A promising start

IT’s early days now. Still, fourth quarter earnings have turned out to be better than the previous year’s, but for the exception of IT majors. Only 50-plus BSE-listed firms have communicated their fourth quarter earnings to the stock exchange.

An earnings analysis of the first 50 firms show their profit after tax rose 12.58 per cent for the January-March quarter over the year-ago period. Earnings before interest, tax, depreciation and amortisation, or Ebitda, a measure of operating performance, rose 12.86 per cent while revenue rose 9.48 per cent.

Financial services firms like HDFC Bank, IndusInd Bank and Yes Bank, metal producer Hindustan Zinc and cement major ACC have beaten street estimates, giving a promising start to the earnings season. However, big IT firms. Infosys Technologies and Tata Consult-ancy Services, disappointed the market. But mid-level IT firms, MindTree and Cyient Technologies, reported good revenue growth, though their adjusted profit numbers were mixed. The worry for both big and mid-sized IT firms going ahead, according to analysts, is the rupee strengthening against the US dollar.

HDFC Bank’s fourth quarter net profit was up 18.3 per cent to Rs 3,990 crore against Rs 3,374 crore in year ago-period. Its revenue was up 21 per cent to Rs 12,501 crore from Rs 10,319 crore.

The bank saw a doubling of provisions and contingencies for the quarter to March 2017 at Rs 1,261.8 crore from Rs 662.5 crore in the year-ago quarter, but was not a big concern as it was still a miniscule part of the bank’s total loan portfolio.

Alpesh Mehta, banking analyst, Motilal Oswal Securities, commenting on HDFC Bank’s results, said, "We are positively surprised with the strong operating profit growth of 27 per cent year-on-year helped by strong loan growth of 12 per cent quarter-on-quarter. Beneficial cost of funds is helping HDFC Bank to remain extremely competitive in the market and gain market share. Asset quality is one of the best in the system with low net stress loans of 50 basis points. CASA ratio is the best in the system at around 48 per cent.”

Hindustan Zinc also came out with stellar numbers, with its profit soaring 41.2 per cent to Rs 3,033 crore from Rs 2,148 crore while revenue doubled to Rs 6,260 crore from Rs 3,124 crore year-on-year. The firm’s Ebitda rose 183.5 per cent.

Commenting on the results, brokerage HDFC Securities said, “Hindustan Zinc reported strong numbers driven by higher volumes and strong pricing as the London Metal Exchange zinc prices were up 65 per cent YoY. Also zinc’s cost of production remained stable at $800 levels despite higher coal/met-coke prices, led by higher volumes.”

“Zinc has performed exceptionally well in the past 12 months, led by production cuts globally, which drove deficits. Some of the capacity is now restarting/being scaled up in China, Antamina in Peru, Nyrstar in the US and coupled with slower growth in China, the deficit situation witnessed earlier may not hold,” HDFC Securities said.

Cyient Technologies’ revenue grew 20.7 per cent YoY while its adjusted PAT grew 26.7 per cent. For Mindtree, YoY revenue grew by 11.9 per cent while its adjusted PAT saw a de-growth of 26.6 per cent.

“Mindtree’s challenges through the past 12 months is a perfect example of the tough environment that Indian IT has faced through CY16/FY17. Mindtree’s overall revenue growth slipped sharply from 22 per cent-plus in the September 2015 quarter to 12 per cent YoY in the March 2017 quarter, resulting from significant pressure within top clients,” said Manik Taneja and Ruchi Burde, analysts at Emkay Global Financial Services.

Cement major ACC also reported encouraging numbers. After three quarters of decline, the firm reported a growth in volume this time. ACC’s Q1 results were ahead of estimates with Ebitda at Rs 3,400 crore against analysts’ estimate of Rs 3,100 crore, supported by lower operational expenditure per tonne. “Sales volume growth at 3.8 per cent YoY was a positive surprise and was ahead of our estimate of 2.5 per cent YoY growth,” Emkay Global said.

As fourth quarter results are staggered over several weeks, it will take time before a defining trend is spotted. The coming weeks may distort the current trend.

The IT sector has investors worried and may be the pharma sector results later won’t be any different, given the negative expectations built around them.

The numbers from Tata Consultancy Services fell below street estimates as it reported a 4.2 per cent rise in net profit at Rs 6,608 crore. Analysts had expected a consolidated Q4 profit of Rs 6,662 crore. TCS cited protectionist tendencies in its key markets and currency volatilities as reasons for the mediocre performance.

Emkay Global said, “TCS’s March 2017 quarter performance, a tad better than Infosys, however, failed to live up to the hope and the indication of the management commentary on ‘buoyant demand’ in financial services/ US.”

It went on to add: “Sequen-tial decline from US/financial services was, however, attributed to the end of a large transformation engagement at a large client, with TCS saying that ‘confidence right now is higher than six months back’ citing client indications, deal signings and pipeline.”

HDFC Securities in its earnings report on TCS said, "4Q was marked by skewed growth across services and geographies, and visible challenges in the core geo and core verticals (BFSI, Retail). Additionally, the margin outlook of 26 to 28 per cent Ebit also comes with its downside risks. Structural headwinds (including a shorter contract duration) in TCS’ BFSI and Retail & CPG verticals (which contributes 53 per cent of revenue) are reflecting in its underperformance versus Infosys.”

Infosys reported 3.4 per cent YoY growth in revenue at Rs 17,120 crore against Rs 16,550 crore while profit rose just 0.8 per cent to Rs 3,628 crore from Rs 3,598 crore. Its March quarter results missed expectations, marking the end to a difficult FY17 that started on a high and ended in a low note, analyst said.

“Qualitative commentary suggests that Infosys has still not seen any actual pickup in spending from the US BFS clients, yet though the expectations stay on this count, given the improved sentiment,” Emkay Global said.

raviranjan@mydigitalfc.com