Q4FY18 Earnings:In Line With The Estimates

Earnings season is always the most crucial of all seasons when it comes to equity markets. Earning seasons is considered important as focusing attention on the earnings of the corporates helps traders and investors understand the stock price movement and gain confidence in the markets. Indeed, in long run, the consistent growth in earnings and quality of earnings is undoubtedly the most important factor that drives not only an individual stock performance but also the overall market performance. 

When we look at any earnings season, we essentially want to find out: 

1. If there are any earnings surprises 

2. What is happening with the bellwether stocks in terms of earnings and 

3. If the overall earnings have matched market’s expectations of earnings. 

We find that overall in this season, there were more negative surprises than positive ones. The bellwether stocks managed to report flattish kind of growth and, overall, the results this season were in line with market estimates. 

Q4FY18 Analysis:- 

We find that there are 2036 companies which have declared their Q4FY18 results so far (as on May 29). Out of these 2036 companies, there are 96 largecapcompanies, followed by 137 mid-cap companies and 1803 small-cap companies

 

We find that at least 63 per cent of the large-cap companies that reported Q4FY18 results have reported growth in net sales on both QoQ as well as YoY basis. Almost 51 per cent of the mid-caps which have reported their Q4FY18 results have impressed with rise in net sales on both QoQ and YoY basis. The figures are less impressive for small-caps on a relative basis as 41 per cent of the small-cap companies that have reported their quarterly results have announced growth in net sales on QoQ and YoY basis.

The EBITDA growth on both Q0Q and YoY basis in large-caps and mid-caps was seen in about 43 per cent of companies that have declared results so far. In the case of small-caps, 37 per cent of the companies that have announced Q4FY18 results so far have showed growth in EBITDA numbers on both Q0Q and YoY basis.

 

Almost 37 per cent of the large-caps and small-caps have reported increase in PAT on both QoQ and YoY basis, while 45 per cent of the mid-caps have declared improvement in PAT on both counts.

The mid-caps fared better than the large-caps as a group when it came to EBITDA margins. Almost 33 per cent of the mid-caps reported growth in margins on both QoQ and YoY basis. Only 28 per cent of the large-caps and small-caps that declared results so far managed to show expansion in EBITDA margins on both QoQ and YoY basis 

Almost 39 per cent of all mid-cap companies that declared Q4 results saw growth in PAT margins on quarterly as well as yearly basis. PAT margins of 24 per cent large-caps and 31 per cent small-caps grew on both QoQ and YoY basis.

 

Q4 FY18 results analysis: Large-Caps vs Mid-Caps vs Small-Caps

 

Looking at the Q4FY18 results, the median net sales grew by 4.43 per cent on QoQ basis for the large caps, while the median growth stood at 10.40 per cent for large-caps on a YoY basis. For the mid-caps, the QoQ median growth in net sales stood at 4.17 per cent and 9.74 per cent on a YoY basis. For small-caps, the median growth in net sales on QoQ basis was 6.24 per cent, while on a YoY basis it was 7.83 per cent. 

The EBITDA of large-caps slipped on a QoQ basis, however on a YoY basis, the EBITDA grew by 17.62 per cent. For mid-caps, the EBITDA grew by 1.15 per cent QoQ basis, while on YoY basis the EBITDA grew by 14.69 per cent. The EBITDA growth was flat on Q0Q basis for the small-cap stocks, while it grew by 1.95 per cent on a YoY basis. 

The median PAT growth on QoQ basis was highest for the mid-caps at 2.93 per cent, while on a YoY basis, the large-caps have fared better. Small-caps on an average have struggled to deliver profits.

The EBITDA margins slipped on a QoQ basis across the board. However, on a YoY basis, the EBITDA margins of the mid-caps grew by 2.65 per cent.

The PAT margins de-grew on an average for large-caps, mid-caps and small-caps on QoQ basis. The PAT margins on YoY basis reflected a growth of 4.58 per cent for the mid-caps, while for the large-caps and small-caps, the margins had declined. 

Sensex Q4FY18 performance 

Out of the 30 Sensex stocks, 26 companies managed to reflect growth in net sales on both QoQ and YoY basis. Almost 15 Sensex companies managed to show growth in EBITDA on both QoQ and YoY basis. There were 14 companies that have declared growth in PAT on both QoQ and on YoY basis. Merely 7 Sensex companies reported expansion in both EBITDA margins and PAT margins. 

Jayant Manglik
President, Religare Broking Ltd. 

❝Most of the sectors that did well in Q4 will sustain earnings growth momentum❞ 

How did Q4FY18 results fare for mid-caps? 

Q4FY18 results have been a mixed bag, depending upon the sector which is being considered. However, on an aggregate basis, the mid-caps under our coverage have registered ~10% growth in net revenue, leading to a net profit growth of ~11%. On the margin front, while a sector like auto witnessed some pressure on account of the higher raw material prices with global metal prices being firm, consumer companies largely managed to improve their margins on account of improvement in topline. Notably, a few of the managements also indicated continued lingering impact of GST transition being felt in their businesses. 

Which sectors in your view managed to deliver superior earnings growth within the mid-cap and small-cap space? 

In terms of sectors in the mid-cap space, auto and auto ancillary, capital goods, consumer, NBFC, IT and private banks delivered superior earnings growth. On the flip side, PSU banks and pharma continued to disappoint on a Y-o-Y basis. Further, in certain sectors like IT and private banks, the mid-cap companies outperformed their larger peers across most parameters. 

Looking at Q4FY18 earnings, in which sector do you see earnings growth momentum? 

Based on the results and the management commentaries, we expect the earnings growth momentum to sustain in most of the sectors that performed well in Q4 and these include auto and auto ancillary, capital goods, consumer, NBFC, IT and private banks. Going forward, while a good monsoon will be one of the triggers that will support growth, a higher interest rate regime could be a potential challenge in the foreseeable future. 

Arun Thukral
MD & CEO, Axis Securities 

❝Q4FY18 results confirmed that the consumer demand is back on track❞ 

How have the Q4FY18 results been? 

The results for most of the sectors have been positive, being in line with what was estimated mainly due to increasing consumption-led demand. Q4FY18 would be recalled for the confirmation that the consumer demand is back on track. The FMCG volume growth, which indicates a pick-up in consumer demand, be it rural or urban, has been strikingly noticed in Q4FY18. HUL, ITC, Dabur posted excellent volume growth. FMCG saw an increase in demand from both rural and urban consumers and was captured in the volume growth of the companies. Auto OEMs are seeing a sustained recovery in the rural demand, while urban demand continues to be stable. Passenger vehicles (PVs) and 2-wheelers (2Ws) have strong demand from rural and urban pockets, whereas pick-up in infrastructure activities is driving orders for commercial vehicles (CVs). NBFCs and private banks with retail focus have done well post the growth opportunities created from the formalisation of the economy. Housing finance companies have reported good results, driven by developer/project loans. Metal industries also reported good results as the global metal prices are moving upwards. In the telecom industry, ARPU was down and is expected to stay depressed until the time small players get merged with bigger ones to realise synergies and remain competitive. 

What is your take on the PSU banks post Q4FY18 results? 

The PSU banks have largely reported losses, led by high credit costs and MTM provisions, as well as a higher operating expense due to incremental gratuity provisions toward enhanced gratuity ceiling. The PSU banks and private banks have shown a sharp spike in slippages, led by the RBI’s revised guidelines. We feel that the PSU banks are still not out of the woods and they would continue to lose market share to private banks, both on the lending and deposit sides. After the healthy CASA inflows post demonetisation, the CASA growth has now stabilised and deposit growth in 4Q has been led more by bulky term deposits. Margins have been largely stable, even as the cost of funds has increased slightly across the board. 

The risk threshold parameters under the RBI’s prompt corrective action (PCA) framework shows the weak situation of Indian PSU banks. 11 PSU banks accounting for 20% market share are already under PCA, with further 16% (5 more banks) vulnerable to PCA in the near term. Given this background, we would prefer private banks with retail focus over the PSU banks.

Which sectors have gained momentum in Q4FY18? 

FMCG companies have performed well. Rural development has led to stabilised consumption demand with an upside potential as the per capita income further improves. The normalised trade channel has led to improved profitability; price hikes are being visible across categories after passing the GST-related benefits and increase is also seen in the intensity of new product launches. The companies have reported gross margin expansion, along with volume, sales and EBITDA margins. Low raw material costs aided margins of food companies. Apart from the demand, the shift from the unorganised to the organised (impact of GST implementation) made discretionary companies outperform expectations in Q4 results. The automotive industry has also gained momentum from the increased demand coming from the rural market for PVs and 2Ws. The urban demand has also been stable and the rise in infrastructure activities has led to an increase in demand for CVs. We expect the demand momentum to continue for both FMCG and automobiles sectors following the expected ‘normal’ monsoon and improving per capita income. 

Which sectors have surprised positively and which ones have surprised negatively? 

Biggest surprise – FMCG turned out to be the biggest surprise in terms of better operating parameters such as volume, sales, EBITDA margins. This is the third consecutive quarter that we have seen that rural sales have grown faster than the urban sales for almost all companies. The companies executed cost-efficiency and improved product mix for boosting profitability. The rural demand has picked up on the expectation of good monsoon and medium-term outlook is promising due to sustained benefits from GST and normalisation of trade channels. 

Biggest disappointment- Pharmaceutical sector has disappointed the most as the Q4 results were below expectations. The pharmaceutical industry is going through a dull phase in its life cycle. The main reason for this is the US FDA issues and the US market price. While the US FDA issues may get resolved in the coming months, pricing in the US market is making us sceptical about the prospects of the pharmaceutical sector

Q4FY18 Sectoral Earnings 

Chemicals & Fertilizers Industry

 

Major chemical and agro-chemical companies have come up with financial performance for the last quarter of FY18. The agro-chemical companies disappointed the street as these companies could not live up to the financial performance expected of them. However, the forecast of favourable monsoon this year is expected to revive the agro-chemical companies going ahead.

We have analysed 36 chemical companies according to their market caps. During Q4FY18, the industry reported decent revenue growth of around 14 per cent on a YoY basis and 8 per cent growth on a QoQ basis. Also, at the operating level, the industry has delivered growth of around 48 per cent on a YoY basis during Q4FY18. Also, in terms of profitability, the industry has delivered significant growth of 96 per cent YoY, and a moderate growth of 16 per cent on QoQ basis. 

The chemical major, Pidilite Industries, reported muted revenue growth of 3 per cent, whereas its PBDIT remained same. However, it has outperformed at the bottomline level with a jump of 235 per cent. Further, Godrej Industries posted moderate growth of 6 per cent in revenue, but registered tremendous growth of 136 per cent in PBDIT and 41 per cent in bottomline. Further, Solar Industries has reported muted growth of 4 per cent in revenue and 8 per cent at PBDIT level and registered 22 per cent growth in terms of profit. 

The overall operational performance of the entire industry was mainly affected by sharp changes in crude oil prices due to the unfavourable macroeconomic environment, which had led to huge volatility in raw material prices. 

Coming to the Fertiliser industry , major fertiliser companies have come up with financial performance for the last quarter of FY18. We have analysed 17 chemical companies according to their market caps. Overall, the industry has delivered significant jump in terms of revenue and operating profit by 98 per cent YoY and 132 per cent YoY, respectively. However, the overall profitability has deteriorated by almost 21 per cent during the quarter. 

The fertiliser major Coromandel International has delivered moderate rise of 4 per cent in its topline. However, its operating performance and profitability declined by 41 per cent and 53 per cent, respectively. On the other hand, GNFC came out with sparkling performance with a jump in its revenue, PBDIT and PAT by 34 per cent, 1573 per cent and 38 per cent, respectively. However, Chambal Fertilisers & Chemicals disappointed with a decline in its revenue, PBDIT and net profit by 2 per cent, 12 per cent and 18 per cent, respectively. 

Most of the fertiliser companies witnessed a jump in prices of raw materials such as phos acid, sulphuric acid and potash by almost 15 per cent YoY, which ruined the operating efficiency of these companies. 

Going ahead, the recent announcement of NBS (nutrient-based subsidy) rates by the government for FY19 are a positive for the sector as it takes care of the increase in input costs. However, the jump in global raw material prices remains a key risk. 

FMCG

 

Financial Highlight: 

Looking at 70 companies from the BSE FMCG index, the revenue growth was 4% YoY, but their net profit dropped by 20% YoY. However, it is better to look on a segmental basis to understand the performance. 

Key segmental trends: 

FMCG - 

Household and personal care contributed 50% of FMCG while F&B contributed 19%. The top companies in BSE FMCG index have posted single digit topline growth on a QoQ basis, viz Hindustan Unilever net sales was up by 8%, ITC by 9%, Nestle India 6% and Dabur India by 4% due to GST-led reporting changes and demonetisation impact in the base quarter. The F&B segment saw rebound in the topline and operational performance, aided by lower input costs (wheat, barley, maize, sugar) for consecutive quarters and increase in rural demand. Overall, there was a double-digit rise in the mid-sized food stocks, viz Heritage Foods,Prataap Snacks, LT foods with average of 11% hike in PAT YoY. 

Breweries and Distilleries : - 

Within the set, breweries and distilleries reported stellar performance with Som Distilleries reporting PAT growth of 148% YoY, GM Breweries 139% YoY and the giant United Breweries posting a whopping growth of 1250%. This was on the back of better volumes and lower costs with demand for premium and craft beers remaining strong.

Sugar : - 

Sugar companies witnessed substantial drop in their bottomline due to lower realisation triggered by higher sugarcane production. The government's efforts to raise import duty, increase subsidy to crushing companies and increase in ethnol blending did not help much. The stocks which mainly faced the heat were Ugar Sugar, which posted a PAT decline of 106% YoY, Dwarikesh Sugar 120% YoY decline and Balrampur Chini posting decline of 121% YoY. 

Growing awareness, easier access, and changing lifestyles are the key growth drivers for the consumer market, whereas favourable monsoons, growing rural demand and direct distribution channel with new initiatives and premiumisation of products will have a positive impact on the FMCG sector. 

Banking 

We analysed 34 banks, grouping them under private banks and public sector banks. The current Q4FY18 earnings overall indicate that “all is not well” in the banking and financial system. The NPA problem has opened the Pandora’s box of problems and the recent frauds have added to the worry of the RBI and the government.

 

Public sector banks: PSU banks recorded heavy deterioration, with their losses crossing the Rs 50,000 crore mark as compared with Rs 18,000 crore loss in the previous quarter. The total GNPAs increased by 15 per cent QoQ and 45 per cent YoY, which adds to the worry. The total NII remained weak, with a decline of 4 per cent QoQ and an increase of 1 per cent YoY. The provisioning remained higher at 94 per cent QoQ and an increase of 140 per cent YoY, which acted as a drag on profits for the banks. The bellwether SBI and Punjab National Bank posted heavy losses for the quarter, with strong jump in GNPAs and the resultant provisioning.

Private sector banks: The private banks were better off compared to their public sector peers. However, the concern on asset quality remains the key risk for private banks too. The total NII for private banks grew by a meagerly 4 per cent QoQ and 15 per cent YoY to Rs 895,601 crore in Q4FY18 as against Rs 777,266 crore in Q3FY18. However, provisions for the NPAs in private banks increased as in public sector banks (doubled to Rs 19,576 crore on a QoQ basis). This led to sharp decline in net profits by 37 per cent QoQ and 33 per cent YoY. Axis Bank posted net loss of Rs 2,500 crore due to steady increase in its GNPAs by 37 per cent QoQ. The total GNPAs for private banks increased by 18 per cent QoQ . HDFC Bank, Kotak Mahindra Bank and RBL Bank maintained their strong growth during the quarter, while Yes Bank emerged as the best performer with stellar performance across the board.

The IBC resolution process aided good results, with the resolution of one major account of Bhushan Steel providing some relief to the bank. Going forward, we see resolution process to remain the key trigger in FY19 for improvement in asset quality and a strong GDP growth will aid growth in advances.

Pharma sector

We looked at 79 pharma companies to understand the trends in their financial performance in Q4FY18. We see that on an average, the companies reported low single digit growth of 11% on a YoY basis and the same on a QoQ basis. 

Looking at large-cap pharma companies, we see that it has been a mixed bag, with companies having domestic focus or biosimilars faring better than those having international footprint. Natco Pharma continued its growth trend, reporting a solid 32.9% YoY growth and this was followed by Cadila Healthcare and Biocon, which grew by 28.5% and 25.6%, respectively. We see a marked improvement in profitability, with average growth of 23% in EBITDA. However, the PAT was a mixed bag with Piramal Enterprises reporting exceptional growth of 1201% on a YoY basis, while the net profits of Cipla and Lupin slid by 352% and 304%, respectively. 

For the mid-cap pharma companies, the average sales were up by 6%, with exceptional performance by Granules (sales up 39.1% YoY). However, EBITDA showed extreme patterns of range with huge profits and losses. However, on a QoQ basis, EBITDA was down by 19%. The net profit was also down by average 19% on a YoY basis. The mid-cap pharma companies continue to face mixed operating environment and the uncertainty of pricing in the mature markets had a huge impact on these companies. 

The average growth of small pharma companies was better than their large-cap peers. Their sales grew 13.3% on a average, with exceptional performance from Krebs Biochemicals & Industries (sales up 230% YoY, but down 60% QoQ) and Piramal Phytocare (sales up 137% YoY, but down 63% on a QoQ basis). Profitability on an average improved by 24%, while PAT improved on an average by 20%. 

We see that after two years of muted growth and pricing pressures, the pharma companies are expecting improvement in the environment. The margins were however lower due to the poor product profiles, higher R&D spending and marketing expenses. The companies with foreign exposures are also are facing higher compliance issues from the USFDA. Major incidences of the same were seen in Lupin, Indoco Remedies, Sun Pharma, Alembic, Alkem, Aurobindo and Glenmark. We expect Biocon to perform better in future due to the product profile of its biosimilars. We are still to see a major recovery in the pharma sector and the outlook remains subdued. 

Construction sector (real estate and infra)

 

For reviewing infrastructure and real estate sectors' financial performance in the fourth quarter of fiscal 2018, we analysed 20 companies. The aggregate sales of these 20 companies involved in real estate and infrastructure space rose almost 15 per cent in Q4FY18 over the corresponding quarter of previous fiscal. The outlier in terms of net sales was Indiabulls Real Estate, which registered a remarkable consolidated sales growth of 364 per cent YoY. Also, infrastructure players like Sadbhav Infrastructure Project and MEP Infrastructure Developers reported strong net sales growth of 96 per cent and 80 per cent YoY, respectively. 

In terms of operating profit, the aggregate operating profit of theses 20 companies’surged by almost 23 per cent YoY. Notably, all these 20 companies’ aggregate net profit jumped almost 184 per cent YoY, which indicates that overall these companies are doing better at the operational level. 

The government’s impetus to affordable housing and regulatory reforms like RERA are expected to give boost to the real estate sector. However, due to the higher unsold inventories with developers and the strict regulatory reforms, the real estate prices may remain stagnant going forward. Further, Government of Maharashtra has kept its ready reckoner rates unchanged for FY2018-19. 

NHAI has awarded 150 road projects of 7,397 km in FY18 as against 4,335 km in FY17. In the last five years, average length of road projects awarded by NHAI was around 2,860 km. Looking at the past records, the length of projects awarded in FY18 is at an all-time high. Due to the heavy orders in the financial year 2018, the order book of most of infra companies are in healthy position. Notably, India will go for a general election next year (2019) and we believe this will result in speeding up of infrastructure spending which, in turn, will benefit major players in the infrastructure space. 

IT industry

 

We took up 68 companies in our analysis, ranging from small-caps to large-caps. The revenue growth from mid-teens in FY17 have tapered down to low single digits for the first three quarters of FY18. However, it rebounded again to mid-teens (16% YoY) in Q4FY18, supported by benign rupee depreciation (6.4% in CY2018). However, profitability took a dip due to higher employee cost and lower margins (EBITDA down ~80% YoY and ~35% QoQ basis). 

IT biggies like TCS, Infosys, HCL reported single digit growth in revenue on YoY and QoQ basis. However, L&T Infotech, Mphasis, Mindtree posted double digit growth in topline. The net profits of biggies like Infosys and Wipro also were down on YoY and QoQ basis. 

We see mid-cap companies have fared better in terms of revenue and profitability with Polaris, Take Solutions, Mastek posting double digit revenue growth on a YoY basis for the quarter. However, most of the small-cap companies have shown de-growth in revenues in Q4FY18, except Moschip Semiconductor which grew exceptionally by 226% YoY.

Profitability-wise, outliners like Trigyn Technologies, Polaris, 3I Infotech and Zensar Technologies depicted YoY net profits jump of 1588%, 428%, 385% and 190%, respectively. However, the small-caps bore the brunt of lower profits and rising costs while mid-cap companies’ were a mixed bag. On an aggregate basis, net profit of all 68 companies was down by ~74% YoY, but increased by ~40% QoQ. 

Being export-oriented, rupee depreciation is a positive tailwind. In FY19, the industry experts expect industry exports to grow by 7-9%, which would be better than the last fiscal. However, the stringent H1B visa regulations and uncertain spending by mature markets might act as an overhang. Overall, the trend is expected to remain cautiously positive for the industry. 

The key emerging digital technologies, which include Saas, cloud analytics, robotics and artificial intelligence would continue to be the growth drivers for the industry in the near term. These digital technologies would account for 80% of the incremental IT spending. As per the NASSCOM’s latest report, the Indian technology and services industry is on the track to reach its goal of USD 200-225 billion in revenues by 2020. 

Conclusion 

With Q4FY18 results coming out in line with the market estimates, the focus will shift on Q1FY19 results. While the telecom and pharma sectors, along with PSU banks, disappointed in terms of quality of results, the FMCG sector impressed with its overall performance. The earnings growth momentum was seen in auto and auto ancillary sector, along with NBFC, IT and private banks. For the markets, there are visible headwinds in the form of the possibility of hardening interest rates, rising crude oil prices and political uncertainty (2019 elections). To move up, the markets will have to overcome all these fears and will also need the support of earnings growth from a wider gamut of sectors. 

Going forward we expect volume growth in sectors line FMCG , Auto and Pharma however the pricing pressure and rising cost can erode margins in the range of 50 to 100 bps.