Quarterly Results : What Does It Indicate

The earnings season is always crucial as it sets the tone for the market direction. Yogesh Supekar summarises the earnings seasons while the DSIJ Research Team share their observations on sectoral earnings.

The earnings season this time around (Q3FY20) gains importance as markets will gauge the strength in economy based on the earnings after all the economic activity data, RBI comments and budgetary comments have been factored in by the markets. Market participants are keen to understand whether the economy has bottomed out or there is further downside left to be tackled. So far, going by the earnings, there are no clear signs of economic activity improving substantially even though the improvement in results can be attributed to the tax cut decision announced by the government. This is now the second quarter where the benefits of tax cuts are reflected in the earnings. 

Out of 30 Sensex stocks, 28 have declared their quarterly results so far. We can see from the table above that the median growth in
net sales was 3.46 per cent on QoQ basis while on YoY basis it was 6.74 per cent. However the median growth of net profits of the
BSE Sensex companies for the December 2019 quarter fell by 0.06 per cent on QoQ basis while it grew by 13.83 per cent on YoY
basis. Tata Consultancy Services, HDFC Bank, Infosys, Bajaj Finance, State Bank Of India, Maruti Suzuki India, Larsen & Toubro,
HCL Technologies, Titan Company and Power Grid Corporation Of India are the constituents of the Sensex that managed to
reflect growth in net sales and net profits on both QoQ basis as well as on YoY basis.

Sensex Constituents’ Earnings

Out of the 30 Sensex companies, 28 companies have declared results for the current quarter and we find that ICICI Bank, SBI and Bajaj Finance have impressed investors with their performance while Ultratech Cement, Axis Bank, Asian Paints, HDFC Bank, IndusInd Bank and Infosys have managed to meet the earnings estimate. Mahindra & Mahindra has disappointed investors while RIL reported flat earnings along with the likes of HUL, Bajaj Auto, Larsen & Toubro, Kotak Mahindra Bank and Tech Mahindra. 

Auto

The auto industry has been hit due to various factors. BS VI norms and increased insurance prices have resulted in an upward spiral of vehicle prices. The main pain areas for auto manufacturers have been getting rid of BS IV inventory before BS VI becomes mandatory with the help of heavy discounting. The NBFC crisis has also affected auto sales as getting vehicle loans has now become difficult. These factors have affected the numbers in the last few quarters. Of the big auto companies, Bajaj Auto showed a YoY increase in sales of 2.67 per cent and corresponding PAT increase of 14.56 per cent. Maruti Suzuki also saw similar increase in sales of 3.8 per cent.

However, the PAT increase for Maruti Suzuki was about 5.33 per cent. These two were outliers in the sector. Other major auto companies either saw either a decrease or an insignificant growth in sales. Going forward, the auto sector might see better numbers in the coming quarters after the implementation of BS VI norms in April 2020. Some of the leading auto manufacturers are optimistic of better numbers in passenger vehicles going forward with effect of the NBFC crisis fading, good monsoons and new BS VI models hitting the showrooms and generating customer interest. 

Pritam Deuskar

Fund Manager, Bonanza Portfolio Ltd 

Among the declared results, there are 49 companies having mid-cap in between Rs. 500 to 2,500 crore that produced 25 per cent plus growth whereas 37 companies posted 15 per cent of the sales growth. Among these companies, consistent or margin growers will do well. As far as the small-cap index is concerned, it’s the first time after February 18 that it is coming back to its 52-week average and above. Over the next one or two months the rally will pick up strength for sustenance over the next 10-12 months. Index shuffling also makes Nifty Small-Cap index stronger than earlier. Sticking to consumer-facing companies will be an efficient investment than commodity or cyclical for small-cap investors.

Instead of looking at PE ratios, growth constancy and maintenance should be given priority in looking for small-cap space with high ROCE or their improvements along with high promoter holdings. Also, since many small-caps face corporate governance issues, one should seek clean companies and better history. With the segment getting better, many false companies would also rise with the tide but investors should stock with preference to better fundamentals. It’s historically seen that only 4% of companies have been able to make and sustain growth from the small-cap space. 

Banking

The higher QoQ provisions by the banks for bad loans hampered the bottom line of the banking industry. For the third quarter of the current fiscal, overall, the banking industry saw a jump of 45.53 per cent in provisions. This resulted in 56 per cent average drop in net profit on a QoQ basis. In the private banking space, IDFC First Bank and Bandhan Bank reported highest growth in provisions from the previous quarter. Lower provisions during the quarter helped The Jammu & Kashmir Bank recover its losses of the previous quarter. In case of PSUs, Oriental Bank of Commerce (OBC) and State Bank of India (SBI) reported a strong set of numbers. These banks saw lower bad loan provisioning positively affecting their net profit. The net profit as of end of Q3FY20 of OBC stood at Rs. 201.66 crore (YoY growth – 39 per cent and QoQ growth – 60 per cent) while for SBI it stood at Rs. 5,583.36 crore (YoY growth – 41 per cent and QoQ growth – 85 per cent).

Chemicals

There were some signs of recovery in rural demand but the sluggishness in the urban segment for chemicals continued in the December quarter as well. Industrial business contributed well to the demand and the overall exports’ growth stood strong. Crude oil prices which were extremely volatile during the September 2019 quarter were on a rising trend in the December quarter. In October, the crude oil price was as low as USD 51.9 per barrel which kept rising to USD 64.6 per barrel by the end of December 2019. This price rise continued to show impact on the margins of the companies. Till now, of the companies which have reported their numbers for the quarter ending December 31, 2019, the performance has been mixed.

In terms of revenue, small-cap companies like Diamines & Chemicals Ltd., Amal Ltd. and Alufluoride Ltd. delivered extraordinary growth of 99 per cent, 97 per cent and 52 per cent, respectively. The revenue of mid-cap companies like Deepak Nitrite Ltd. and Alkyl Amines Chemicals Ltd. grew by 29 per cent and 21 per cent respectively. Up to 50 per cent of the companies managed to deliver decent growth in operating profits. The operating profit of companies like Diamines & Chemicals Ltd., Alufluoride Ltd. and Deepak Nitrite Ltd. grew exceptionally by 220-240 per cent on a YoY basis.

In terms of net profit growth, small-cap companies like Jocil Ltd., Resonance Specialties Ltd. and Sharda Cropchem Ltd. grew in triple digits. The recent outbreak of the corona virus in China has led to temporary shutdown of production process of various businesses in some parts. If the disease continues to spread, it could further impact the production. The chemical sector is one of those that would have to bear the brunt of this impact. However, this could be beneficial to the chemical sector in India.

Umesh Mehta

Head of Research, Samco Securities 

How has the earnings season been so far?

The current quarter has broadly been a mixed bag with some companies meeting expected estimates of muted growth while some outperforming expectations. Cement, mid-cap IT and specialty chemicals are some sectors which have largely surpassed expectations due to a low base and low raw material costs. However, other consumer-linked sectors have largely remained muted. Structural slowdown and other cyclical factors are clearly visible in the results even though the corporate tax cut move by the government largely helped keep a positive sentiment towards the bottom line of the companies. However, one may note that top line growth just met the street’s expectations, although subdued.

What is your outlook on the markets?

Keeping the current quarterly performance in mind, going ahead, unless near-term growth visibly translates into sales, the markets seem unlikely to inch higher. However, given the array of stimuli from both the government as well as the RBI, hopefully healthy results should be visible by the second quarter of the next fiscal year. Markets are expected to largely remain sideways with some buoyancy from primary markets in the form of IPOs and NFOs. Additionally, the government’s divestment plan of Rs. 2.1 lakh crore will also keep the upside capped. 

Cement

To elaborate about the performance of the cement industry in the recently concluded quarter ended December 31, 2019, around 21 companies have come up with their quarterly numbers. The average revenue has witnessed de-growth of 4 per cent on a YoY basis led by lower realisations. On the operational front, operating profit jumped by 24 per cent on a YoY basis led by lower coal and pet coke price. On the bottom line front, PAT witnessed growth of 12 per cent on a YoY basis. Talking about India’s largest cement company, the revenue of Ultratech Cement (19 per cent market share) remained largely flat and domestic volumes grew by 3 per cent YoY. Normalised EBITDA grew 33 per cent YoY led by 15 per cent and 5 per cent decline in energy and logistics cost.

EBITDA improved to Rs. 1,004 per ton as against Rs. 741 per ton in Q3FY19. Notably, the company in line with its aim reduced debt during the quarter by Rs. 1,994 crore to Rs. 18,625 crore. The utilisation level of Century Textile’s acquired plants is ramping up rapidly and as on Q3YF20, it was at 79 per cent. Also, under this Union Budget, the emphasis on highways and roads development is well-placed and this may boost demand for the cement sector. Also, the development of warehouses and cold storage facilities in rural India would give a push to the demand. Going ahead, companies are likely to post double-digit growth led by various capacity expansions. Also, the government’s 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. 

Information Technology

In Q3FY20, almost all the large-cap companies reported decent single-digit net sales growth on a QoQ basis while mid-cap IT companies reported healthy sales growth in the quarter. Many of the mid-cap IT firms outpaced in terms of PAT growth as compared to large-cap firms on a QoQ basis. Going forward, a shift from onsite to offshore and fresher hiring is expected to aid the margins. In Q3FY20, many companies witnessed healthy deal wins, leading to positive commentary from the managements. 

Conclusion

The market outlook remains strong even as the global markets attempts to steady themselves in spite of volatility emanating from China. The effect of corona virus is inducing volatility in the global equity markets even though there is consensus that the impact of the spread of the virus will at the best remain for one quarter while the subsequent quarters will see recovery. The imported volatility, be it the corona virus or the US-China trade war or Brexit-related development may influence the fortunes of Indian equity investors as well. However, the key trigger would be the earnings up-cycle expected in the emerging market space.

In such volatile times, even though the broader markets are expected to perform relatively better in 2020, we find that the quality stocks which have performed well in the past two to three years may continue to outperform in the coming year as well. Only 56 stocks out of 3,000 actively traded shares have managed to provide consistent returns (greater than 10%) in each of the past three years. Investors are well advised to further research investing opportunities in those companies that have shown growth in net sales and net profits on both QoQ basis as well as on YoY basis.

The inflows into equity mutual funds hit a five-month high in January, indicating ample liquidity and investor interest in the markets. In addition, manufacturing activity has revived and is a leading indicator that the earnings up-cycle is on its way. The credit cycle is expected to revive further, suggesting that earnings could see an uptick in the coming year or two. These factors may attract foreign investors to Indian shores in the coming quarters.