quarter. SBI registered an advances growth of 13 per cent. 

Average advances during the quarter rose by ~4.5 per cent with Indian Bank clocking the highest advances growth of 15 per cent during the quarter. The sector was one of the major wealth destroyer in calendar year 2019. Overall, banking stocks gave negative returns of 19 per cent on year to date basis. Private banking players such as Yes Bank, Lakshmi Vilas Bank along with a few PSU banks such as Indian Bank and Corporation Bank fell as much as 43 per cent to 83 per cent during 2019, till date. Though, with signs of recovery after the recent results, these stocks have shown strong gains. Since the start of the result season on 10 October 2019, the set of banking stocks have given 12.5 per cent returns to the investors, beating the Sensex, which grew by 6.25 per cent during the same period. 

FMCG Sector 

As of now, 16 companies have declared their results in the FMCG sector. The effects of unfavourable macro-economic conditions can be seen in the FMCG sector with slower than usual revenue growth of consumer packaged goods firms. Recently, Britannia, which is a well-known cookies maker had reported a sharper slowdown in its core category of biscuits compared to the average of the FMCG pack. The biscuits segments contributes nearly 80 per cent of the company’s revenue. For the quarter ended September 2019, companies belonging to the large cap group such as Marico, Dabur India and Colgate Palmolive were able to remain immune to the slowdown and deliver positive financial results. Growing market share, strong pace of innovations and entry into new categories has worked as an advantage for theses companies. With a decrease in market share of rival company Patanjali, Dabur India increased its consumer base by implementing company specific plans whereas Colgate Palmolive captured the market’s attention with its focus on naturals segment in the oral health category. 

For Q2FY20, Dabur posted a 4.1 per cent growth in its consolidated revenue to Rs. 2,212 crore from Rs. 2,125 crore in Q2FY19, with an improvement of 90 bps in the operating margin. In Q2FY20, the company’s consolidated net profit increased by 7 per cent to Rs. 403 crore from Rs. 377 crore gained in Q2FY19. The reported net profit is slightly lower than the expected value due to one-time impairment in value of investments to the tune of Rs 40 Crore. For Q2FY20, the domestic FMCG business reported a volume growth of 4.8 per cent. The Domestic FMCG volume growth for Q2FY20 excluding the foods business was 7.4 per cent. As the domestic business of FMCG firms continues to face aggravated headwinds due to liquidity crunch in the market, small cap companies reported negative performance for the recently concluded quarter. 

Overall for Q2FY20, despite a good monsoon, the FMCG sector witnessed decelerating revenue and PAT YoY owing to slowest volume growth for consumer goods since Q1FY18 which was impacted by GST related destocking. The government announced a corporate tax rate cut to 22 per cent from 30 per cent for existing companies and to 15 per cent from 25 per cent for new companies. Including a surcharge and cess, the effective tax rate for existing companies drops down to 25.17 per cent from 35 per cent. The effects of this financial support to revive demand and growth for companies will be reflected through the financial performance for the next few quarters 

Chemical sector 

The sluggishness in the chemicals sector continued in the September quarter as well. Lower demand growth and higher supplies of soda ash, affected prices, leading to lower realizations of soda ash companies. The stabilization of prices in the fluorine based chemicals segment, which is one of the key raw materials, has augured well for some of the companies. The volatility in crude oil prices during the July-September 2019 period continued to affect input prices of companies, leading to pressure on margins. 

Till now, of the companies which have reported its numbers for the quarter ending September 30, 2019, the performance seems to have been mixed. Of these, 50% of the companies managed to deliver decent performance while the remaining companies failed to meet market expectations. Companies like Deepak Nitrite, Jayant Agro-Organics and Diamines Chemicals reported sales growth of 118%, 47% and 41% respectively for Q2FY20 on a yoy basis. Whereas, the sales of companies like Thirumalai Chemicals, Andhra Petrochemicals, and Apcotex Industries dipped by more than 20% on a yoy basis. The net profit of companies like Keltech Energies, Deepak Nitrite, Supreme Petrochem and Jubilant Industries rose by 705%, 533%, 359% and 204% respectively during the September quarter on a yoy basis. Whereas, the net profit of companies like Sharda Cropchem and Thirumalai Chemicals slipped by 135% and 81% respectively on a yoy basis. Also, companies like GHCL and Atul witnessed muted sales growth for the quarter, but their net profit surged by 72% and 71% respectively. 

Some recovery is expected in H2FY20 led by expected good growth in the speciality chemicals segment. Also, new facilities of some companies are coming up and steady revival in demand would boost the sector going forward. The Department of Chemicals and Petrochemicals has projected annual growth rate of 8-10% and the sector would double its size to USD 300 billion by 2025 

IT Sector 

Out of 50 BSE IT index companies, around 27 firms have reported their Q2FY19 results. Overall net sales of these 27 companies are up by 3 per cent over the preceding quarter and ~9 per cent on a YoY basis. Operating profits of these companies were up by nearly 7.4 per cent QoQ and 8.1 per cent YoY. However, profit after tax remained largely flat of these 27 companies on a QoQ basis but grew by 6 per cent on a YoY basis. 

Infosys’ management has revised its revenue guidance to 9-10 per cent for FY20E from earlier 8.5-10 per cent in constant currency (CC) terms. Further, it has maintained its EBIT margin guidance at 21-23 per cent. 

TCS won orders worth US$ 6.4 billion in the quarter as against US$ 5.7 billion in the previous quarter. 

HCL Technologies’ management has increased its revenue growth guidance to 15-16 per cent from earlier 14-16 per cent and retained the EBIT margin guidance band of 18.5-19.5 per cent. 

These top 3 IT companies, TCS, Infosys and HCL Tech, have posted 2 per cent, 4 per cent and 7 per cent QoQ net sales growth, respectively. While TCS reported a marginal decline (1 per cent) in PAT, Infosys and HCL Tech posted a 6 per cent and 22 per cent PAT growth QoQ, respectively. 

Going forward, global BFSI customers may witness headwinds from a flattened/inverted yield curve and negative yields across a large part of European bonds, which in turn, is likely to put restriction on IT spending of global BFSI customers. But growth in digital segment might help IT companies to fuel their growth engines in the coming days. 

Cement Sector 

In the cement space, around 17 companies have come up with the numbers for the quarter ended September 30, 2019,. Average revenue grew 3% yoy and declined 20% on a qoq basis. On the operational front, operating profit jumped by 23% yoy led by lower coal and pet coke price. On the bottom-line front, PAT declined by 15% yoy. 

India's largest cement company, Ultratech Cement's (19% market share) revenue grew 4% yoy. EBITDA for the quarter grew by 35% yoy to Rs. 1,918.09 crore with a corresponding margin expansion of 457 bps. EBITDA margin for the quarter stood at 19.9%. PAT for the quarter came in at Rs. 578.55 crore, a yoy increase of 62.6%. The company has also completed acquisition of Century's cement business w.e.f 1st October, 2019. With this acquisition, Ultratech's cement capacity has increased to 117.4 MTPA. The company is planning to invest Rs. 940 crore to increase production of premium products for strengthening its position in eastern markets. This fund will be used to increase its grinding capacities in Bihar and West Bengal by 0.6 MTPA each and towards a new grinding unit of 2.2 MTPA in Odisha. All plants will be commissioned by Q1FY21E. Looking at the Eastern markets, Ultratech Cement holds 12% market share of market mix and 13% share in the industry. 

Shree Cement (8% market share) is the third largest cement group in India. The company’s cement capacity as on September 30, 2019 stood at 40.4MTPA and is likely to be scaled up to 50.4MTPA by FY21E.Revenue for the quarter grew by 8% yoy and operating profit spiked by 62% yoy. Profit also spiked by 526% yoy. Rising share from the trade segment (82% in H1FY20 from 72% in FY19) would further help in driving the top-line. 

Ambuja Cement's volumes declined by 4% yoy led by heavy rains and floods in the states of UP, Bihar, Maharashtra and Gujarat. Realisations improved by 5% yoy. Revenue remained flat whereas operating profit improved by 23% yoy led by lower logistics cost. Profit also improved by 31% yoy. 

ACC's cement volumes for the quarter declined by 2% yoy. Revenue grew by 3% yoy, whereas operating profit grew by 26% yoy. Lower raw material cost coupled with lower SG&A expenses aided the operating performance of ACC. The company is executing projects that will add new capacity in the markets of Uttar Pradesh, Madhya Pradesh, Bihar. Jharkhand and West Bengal. 

Going ahead, companies are likely to post double digit growth led by various capacity expansions. Also, government's recent steps such as reduction in corporate tax as well as lowering of interest rates are expected to stimulate the economy and drive infrastructure and affordable housing demand. 

Auto and Auto ancillary Sector 

The auto sector has witnessed a very sluggish quarter ended September 2019. Since the first quarter of FY20 did not bring any recovery but was rather painful, it was expected for Q2FY20 to deliver a better performance. But the slowdown in the auto sector continued despite the festive season. Sales growth in the festive season was low compared to the same period of the previous year. Passenger vehicles comparitively received a positive sales demand whereas M&HCV vehicles continued to witness sluggishness in demand. Because of mismatch in the production demand and supply, many auto-makers were forced to halt production of various models at multiple manufacturing facilities. The quarter saw auto companies offering huge discounts to its consumers in an attempt to clear its piled-up inventories. Implementation of new safety BS-VI norms continued to be a trouble for the sector’s demand growth. This is expected to inflate the cost substantially by around 10-12 per cent. 

Amongst two and three wheeler manufacturing companies, on a consolidated basis, Bajaj Auto posted a 4.24 per cent decline in net sales for Q2FY20 to Rs.7,499.21 crore from Rs.7,831.79 crore for Q2FY19. Despite lower sales in Q2FY20, the company was able to deliver a net profit of Rs. 1,523.32 crore, increasing by 21.22 per cent, owing to slump in tax expenses. For Q2FY20, on a consolidated basis, Hero MotoCorp reported a 16.44 per cent YoY decline in revenue from operations to Rs.7,660.60 crore. Subsequently for the same quarter, net profit also reduced by 10 per cent to Rs. 883.78 crore from Rs. 981.99 gained in Q2FY19. For the passenger vehicles segment, on the consolidated front, Maruti Suzuki’s net sales reduced by 25.19 per cent to Rs.16,123.2 crore in Q2FY20 from Rs.21,553.7 crore in Q2FY19. Similar to the declining trend of other auto companies in the passenger vehicles space, Maruti Suzuki also witnessed a 39 per cent YoY decline in net profit to Rs.1,391.1 crore for Q2FY20. On a consolidated basis, net sales of Force Motors declined by 14.08 per cent YoY to Rs.75,515 crore in Q2FY20. For the same quarter, net profit drastically dropped down by 89.41 per cent YoY to Rs.421 crore. 

The uptrend in revival of the auto sector will continue to remain flat till economic stages a recovery. Auto companies have been demanding a proper scrappage policy from the government and directions before implementing the new BS-VI norms. Various companies such as Ashok Leyland, Volkswagen, Honda, etc. have already began preparing for BS-VI norms. Ashok Leyland has already showcased a wide range of Bharat Stage BS-VI trucks and buses. Volkswagen suggested that the company won’t hike prices by much once BS-VI norms are implemented. This comes as a good news for consumers but might put pressure on the company’s margins. Honda Motorcycle and Scooter India Pvt Ltd (HMSI) launched BS-VI compliant scooter-Activa whereas Maruti Suzuki boasts of selling around 2 lakh units of BS-VI compliant vehicles in the first half of CY19. With the government’s focus on manufacture and use of electric vehicles along with construction of the necessary infrastructure, the segment is expected to experience some growth. 

Conclusion 

The dichotomy in the markets is puzzling most investors with Sensex making record highs and at the same time more than 50 per cent of the BSE 500 stocks are trailing below their 200 days DMA (daily moving average). Global optimism is helping Indian equity markets stay in the bullish zone. In such times when only quality stocks are getting rewarded and the weaker ones being punished, it becomes essential that investors track earnings in order to keep an eye on quality stocks. 

Investors ought to be focused on those companies that have been consistent in their performance. We find that those companies that are clocking growth in terms of net sales and net profits on both QoQ as well as YoY basis are being able to beat the respective benchmark indices. 

Select private banks have managed to deliver as per expectation while PSU banks such as Indian bank and SBI have surprised the investors positively. Several pharma stocks have caught investors' attention this season with their outstanding performance, including Dr Reddy’s and Cipla. 

Small finance banks have reflected decent growth indicating that the liquidity crisis has already eased in the economy. Several mid-sized cement companies have also shown decent performance this season with JK Lakhsmi cement leading the pack with positive earnings. 

All eyes will now be on the next earnings seasons where the benefits of the tax cuts will start getting discounted. The benefits of the rate cuts could be seen in the coming quarters as well which leads us to believe that better days are ahead of us 

Rate this article:
No rating
Comments are only visible to subscribers.

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR