India Inc Results a Mixed Bag

Although the economy is showing signs of improvement, the full potential of India Inc will be visible only in the next 12-18 months
Tanvi Varma/Money Today        Print Edition: September 2014
India Inc Results a Mixed Bag
India Inc Results a Mixed Bag

Ever since the Narendra Modi-led NDA came to power in the recent national elections, 'economic revival' has become the talk of Dalal Street. In this context, corporate earnings have taken over the mantle of indicating the progress we are making. The big ticket events-National elections and Union budget-are behind us and market participants need another hint or clue to decide their next course of action. Sankaran Naren, CIO, ICICI Prudential AMC says the market has seen a good re-rating in the last 10 months and the returns from here on will have to follow earnings.

Consensus among experts is that earnings for April-June period in 2014-15 have been a mixed bag so far. Sandeep Shenoy, executive director-institutional equities, Anand Rathi Securities says, "Numbers posted by players like BHEL, L&T and Coal India still convey some pain in the system. This, coupled with inflation stubbornly refusing to abate, would bring investors to reality." Dipen Shah, head, private client group research, Kotak Securities, adds: "Although the quarterly results show that revenue growth has been slightly better, margins are yet to show major improvement for several sectors."

However, there is a silver lining. According to Vinay Khattar, associate director and head of research, Edelweiss, managements are more confident of putting better results in the second half of 2014-15. Improved consumer sentiment has been the main reason behind the result, he added.

How the Top Companies Fared This Quarter

This can be seen in the better performance displayed by the consumption-related sectors like consumer goods, banking, NBFCs and auto. Among domestic-play industries, auto and housing finance companies stand out for their stellar performance.


Marico surpassed expectations, recording a 25% year-on-year (YoY) growth in revenue and 20% growth in profit after tax (PAT) as it continues to grow in line with, or ahead of, the categories it operates in. Similarly, Britannia Industries results were also ahead of estimate with net sales growing 15% YoY and PAT 27%, among the highest in the category. The company has maintained its margins by taking many cost-containment measures, which are likely to be sustained. HUL too reported a healthy sales growth of 13% YoY led by double-digit sales growth across segments. Jubilant Foodworks however, disappointed with EBITDA margins declining 12.4% and PAT declining 18% YoY. Higher promotions, outlet expansion and higher operating cost dented margins.


Numbers posted by players like bhel, l&t and coal india still convey some pain in the system..


ED, Institutional Equities, Anand Rathi Securities


Tata Motors reported a stellar quarter with net sales growth of 37% and EBIDTA margins of 18%. According to Piyush Jain, equity research analyst at Morningstar India, Tata Motors derives substantial profitability and returns generated from its premium brands Jaguar and Land Rover (JLR). Over the last five years, JLR revenue has grown at a compounded annual growth rate (CAGR) of 40% and is likely to continue achieving strong international growth. In fact in 2013 Tata Motors derived 90% of its operating profit from JLR. While the company's Indian operations delivered a loss of Rs 600 crore, it still commands 50% of Indian commercial vehicle market and will benefit from economic growth and government spending, says Jain.

Bajaj Auto saw sales growth of 7% YoY and quarter over quarter (QoQ) which was low due to the muted sales growth of its two wheelers but it met expectations. Bajaj's competitor Hero Motocorp reported better numbers with net sales growing 14% and PAT by 4% YoY, scooter sales were robust, growing by 16.2%.


The banking sector registered mixed performance. There was deterioration in asset quality led by PSU banks where restructuring was higher compared to private banks. According to a report by CARE ratings, for 2013-14 the gross NPAs of PSU banks rose 38.2% and restructured advances stood at 7% while gross NPAs of private banks was comparatively lower at 13.6% and restructured advances at 2.5%.


Revenue growth has been slightly better, but margins are yet to show major improvement for several sectors.


Head, Private Client Group Research, Kotak Securities

Also, credit growth was subdued for most of the banks and remained at 11-13%, given a slowdown in economic activity and high interest rates for 2013-14. On a YoY basis, private sector banks-ICICI and HDFC Bank-met or beat street expectations with high double-digit PAT numbers. "ICICI Bank grew net interest income by 17%, driven by loan growth of 15% and expansion in net interest margin by 13 basis points to 3.4%", says Suruchi Jain, equity research analyst at Morningstar. Deposits (up 16%) grew faster than advances (15%), which would help to further expand margins. HDFC Bank's earnings were up 21% YoY as good cost control made up for slower revenue growth. The bank's NIMs are amongst the best in the industry at 4.4%. Meanwhile, Axis Bank posted results in line with estimates with NII and PAT at about Rs 3,300 crore and Rs1,670 crore. The net interest margins (NIMs) retained at 3.9% with loan growth moderating to 16% YoY.

On the other hand, PSU banks showed moderate growth in revenue and PAT. Although SBI reported healthier growth in sales and PAT than expected with NIM at 3.5%, its asset quality was stressed with gross NPA at 4.9% and higher slippages from mid-corporate and SME segments. Union Bank showed better performance with PAT growth of 19% YoY with stable asset quality, while NIMs are still low at 2.6%.

Housing finance companies posted results in line with estimate. The loan growth was at 15% with spread stabilising. Emkay Global expects HDFC to log a 14.5% CAGR over 2013-14 and 2015-16 in net interest income (NII) driven by 16.5% CAGR in loans. Uptick in developers' loans could provide upside. Overall, Khattar is positive on private banks as they have shown good governance and adequate capital for growth.


The capital expenditure (Capex) related sector (capital goods, metals) has underperformed as capacity utilisation across the sector is still at around 70% and hence no new expansion has been announced, says Khattar. Naren believes that the pickup in capital goods cycle will only happen in 2015-16 i.e. once coal shortage comes down and project-related environment issues are sorted out. Take BHEL for instance: the company's revenues and margins were both weak with an even poor order inflow for the quarter. EBIDTA and PAT plunged 44% YoY and 58% YoY, respectively. The decline of 20% in the top line highlights that the state of the power sector continues to be challenging.

Shah of Kotak Securities says that infrastructure companies have not reported any major increase in order book. Although L&T reported a 10% increase in top line YoY, quarterly numbers were not very encouraging. L&T's order inflow was lower than management guidance of 15% as the domestic market remained sluggish in power, hydrocarbon and metal space. The company, however, has maintained a guidance of 15% revenue growth on 20% growth in order inflow. "The commodity cycle could be softening and that bodes well for many heavy industries in India," says Shenoy of Anand Rathi.


Since domestic capex cycle is yet to pick up,export-oriented/import-parity industries are expected to cruise well. According to a recent report by Emkay Global Financial Services, within IT companies Tier-1 companies have positively surprised on margins on the back of utilisation improvement (barring Wipro). On the other hand, mid-tier peers surprised negatively on margins. Revenues from North America for the larger companies bounced back. Tier-1 companies saw a 1.2-5.5% QoQ US revenue growth with TCS being the star performer in June 2014 quarter delivering a 5.5% dollar revenue growth while Wipro's quarterly change was at the lower end owing to decline in US and EU revenues. Infosys results were in line. The company left 2014-15 dollar revenue growth guidance unchanged at 7-9%, which implies a 2.3-3.5% sequential growth over next three quarters. Among mid-tier companies Mindtree did well with a robust revenue growth. However, margins were subdued due to fall in currency realisation. Appreciation of about 3% QoQ in rupee affected margins across companies.


Healthcare showed interesting numbers on the back of higher US and domestic sales. Sun Pharma posted lower-than-expected numbers with revenues growing 13% and PAT at Rs 1,478 crore. However, the management has maintained its revenue growth guidance for 2014-15 at 13-15%. Among other companies, Lupin beat street expectation with revenues rising 36% YoY and 8% on a QoQ basis driven by 56% rise in US sales and about 29% growth in its Indian business. According to an IIFL report, the company aims revenue of $5 billion and is expected to grow PAT at 22% CAGR over 2013-14 and 2015-16.

Glenmark Pharma's recent results too were better than expected. Revenue grew 19% whilst PAT growth grew 42% YoY. According to a report by Motilal Oswal, with an uptick in the US business the company is likely to witness 20% earnings growth.


As consumer demand picks up, we should see it percolate into earnings over the next two quarters. the 2015-16 sensex eps estimate would be rs 1,820


Head-Research, Edelweiss


The biggest factors that would impact earnings going forward would be interest rates and the monsoon. In its latest bi-monthly monetary policy review, the Reserve Bank of India left the repo rate and CRR unchanged at 8% and 4% respectively. Khattar is of the opinion that the first rate cut will happen in the fourth quarter of this financial year, although uncertainty around that outlook has increased. This can be seen in the underperformance of rate sensitive sectors, compared to the broader market. Further, monsoon has been a huge cause of concern this year. However, a substantial pick up in rainfall since the 2nd week of July along iwth with improving sowing data has caused relief.

Shenoy believes the earning traction of 15-16% on the EPS front will stabilise markets. With the fundamentals of the economy strengthening and the government initiating policy reforms, sentiments are improving. "As consumer demand picks up, we should see it percolate into earnings over the next two quarters and the 2015-16 Sensex EPS estimate would be Rs 1,820 (at around Rs 1,420 On August 19),' says Khattar.

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