India Strategy 2QFY20 Interim Earnings Review

South Indian Bank’s shares plunge 18% after Q1 profit declines 77%

INDIA STRATEGY: 2QFY20 Interim Earnings Review; Operationally in line; tax cuts drive profit beat; Commentaries improving

–          The September quarter earnings season is at the halfway point, with 92 MOFSL Universe and 28 Nifty companies announcing their results as of 2nd Nov’19. While the aggregate earnings have been in line with estimates, commentary is turning incrementally positive, especially on the Consumption front. The reduction in corporate tax has largely resulted in better-than-expected profit delivery and also restricted the pace of earnings downgrades. This, combined with various government announcements to revive the troubled sectors, has helped revive market sentiment.

–          Key insights from 2QFY20 results so far: [1] Both the Nifty and the MOSL Universe have met expectations on the sales/EBITDA/PBT front but surprised on PAT owing to the revision in tax expenses post the corporate tax cuts. [2] In terms of PBT, Automobiles and Healthcare have exceeded, while Cement and Capital Goods have missed our expectations. [3] Not all corporates are shifting to the new tax regime due to considerations around MAT credit and other exemptions. [4] Notably, the trend in earnings revision has remained balanced so far which was skewed significantly in favor of downgrades in the past quarters. This can be attributed to the revised lower tax assumptions. [5] Management commentary is incrementally positive for Automobiles and Corporate Banks, while it is stable for FMCG. Commentary remains cautious for IT (especially on margins) and capex-oriented companies.

Key highlights of 2QFY20 results:

–          Sales, EBITDA, PBT and PAT for the 28 Nifty companies have grown at -0.6%, 9.1%, 10.6% and 12.4% YoY, as against our estimates of -0.4%, 1.7%, 9.7% and -1.8% YoY, respectively. Of the 28 Nifty companies that have announced their earnings, 22 have either met or exceeded our PBT estimates.

–          For the MOFSL Universe, sales, EBITDA, PBT and PAT grew -0.3%, 7%, 9.2% and 12.5% YoY, as against our estimates of 0.5%, 2.9%, 10.6% and 1.5% YoY, respectively.

–          The earnings upgrade/downgrade ratio has been balanced so far, with 31 MOFSL Universe companies witnessing upgrades of more than 3% and 29 witnessing downgrades of more than 3%, indicating a revival in earnings momentum.

–          Among the Nifty constituents, Maruti Suzuki, HCL Tech and Tata Motors exceeded our PBT estimates, while IOCL, IndusInd and Ultratech missed our expectation.

–          Our FY20 Nifty EPS estimates have been stable at INR536. We are building in Nifty EPS growth of 11.5% for FY20. Ex-Corporate Banks, we estimate 3.8% YoY profit growth for the Nifty in FY20.

–          Within the MOFSL sectoral coverage, Auto and Metals have seen 12-13% earnings upgrade, while Capital Goods has seen a 7% earnings cut.

Key sectoral trends from the ongoing earnings-report season

[1]  Banks reported a slight moderation in loan growth, led by a slowdown in the corporate book reflecting the weak economic environment, while retail loan growth remains steady. Retail banks reported healthy earnings, while large corporate banks were affected by a one-time DTA charge, though operating profits remain healthy. Asset quality trends have been mixed amidst the challenging macro environment.

[2]  For NBFC, 2Q has been a slow quarter. Vehicle financiers such as SHTF and MMFS have witnessed a slowdown in growth. MSME financiers such as SCUF have witnessed a sharp decline in disbursements. In housing finance, the trends are divergent. However, all players have been able to maintain margins well. In addition, asset quality has been largely maintained for most.

[3]  Consumer companies have delivered an in-line performance. Management commentary did not indicate any signs of revival in volume momentum in 3QFY20. Nevertheless with a good recovery in monsoon in the latter half of the season, hopes for a revival from 4QFY20 remain high.

[4]  Auto companies have beaten expectations led by cost-saving initiatives, resulting in a big beat in margins. While the festive season led to a recovery in demand, OEMs would wait for sustenance of demand momentum post the festive season as they moderate consumer schemes.

[5]  In IT, some pockets of weakness have offset the positive seasonality of 2Q. Uncertainty around BFS is now coming to the fore with most of the companies highlighting an underperformance in the US capital markets and the banking ecosystem in Europe led by lower yields. Margins have slipped by a few percentage points YoY due to structural cost pressures.

[6]  In Cement, volume growth has been in line for most of the players, while DALMIA and RAMCO surprised positively as they gained market share. Realizations were weak across India, with the decline being more prominent for companies based in south/east (down 9-11% QoQ) than north/central (down 1-3% QoQ).

(Review By- Motilal Oswal Institutional Equities)