Q2 Results : More Buying Opportunities

The earnings’ season is always a busy season for market participants. The current earnings’ season was especially important for investors because it reflects not only the pace of recovery but also the quality of recovery across various sectors. Yogesh Supekar comments on the performance of various companies across the board while Geyatee Deshpande highlights the ‘outstanding performances’ this earnings’ seasons in addition to the DSIJ Research Team analysing the quarterly results sector-wise 



When the Sensex touched its record high during ‘mahurat’ trading this Diwali, creating wealth of Rs 94,381.68 crore for investors in just one hour (translating into a whopping Rs 26.21 crore per second), what it did was to immediately give a sense of optimism prevailing in the market. Indeed, markets are on song and it looks like the current rally has much more distance to cover. One of the key reasons supporting the current rally is the better than expected earnings’ reports of corporate India. Markets can go up due to several triggers, including interest rate cut, positive government announcements, etc. but when the rally in the equity markets is supported by earnings’ upgrades and better than expected earnings, the strength in the market momentum is validated. 

The investing community had its eyes glued on the earnings for the July-September quarter. It was expected that the September quarter would be a much better one on a sequential basis. There was also the expectation that corporate earnings in the September quarter would fare better with businesses emerging from a nationwide lockdown which had caused unprecedented supply chain disruptions in the economy. Also, several analysts expected that the rebound would be helped by lower input costs, cost-cutting measures adopted by various companies and a steady demand recovery.

Now that the earnings are out for the season, all the expectations of the investors and analysts have come true while the management commentary has pitched in an additional surprise for the investors. With there being a positive undercurrent in all such commentaries, there is now an upsurge of confidence in investors. The demand recovery across all sectors does seem to be on an upward spiral and that bodes well for the markets in the coming days. Several Nifty components have declared better than estimated results, including leading entities such as Asian Paints, Tata Motors, ICICI Bank, State Bank of India, Kotak Mahindra Bank, HDFC Bank, etc.

The Q2 results for several large companies re-confirms RBI’s and the government’s claims of a V-shaped recovery. The aggregate net income of 46 Nifty companies grew by 4.8 per cent from a year earlier in the quarter through September. This has got the analysts excited because it was expected that earnings would grow sequentially on QoQ basis. However, a minor dip was expected on YoY basis. Almost two-thirds of the earnings surpassed or matched analysts’ estimates this earnings season when compared to a double-digit dip in profits in the previous two quarters. To understand the earnings season it would be useful to have a peek at the sectoral earnings. This will help investors understand the underlying trend and take appropriate investment decisions. 

Sectoral Performance Review

Automotive and Automotive Ancillary



The automobile and its allied industries were compelled to close manufacturing facilities due to slowdown but with the gradual easing of those headwinds, the sector is now witnessing resurgence as sales numbers look positive over the last couple of months. According to the latest data by the Society of Indian Automobile Manufacturers (SIAM), passenger vehicle sales in the July-September quarter increased to 7,26,232 units from 6,20,620 units in the same period last year. Similarly, twowheeler sales during the September quarter rose marginally to 46,90,565 units as compared with 46,82,571 units in the same period last fiscal.

However, commercial vehicle sales saw a dip of 20.13 per cent at 1,33,524 units in the quarter under review. It is the sixth consecutive quarter of sales de-growth in the commercial vehicle segment. In the PV segment, Maruti Suzuki saw a 10.3 per cent YoY expansion during the quarter and reported net profit growth of 11 per cent. Mahindra & Mahindra’s PV segment has put up a contrasting show ending the month with a sales decline of 1.5 per cent YoY due to supply-side constraints. In the two-wheeler segment, Hero MotoCorp was the best performer, recording a sales growth of 23.66 per cent with the bottom-line expanding by 9 per cent YoY.

The tractor segment saw impressive growth on the back of a good monsoon and an increase in rural income. Escorts and VST Tillers Tractors recorded YoY revenue expansion of 24 and 36 per cent, respectively, while net profit increased YoY by 123 and 369 per cent, respectively. Factors like an increase in demand for personal mobility, the festive season offers, low interest rates and easy availability of financing has contributed to continued resilience in PVs and two-wheelers, and this growth momentum is likely to extend till the end of CY20. 

Banking

The banking sector is a key indicator of the state of the economy. Banks’ non-performing assets had been increasing from the last three fiscal years and recovery was low. The Reserve Bank of India (RBI) provided moratorium because of the pandemic, which further reduced the recoveries. This led to higher provisioning and stressed net profit figures. In the recently concluded Q2FY21, banks improved their performance and reported lower NPAs. For example, ICICI Bank reported a contraction of 120 bps in its gross NPAs.

The private banks showed a mixed trend in Q2FY21. ICICI Bank, Axis Bank, RBL Bank and Bandhan Bank showed a declining trend in NPAs. In the last quarter, private banks like HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and RBL Bank have reported profit after tax of Rs 7,711.37 crore, Rs 4,882.33 crore, Rs 2,946.62 crore, Rs 1,682.67 crore and Rs 152.43 crore, respectively. Meanwhile, public sector banks like State Bank of India, Bank of Baroda, Punjab National Bank and Union Bank of India reported profit after tax of Rs 5,403.81 crore, Rs 1,794.30 crore, Rs 544.66 crore and Rs 849 crore, respectively.

The sector was one of the major wealth destroyers in the year 2020. Private sector banks gave a negative return of 26 per cent while the public sector banks gave a negative return of 37 per cent in the last one year. Going forward, the MSME segment may see a marginal uptick in disbursement owing to the Emergency Credit Line Guarantee Scheme. As the cost of funding for the banks has reduced, the lending will be increased. Deposit growth and NIM is expected to remain strong on a sequential basis. Post the easing of restrictions, there has been a substantial increase in disbursements across retail products. Improvement in the repayment trend has also reduced the moratorium book for most of the lenders.

Cement

After gaining momentum in June, cement demand weakened YoY in the first two months of the quarter with July and August witnessing volume de-growth of 13 per cent and 15 per cent, respectively, largely on account of the western and southern regions which experienced heavy monsoons and extended localised lockdowns. On the other hand, healthy demand was seen in the northern, eastern and central regions. Key drivers aiding demand growth were improving labour availability and festival demand from the individual homebuilding segment.

During the quarter, average cement prices declined 3-5 per cent QoQ to Rs 368 per bag on a pan-India basis. However, it still remains higher by 3 per cent on YoY basis. Prices in the northern, eastern and central region fell by 3.8, 3.7 and 4.1 per cent QoQ, respectively, while in the south prices declined marginally QoQ due to strict pricing discipline followed by south-based cement makers. Market leader Ultratech Cement’s volumes during the quarter surged 20 per cent YoY and its revenue increased by 8 per cent, while its bottom-line expanded by 55 per cent on the back of operational efficiencies and a reduction in finance cost.

Its close competitor, ACC, also witnessed a steady improvement in demand in the retail and rural markets. The company reported net profit growth of 21 per cent during the quarter. Ramco Cement, one of the largest cement players in the south, registered a revenue increase of 40 per cent. The company’s revenue, however, declined 4 per cent YoY. Demand-supply appears to be in favour of manufacturers outside the southern markets. Looking forward, higher government spending in the northern and eastern parts of India is likely to offer an edge to companies having a dominant position in these markets.

Chemicals



It would not be wrong to say that the pandemic has been a blessing in disguise for the chemical sector in India and especially the specialty chemicals segment. The specialty chemical companies have been supplying to pharmaceutical and agrochemical segments which outperformed during this period. These companies have been providing a wide range of products required for the production of sanitizers, disinfectants, test kit sets, ventilator parts, face shields, masks and PPE apart from supporting the pharmaceutical industry in key ingredients and packaging materials. The steady crude oil prices also helped the companies to control its input prices, thereby supporting its operating margins.

Of the companies that reported their results for the quarter ending September 2020, PI Industries, Aarti Industries, Alkyl Amines Chemicals, Balaji Amines and Sharda Cropchem outperformed. PI Industries’ top-line grew 18 per cent YoY led by strong performance from its CSM and domestic formulations business segments. Its net profit grew by 70 per cent YoY. Aarti Industries’ revenue grew 20 per cent YoY supported by the significant growth delivered by both its specialty and pharmaceutical segments. Alkyl Amines’ revenue was up by 24 per cent YoY while net profit grew 21.5 per cent YoY led by capacity expansion plans, new product launches and steady demand in the international market.

Balaji Amines’ revenue and net profit grew 22 per cent and 37 per cent YoY respectively led by increase in demand across its product portfolio with improved price realisations. Also, Sharda Cropchem’s top-line and net profit grew significantly by 57 per cent and 357 per cent YoY respectively led by strong volume growth across all its geographical segments. Lesser dependence on China for imports, extensive capacity expansion plans through planned capex and strong focus on research and development to make import substitutes would continue to be some of the triggers that would push the sector towards faster growth in the years to come. Gradual recovery in consumption in the domestic market and consistent demand in the international market will boost the chemical sector in India in the near term.

FMCG



The FMCG sector has delivered healthy growth for the quarter ended September 30, 2020 on yearly as well as on sequential basis. As of now, more than 30 companies have announced their second quarter results for the financial year 2020-21. One of India’s largest fast moving consumer goods company, Tata Consumers Product Limited with its iconic brands like Tata Tea, Tetley and Tata Salt recorded consolidated revenue from operations of Rs 2,781.34 crore, witnessing growth of 18.5 per cent YoY and 2.48 per cent QoQ from Rs 2,347.07 in Q2FY20 and Rs 2,713.91 crore in Q1FY21. The company witnessed an expansion of 712 bps YoY in its EBITDA margin, excluding other income. Net profit for the quarter stood at Rs 234.33 crore, registering growth of 17.96 per cent YoY compared to Rs 198.65 crore in Q2FY20.

The company’s India-packed beverage business saw a robust revenue growth of 29 per cent and volume growth of 12 per cent driven by higher volume and price realisation. Its India food business grew 13 per cent and Nourishco Beverages also saw a sequential performance improvement. Other major FMCG players like HUL, Dabur India, Britannia Industries Ltd. and Marico Ltd. registered a growth of 15.7 per cent, 13.75 per cent, 10.96 per cent and 8.75 per cent on YoY basis, respectively, for Q2FY21. The economy is showing signs of revival post the lockdown. Factors like gradual unlocking process, good monsoon, increased rural consumption and demand will contribute to improvement in revenue. Growth is therefore expected in the upcoming quarters. 

Information Technology

To analyse the Q2FY21 results for the IT space on BSE we took into account IT stocks with market capitalisation of more than Rs 100 crore as on November 10, 2020. Out of the top five heavyweights, namely, TCS, Infosys, HCL, Wipro and Tech Mahindra, four showed YoY increase in sales. Infosys showed the highest YoY sales growth of 8.58 per cent followed by HCL Technologies (6.09 per cent). TCS and Tech Mahindra showed an increase of around 3 per cent each while Wipro showed a marginal decline of 0.22 per cent. Out of the 62 companies analysed, 36 companies showed YoY increase in sales in the September 2020 quarter. Some of the companies that saw a significant improvement in sales include Mastek Ltd. (69 per cent), Firstsource Solutions Ltd. (20.59 per cent), Tanla Platforms Ltd. (19.72 per cent), CESC Ventures Ltd. (16.87 per cent) and Larsen & Toubro Infotech Ltd. (16.64 per cent).

The total sales of the 62 companies showed an increase by 5.04 per cent YoY in Q2FY21. The IT and business process management (BPM) industry stood at USD 177 billion in 2019 and is expected to grow to USD 350 billion by 2025. The total revenue from IT services and BPM for FY 2019-20 accounted for USD 135 billion. The sector is headed towards achieving USD 1 trillion digital economy by 2022. Social distancing and the need for remote working have given a boost to the services provided by the IT-BPM industry throughout the world. Most sectors that this industry caters to have started to improve their IT infrastructure to become more agile. Thereby, the Indian IT-BPM sector has good growth prospects going forward.

Realty

The periods of Q4FY20 and Q1FY21 were extremely difficult for the realty sector in India with the lockdown forcing it to halt all business activities. Even though the stage-wise reopening of the economy from the end Q1FY21 and in Q2FY21 was very positive, bringing relief to many, reduced availability of labour raised concerns regarding the speed of recovery. However, in spite of the disruptions, sales and new launches rebounded by around 65 per cent and 79 per cent, respectively, in Q2FY21 compared to the pre-pandemic levels.

While housing sales in top seven cities in the country were down to 12,730 units in Q1FY21, in Q2FY21 sales witnessed strong growth to 29,520 units led by a majority of new launches being done virtually. The festive season and reduced stamp duty charges in Maharashtra along with incentives by developers’ and low interest rates for home loans has attracted new buyers. Currently it is seen that buyers are strongly inclined towards established real estate brands while making their purchases.

The Indian government also considers the realty sector as one of the important contributors to the GDP, thereby providing it with relief stimulus. Prominent companies in the real estate sector such as Oberoi Realty, Prestige Estate Projects, Sobha Ltd. and Godrej Properties reported positive QoQ growth in net sales and net profit even though the YoY results remained subdued. Kolte Patil Developers reported 57.97 per cent growth YoY for Q2FY21 led by pent-up demand. Going forward, office and leisure spaces are expected to witness weaker growth compared to individual housing. 

Consistent Performers





While identifying stocks for long-term investments it is important that one picks a consistent performer. Consistency can be tested by gauging the performance on QoQ basis as well as on YoY basis in terms of sales and profitability. Following are the companies that have shown higher earnings’ growth and consistency in performance. 

Conclusion

The stock prices made lows in March and the recovery process started right after Facebook announced its plans to invest in Reliance Industries Limited (RIL). The stock prices have not looked back since and recovered steadily even as investors wondered about the situation on ground which showed signs of high stress in economic activity. Yet again, the year 2020 has taught us that markets are forward-looking and extremely smart when it comes to gauging the course of future movements. The earnings have surprised some of the most optimistic bulls of Dalal Street this season.

The sharp recovery across sectors, especially large sectors such as pharmaceuticals, financials, IT and cement augur well for the markets going ahead. The sequential performance of certain sectors may not be very impressive in the coming quarters as the pent-up demand effects will not be reflected in the coming quarters. While the results have been impressive there are risks on the downside for the markets as the valuations are stretched and the pandemic is not yet totally under control. A rejig in the MSCI index has led to euphoria along with positive news about the vaccine for corona virus.

Optimism on both the developments may curb down a little bit in the near term. It should be noted by investors that the earnings were strong this season also because of the corporate tax rate reduction offered in September last year. This will be the last quarter where the advantage of tax rate cuts will be reflected in earnings. The earnings also got a boost this quarter due to lower operating expenses. This advantage may not persist going ahead. In the near term the markets will be in an overbought zone and hence a correction in stock prices is not ruled out. Investors need to tread cautiously.

The rising inflation data also suggests that there is no further room to cut interest rates and we may be operating at the lowest interest rate environment at least in the foreseeable future. That being said, the momentum is clearly in favour of bulls with a major event in terms of US’ elections clearly behind us. The liquidity situation is simply too good to ignore for equity investors across the globe. Emerging markets are expected to outperform their developed market peers. Better than expected earnings this season along with the hope for a vaccine in 2021 will provide enough fodder for bulls to outperform in the coming quarters over the medium term.

Clearly the areas to focus on for investors can be energy and financials which have been laggards and have posted the best profit growth on an average in the September quarter. Within financials, some of the private banks show a lot of promise as the economy recovers. Retail lending improved for banks, thus leading to lower provisioning. Most banks were able to beat earnings’ estimates with improving net interest income. ICICI Bank is just a point in case. Investors may look at private banks with renewed interest.

Material and consumer discretionary companies also have posted some of the biggest earnings’ surprises and hence can be looked at favourably by the investors. IT companies promise continuity in earnings’ growth for the coming quarters. Large-cap IT stocks may feature in the ‘buy’ list of FPIs as well as DIIs and hence investors may analyse IT stocks with a positive bias. Chemical and speciality chemical companies continue to show promise and may find favour with stock pickers who bank on consistent profit growth. Hence, investors should not ignore opportunities in the chemical sector too.

INTERVIEW

Rajesh Bhatia
Group CFO, UFlex Limited

How do you explain the two-fold jump in net profit for the September quarter?

Continuing on the growth path from the previous quarter, Q2 FY 2020-21 has been a great quarter for us in terms of production and sales volume, revenues, and almost 70 per cent rise in EBITDA, resulting in a 136 per cent jump YoY in net profit. Rise in customer demand for flexible packaging in segments such as personal hygiene, wellness etc. as well as additional output from Poland and our new Russia plants have contributed to this growth. 

Can we say that the business activity has now returned to the pre-pandemic levels?

The last six months have resulted in a lot of changes in consumption habits which has in many ways contributed to the sudden spike of our packaging volumes. We have witnessed a dramatic surge in food and personal hygiene packaging and we have also seen the emergence of the pouching business that delivered high business growth for us and will continue to garner good demand in other categories. Packaging, in these tough times, has not only ensured access of supplies and safe consumption, but also reiterated its position as a necessity for people.

In the packaging films business, our plans to have international locations operational are also moving as per the expected timeline. Despite the pandemic, we managed to commence commercial operations at our Russia facility. The only business segment that was somewhat affected by the pandemic was aseptic liquid packaging which was working at lesser capacities in the earlier months of the lockdown although it is now looking quite promising with our capacity being fully booked for the coming months.

What explains the huge surge in demand for your products in the recent quarter?

The ongoing pandemic has impacted our lives like never before with ‘safety first’ occupying the foremost preference worldwide. With disruptions caused by the pandemic, we had to adapt to new ways of working with a 360 degree approach. UFlex was amongst the few packaging companies that were able to operate during the time of the lockdown and cater to the packaging needs of essential sectors of FMCG and pharmaceutical. Our presence across the value chain of flexible packaging proved advantageous in the smooth functioning of the supply chain.

Such an established presence and our ability to overcome the challenges imposed by the pandemic helped in acquisition of new clients, leading to added demand, and this along with inflated demand from existing customers, contributed to higher sales of our products. For instance, a leading liquor brand that pivoted to manufacturing hand sanitizer has started working with us. Likewise, because of increased consumption of snacks and home-cooked food, an existing customer who expanded his product portfolio opened new avenues of packaging for UFlex.

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