Q1FY20 Earnings : A Mixed Bag!

Time has come yet again to evaluate quarterly earnings. It is the beginning of the FY2020 and the end of the first quarter amid the ongoing economic slowdown. Let us rewind to November 2016 when the demonetisation happened, dealing a severe blow to consumption, which resulted in declining incomes and loss of jobs, which led to an even bigger drop on the demand side. Post-demonetisation, the GST reform came into play in July 2017, and just like every reform, the GST reform took some time to settle. However, just as the effects of demonetisation and GST were dwindling, enter the IL&FS crisis that triggered the NBFC credit crunch in 2018. The end of 2018 welcomed the US-China trade war, thereby affecting the global trade and GDP growth. In the much-anticipated budget session, the fiscal stimulus was not announced which disappointed the market participants creating confusion in the minds of investors. The economy and the markets both run in a cyclical phase and take time to absorb the changes that occur, but the silver lining is that they always bounce back. Now, here we are, post the Q1FY20 earnings season that reflected mixed results, with the banks expressing relief on the financial front, while most other sectors were hit by low consumer demand.



Taking into consideration the Sensex constituents, the net sales for the June ending quarter climbed 9 per cent YoY while the bottomline grew 17 per cent as compared to the corresponding quarter of the previous fiscal for the 30 companies taken together. Among the 30 companies, in terms of net sales, 24 have posted positive growth with companies like Bajaj Finance and IndusInd Bank posting the highest growth of 47 per cent and 37 per cent, respectively. The companies that performed poorly in terms of growth are none other than those belonging to the sulking auto sector. Tata Motors, Hero MotoCorp and Maruti Suzuki all posted de-growth in terms of net sales growth. In terms of net profit, Power Grid Corporation of India Ltd. has posted exceptional growth of 104 per cent in the latest quarter ended June 2019, while Bharti Airtel and Tata Motors are the only two companies that have posted huge losses in their balance sheets.

We have excluded the earnings of ICICI Bank as the net profit increased due to lower provisioning in the quarter under review as compared to the same quarter last fiscal.

Out of a total of 2839 stocks that declared results for the quarter, around 744 stocks delivered positive results, 1276 stocks remained flat, while 819 stocks posted negative results.

To give you a comprehensive understanding, we have done a study of BSE 500 companies’ Q1 results and compared the growth rate in net sales and net profit for Q1FY20 and Q1FY19. The net sales growth has fallen to 8 per cent in Q1FY20 as compared to 15 per cent growth reported in the corresponding quarter of the previous fiscal owing to weak demand and liquidity crunch. Thus, we witnessed a drop of 7 per cent in the growth in net sales in the current quarter. In terms of net profit growth on YoY basis we witness a 4 per cent drop to 3.08 from 7.19 per cent posted in Q1FY19. In terms of QoQ, we see a grim picture with de-growth in net sales in Q1FY20, while the PAT has witnessed a 7 per cent fall in Q1FY20 from 22 per cent reported in Q1FY19. The slowdown in earnings is quite evident as sales numbers and profits, both show a sharp decline over the first quarter of FY2020. 



On the exports front, India's merchandise exports had fallen toa four-month low of 0.64 per cent in April, 2019 as compared to the same period of last year, as shipments of engineering goods, gems and jewellery, leather and other products declined, widening the trade deficit to a five-month high. The trade deficit, which is the gap between exports and imports, expanded to $15.33 billion in April 2019 as compared to $13.72 billion in April 2018. The demand has taken a hit not only in India, but it has become a global trend.

Large-Caps v/s Mid-Caps v/s Small-Caps

While comparing the broader BSE indices, in the large-cap category, 80 per cent of the companies have posted positive growth in terms of YoY net sales, closely followed by the mid-cap companies, where 76 per cent companies have posted positive growth. Taking into consideration the small-cap companies, 63 per cent have posted positive growth in term of net sales. If we were to compare the indices in terms of positive growth in PAT on a YoY basis, we would notice that there is a visible gap between the large cap companies and mid-cap companies and small cap companies. We see 66 per cent of the large-cap index companies to have posted positive growth in PAT, while 58 per cent of mid-cap index companies and just 43 per cent of small-cap index companies to have posted positive PAT growth.



Here is an analysis of the key sectors.

BANKING

The banking sector during Q1FY20 showed some signs of relief on financial stability front. The public sector banks during the quarter collectively turned in profit during the first quarter of the current fiscal. The positive profits were for the first time in more than two years. Though the total net profit reported was Rs.3948 crore, which is still below HDFC Bank’s Rs.5568 crore, indicating the large size of India’s private banks. The public sector banks are supposed to have benefited from treasury gains due to easing bond yields and lower credit cost, along with the low base effect.

The biggest Indian public sector lender State Bank of India (SBI) reported net profit during the quarter. The positive trend was mostly on account of lower provisioning and higher interest margins. SBI reported a standalone profit of Rs.2312 crore during the first quarter ended June 30, 2019, as compared to loss of Rs.4876 crore during the same period last fiscal. The bottomline was supported by 20 per cent YoY growth in NII. Its provisions fell by 52 per cent YoY.

During the quarter, the banks that reported losses were Syndicate Bank, UCO Bank, Indian Overseas Bank and Punjab & Sind Bank.

The private banks though showed much stronger performance in overall growth. The loan growth came in at just above 15 per cent. Some private banking majors such as HDFC, Kotak Mahindra and Axis witnessed slower loan growth mostly on account of cautious stance due to economic slowdown and slow credit growth. The overall NII growth of the overall baking sector remained in the range of 14 to 15 per cent, and only the private banks saw much higher NII growth rate of more than 20 per cent during the quarter.

ICICI Bank reported strong Q1FY20 across the board. The NII came at Rs.7,737 crore as against Rs.6102 crore, higher by 27 per cent YoY. The bank has reported a net profit of Rs.1908 crore in first quarter of FY20 as against loss of Rs.120 crore YoY. The net profit increased due to lower provisioning in the quarter under review as compared to the same quarter last fiscal. The bank had made higher provisioning for the first quarter of FY19. The provisioning for Q1FY20 stood at Rs.3495.73 crore as against Rs.5971.29 crore for Q1FY19.

The gross NPAs for Q1FY20 stood at 6.49 per cent as against 6.7 per cent QoQ, a decrease by 21 bps. The net NPAs for the first quarter stood at 1.77 per cent as against 2.06 per cent QoQ.

The largest private lender HDFC reported 21 per cent YoY growth in standalone net profit. It posted net profit of Rs.5568.16 crore for the quarter as compared to Rs.4601.44 crore in the year ago period. The NII grew by 22.94 per cent YoY to Rs.13294.25 crore in Q1FY20 as against Rs.10,813.57 crore in Q1FY19. The provisions increased by more than 60 per cent YoY and 38.35 per cent QoQ to Rs.2613.66 crore during first quarter.

CEMENT

Taking a glance at Q1FY20 performance of the cement companies, most of the cement companies reported moderate volume growth due to slowdown in construction activities. Also, the liquidity crunch played a crucial role in the slowdown. The demand for cement remained muted on account of slowdown in construction activities amid general elections. Also, the liquidity crunch contributed to the muted demand. but managements remain confident of 5%-6% volume growth for the full year on the back of strong order flows from the government projects and for affordable housing. Most of the companies expect the demand to pick up further in H2 post-monsoon. 

On the profitability front, Q1FY20 was a healthy quarter with highest ever EBITDA/tonne supported by overall healthy price hike. Also, the smoothening of input costs like pet coke aided operating profitability.

In Q1FY20, the aggregate revenue growth stood at 8% on a yoy basis. The operating profit improved by 38% on a yoy basis led by lower prices of coal and pet coke. Overall, PAT improved by 84% on a yoy basis.

Going ahead, the cement companies are likely to gain traction on revival in the government spending and the prices are likely to remain sustainable in the coming years, led by the expected improvement in demand scenario. Also, the smoothening of raw material prices would further improve the profitability going ahead.

PHARMA

The muted performance in the June quarter continued in the pharma sector. As per AIOCD data, the volumes dropped for the second consecutive month in June and grew just 0.7% in the June quarter. A majority of the companies saw a year-onyear decline in volumes. The slowdown intensified from May when the market decelerated to a growth of 7% from an average of 10% in the preceding five months. In June, the market grew by 6.6%. In Q1FY20, the market growth stood at 7.9%, the slowest in the past seven quarters and one of the lowest in the past five years. The focus on launch of in-licensed molecules from global partners and slower growth in the lower-priced brands were observed during the quarter.

During the June quarter, the Indian currency was stable but growth in the key markets was muted, which is expected to continue in the September quarter as well. Due to launch of ANDAs and branded generics in the US, the pressure on margins might prevail going forward. However, the lower R&D costs supported margins of most of the drug makers.

The overall sales of the sector grew by 13.3% YoY during the quarter. The EBITDA and PAT grew by 23.6% and 29.8% YoY, respectively. Some of the outperformers in the sector included companies like Ajanta Pharma, Astrazeneca Pharma, Biocon, IOL Chemicals, Ipca Laboratorie, Lupin, etc. which delivered growth of more than 15% in revenues and more than 20% in net profits.

As per ICRA, moderation in pricing pressure in the US market, new launches and market share gains for existing products and consolidation benefits will drive growth in FY20 and the industry is likely to grow by 11-13% in FY20. The impact of channel inventory correction that impacted sales in FY19 is expected to ease in FY20, thereby aiding domestic sales.

In terms of generic drugs, the exports are likely to increase, led by patent expiry or loss of brand exclusivity. The companies are also focusing on the development of specialty medicines or complex generics to improve their share in the world market.

IT

Majority of the large IT firms in India reported stable revenue growth in the first quarter of FY20. Also, a majority of companies have guided healthy outlook and have maintained their revenue growth guidance for FY20. This confidence is underpinned by strong momentum in digital and strong deal wins. The secondlargest IT company in India, Infosys, has revised its revenue guidance upward to 8.5-10 per cent due to strong deal win and Q1FY20 performance. Mid-sized IT firms witnessed healthy revenue growth, but as the large IT firms started reporting good growth, the difference between the medium and large IT companies has been narrowing now. Besides, most of the companies witnessed pressure on their margins owning to strong rupee along with wage hikes and higher visa costs. However, macro uncertainties and muted performance of BFSI vertical remain key challenges for the IT companies.

FMCG

A sustained slowdown in consumption has hit almost every sector, including FMCG. Nonetheless, the sector is in the positive territory unlike other sectors like auto. However, the growth is not seen in double digits, but in high single digits for FMCG. There is a sharp rural slowdown as well as weak demand across all food and non-food categories, from salty snacks and biscuits to soaps and packaged tea. Data suggests that the volume growth of categories where the contribution of small packs is high such as soaps and toothpastes has declined on a year-to-date basis compared with the same period of the previous year. The biscuits business, which contributes around two-third of sales of the companies, the volume growth has been hit with a decline of 200 basis points on a YTD basis.

The potato chips segment, where 80 per cent sales come from the smaller sized packets, has witnessed a sharp decline in volume growth by 300 bps YTD. The drop in volume growth is owing to the squeezed spending of the households and the fact that the rural growth is losing steam. The value growth in the country’s FMCG sector has fallen by 10 per cent for April-June quarter, which is the third consecutive quarter of the slowdown, as reported by Nielsen. The current quarter has witnessed a slowdown across all food and non-food categories, including spices, soaps, packaged tea as well as salty snacks. The slowdown is due to the macroeconomic factors, government policies, effect of monsoons and the low base effect. Another important factor that has contributed to the slowdown in FMCG sector is the fading advantage of small manufacturers. Post the implementation of GST, small manufacturers contribute 50 per cent to India’s slowdown story, especially in the North and West zones of the country.

For Q1FY20, the FMCG sector has grown by 8 per cent YoY in terms of net sales and 15 per cent in terms of operating profit. The net profit has expanded by 12 per cent for the quarter under review. Companies like Prabhat Diary, Zydus Wellness and Hindustan Foods have witnessed exceptional growth in net sales on a YoY basis. Out of a total of 105 companies we studied under FMCG sector for Q1FY20, 70 per cent have witnessed positive growth on a YoY basis in net sales and 52 per cent have witnessed a positive PAT growth on a YoY basis.

Auto Sector

The first quarter of FY20 did not bring any recovery, but instead it brought a painful quarter for the auto sector, where the performances of the companies have worsened. The concerns that bothered the auto sector have aggravated and led to subdued volumes and elevated costs, which kept the earnings under pressure for the quarter ended June. What bothers the auto sector is the economic slowdown, liquidity crunch, rural stress, the flood conditions in parts of the country, all of which have added to the decline in demand. There were recent production cuts undertaken by OEMs to counter the rising channel inventories, which resulted in an undesirable impact on the volume growth over the near medium term. Adding to the misery are the regulatory changes, such as the shift to new safety norms and the transition to BS-6 emission norms which are likely to inflate the cost substantially by around 10-12 per cent. This is likely to bring more worries to the troubled sector. For Q1FY20, six companies have posted positive growth in net sales on YoY basis, this includes, Scooters India, HMT Ltd, TVS Motor Company Ltd., Atul Auto Ltd., SML Isuzu Ltd. and Bajaj Auto Ltd. For the same quarter, 4 companies to have reported net loss are Tata motors, HMT, LML and Scooters India. To comment on the PAT, Bajaj Auto, Atul auto, Hero MotoCorp and Yamuna Syndicate are the only companies to have witnessed growth in terms of net profit on YoY basis. looking ahead, the upcoming festive season is expected to bring in more consumer confidence and a positive sentiment in the market, which could spur demand. 


We can say that the clear winner for Q1FY20 is the cement industry followed by the pharmaceutical industry. Both sectors have performed well relative to the other sectors. The auto sector remains in the negative territory yet again, while the IT and FMCG sectors have delivered muted results. The banking sector in terms of bottom-line has posted a turnover on a YoY basis after posting a huge net loss in the corresponding quarter of the previous year.

Umesh Mehta
Head of Research, Samco Securities.

"This quarter's earnings have been more or less subdued and there haven’t been any significant surprises from any sector. The liquidity squeeze, consumption slowdown, trade war friction and its impact on crude and currency are some issues which cast a shadow on individual industries and broadly on the stock price of companies. On the valuations front, Nifty PE has also cooled down from 29 in April 2019 to 26 in August 2019. This shows that the earnings haven't kept pace and hence valuations cooled down."

Foram Parekh
Fundamental Analyst, Indiabulls Ventures

"Real estate stocks overall has not reported good set of numbers, except for a few companies. The entire sector is grappling with multiple problems, both from the perspectives of developers and buyers. Many developers' projects are at a standstill due to liquidity issues and, as a result, this is reflecting in standstill construction. From the consumers' perspective, buyers are not passed on the benefits of multiple rate cuts and slowdown in automobile sector."

Conclusion 

Clearly, looking at Q1FY20 results, corporate India does not appear to be in the best of health. The results have been mixed with more disappointments than positive surprises. The banks looked to have recovered a bit, however, majority of sectors are reeling under pressure.

Economic slowdown in India, liquidity crunch, slowness in India's trading partners and escalating geopolitical tensions are some of the reasons impacting market sentiments. There is a visible drop in consumption across sectors. All eye will be on what happens with interest rates and what sort of support is dolled out for which sectors without disturbing the fiscal deficit.

Going ahead, it does look like a couple of difficult quarters for corporate India with little signs of earnings revival in the next quarter or two. Investors will have to look beyond two quarters of flat to poor earnings for earnings revival.