The September quarter earnings season is nearing its end with most companies reporting results in line with the estimates.
The reduction in corporate tax rates — announced in September — 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 troubled sectors in the economy, has helped revive market sentiment.
According to an earnings review report by brokerage Motilal Oswal, most companies in their purview have met expectations on the sales, earnings before interest, taxes, depreciation, and amortization (Ebitda), and profit before tax (PBT) front but surprised on profit after tax (PAT) owing to the revision in tax expenses post the corporate tax cuts.
In terms of PBT, automobiles and healthcare have exceeded, while cement and capital goods have missed expectations, the report added. Notably, the trend in earnings revision has also remained balanced so far in the Q2 earnings season which was skewed significantly in favor of downgrades in the past quarters. As per the report, this can be attributed to the revised lower tax assumptions.
Management commentary in this earnings season has been incrementally positive for automobiles and corporate banks, stable for fast moving consumer goods (FMCG), and cautious for IT and capex-oriented companies.
According to the brokerage, among the Nifty constituents, Maruti Suzuki, HCL Tech and Tata Motors exceeded PBT estimates, while Indian Oil Corporation (IOCL) and Ultratech missed expectations.
They expect Nifty earnings per share growth of 11.5 percent for FY20. Barring corporate banks, they estimate 3.8 percent YoY profit growth for the Nifty in FY20.
Motilal Oswal's sectoral highlights of the September quarter earnings: Banks: Retail banks reported healthy earnings, while large corporate banks were affected by a one-time DTA charge, though operating profits remain healthy, said the report. Banks also reported a slight moderation in loan growth led by a slowdown in the corporate book reflecting the weak economic environment, while retail loan growth remained steady. Meanwhile, asset quality trends were mixed amidst the challenging macro environment. NBFCs: For non-bank finance companies, Q2 has been a slow quarter. Vehicle financiers such as Shriram Transport Finance and M&M Financial Services witnessed a slowdown in growth, while Micro, Small and Medium Enterprises (MSME) financiers such as Shriram City Union Finance have witnessed a sharp decline in disbursements. In housing finance, the trends were divergent. Retail housing finance growth has been strong for some players like LIC Housing Finance but weak for others like PNB Housing Finance. However, all players have been able to maintain margins well. In addition, asset quality has been largely maintained for most. FMCG: Consumer companies delivered an in-line performance in the September quarter. However, management commentary did not indicate any signs of revival in volume momentum in Q3FY20. Nevertheless, with a good recovery in monsoon in the latter half of the season, hopes for a revival from Q4FY20 remain high. Marico, United Spirits and Colgate reported lower-than-expected volumes and yet performed in line or better on EBITDA and PBT, while HUL and ITC declared broadly in-line results on all fronts. Auto: Auto companies have beaten expectations led by cost-saving initiatives. While the festive season led to a recovery in
demand, original equipment manufacturers (OEMs) would wait for the sustenance of demand momentum post the festive season as they moderate consumer schemes.
IT: In IT, some pockets of weakness have offset the positive seasonality of Q2.
Uncertainty around banking and financial services 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. Retail has also remained under the water with no signs of recovery in the near term. Telecom, media, and life sciences have been the key growth vectors for the quarter. Midcap IT gained momentum (relatively) as competitive pricing pressure led to a loss of renewals for larger players, a gain for lower-priced deals by midcaps. Margins have slipped by a few percentage points YoY due to structural cost pressures.
Cement: In cement, volume growth has been in line for most of the players, while Dalmia Cements and Ramco Cements surprised positively as they gained market share. Realizations were weak across India, with the decline being more prominent for companies based in south/east than north/central. The cement industry was not able to benefit from the sharp decline in fuel costs in Q2FY20 due to the high-cost inventory lying with companies. The brokerage expects the benefits to flow in from next quarter.