Q1 Review: Disappointment all over as lower consumption and NPA mess take a toll

Out of 156 companies under our coverage, 20 percent reported lower than estimated sales and 30 percent reported net profit below estimates. Excluding banks, sales grew 7.5 percent and net profit grew 8 percent YoY for the quarter. Mots sectors disappointed but the worst hit were automobiles, metals and minerals, and NBFC.

Automobiles OEMs revenue and EBITDA fell 6 percent and 22 percent, respectively. Cost-cutting initiatives coupled with lower variable expenses due to production cuts helped companies to maintain EBITDA margin on a sequential basis. The demand outlook continues to remain challenging but the OEMs expect some recovery from Q3FY20 on the back of festive season and pre-buying led by BS-VI norms.

NBFC sector continued to remain under funding pressure despite the ease in liquidity condition towards the end of the quarter. Pressure in high ticket real estate and the slowdown in the auto industry continued to impact the performance of NBFCs. Most of the HFCs are increasingly resorting to securitization for additional growth.

Even in the banking space, where expectations were of good revival and turnaround in the NPA cycle, performances were a little disappointing. Slippages remained elevated driven by agriculture and SME portfolio. The quarter lacked the major recovery or resolution in NPA accounts.

Vineeta Sharma

Head of Research|Narnolia Financial Advisors

• 'Corporate earnings to guide market trajectory; Q1 results start on positive note'

• 'Near term upside for Nifty limited; improved earnings in FY20 will drive investment'

• Narrowing of margins, revenue growth differential augurs well for Infosys, TCS’ RoE pegged at 34.8% in FY20

Development of new stress in the industry is posing a threat. Private banks reported 18 percent YoY growth in advances whereas it was 5 percent for PSU banks. Growth for the corporate lenders like Axis Bank, ICICI Bank and SBI picked up whereas major vehicle financier like HDFC Bank, IndusInd Bank and Kotak Mahindra Bank saw some slowdown.

IT midcap companies disappointed on the margins front as well as overall Sales. Barring L&T Technology that improved its margins by 60bps, all other midcap companies margin shrank between 60 bps to 600bps during the quarter owing to revenue miss and increased subcontracting costs and wage revision. Tier-1 companies (TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra) posted growth ranging from -1.8 percent to 4.2 percent QoQ in constant currency terms while overall margin declined in the range of 60bps to 390bps.

In the infra space, the average revenue growth of the coverage universe is 10 percent YoY. The growth was lower mainly on account of lower workforce availability due to general election and delay in appointment dates. Order inflow again remained sluggish but the total order book continues to be strong.

Consumption companies performed better than expectations, though the volume growth was muted. Rural, which was growing at 1.5-1.3x of urban, is now growing at par. Dabur & Marico led the pack with domestic volume growth of 9.6 percent and 6 percent while Emami and Britannia remained laggard. Modern trade continues to grow better while CSD facing erratic demand scenario.

Pharma showed some signs of revival but the trend has yet not established. There was revenue growth of 13 percent for the coverage companies. There was growth due to certain one-off opportunities. Domestic business remained muted due to delayed monsoon and realignment of the distribution network in certain companies.

We factor in 18 percent growth for Nifty earnings in FY20 based on which Nifty is currently trading at 19 times FY20E EPS.

The author is Head of Research at Narnolia Financial Advisors.

Disclosure: The company/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past.