A detailed analysis of the third quarter numbers of over 7600 companies showed all-around improvement in financial parameters. Aggregate sales growth of 8% was better than the 6.7% in the previous quarter. EBIDTA (earnings before interest depreciation & tax) margins improved a tad as well.
At the start of 2018, market mood was euphoric despite anaemic corporate earnings growth. With the latest earnings season over, the situation is just the opposite. Corporate earnings are looking up—partly the base effect of the demonetisation quarter, and partly the easing of GST woes—but outlook on the market has turned cautious.
All companies – indications of broader recovery, low base may have aided
A detailed analysis of the third quarter numbers of over 7600 companies showed all-around improvement in financial parameters. Aggregate sales growth of 8% was better than the 6.7% in the previous quarter. EBIDTA (earnings before interest depreciation & tax) margins improved a tad as well.
Post-tax profit grew 4.9%, a turnaround considering the decline of 8% during the third quarter of the previous year. A notable trend was the reduction in overall interest outgo, as interest cost as a proportion of sales at 12.4% was 70 basis points less compared to the preceding quarter.
The number of companies reporting a decline in profitability also fell from the previous quarter.
Nifty – back in the double-digit growth trajectory
For the companies in the headline Nifty index, the double-digit growth in profitability was impressive.
For the group, the year-on-year growth in sales, operating profit and net profit at 9%, 18% and 13.6% respectively was much better compared to 7.4%, 14.7% and 9.7% growth reported in the previous quarter.
What’s even more interesting is the fact that the performance was largely driven by non-financial companies, with their overall profitability rising by a healthy 15.3%.
The numbers from the financial pack was somewhat marred by the loss reported by State Bank of India on account of higher provisioning post the asset quality divergence from RBI’s audit. Consequently, for the aggregate of all the financial companies in the Nifty, the profitability growth was a modest 6.8% although the private sector pack reported a steady show.
Besides SBI, the other notable misses from Nifty were the two large pharmaceutical companies –Dr Reddy’s and Lupin as well as Tata Motors.
Pharmaceutical sector continues to reel under pricing pressure for the US generic business besides company-specific issues with the US regulator. We do not see this reversing in a hurry and investors got to place their bets selectively. For Tata Motors, their luxury car business under Jaguar Land Rover was disappointing although domestic business staged a turnaround.
PSU banks – poor show that might continue this way for a while
Amid the otherwise comforting earnings picture, public sector banks disappointed, with most of them reporting losses. Results were weighed down by higher provisioning for non-performing assets as well as investment depreciation and lower treasury gains on account of hardening of yields on Government securities.
The poor show by PSU banks impacted the aggregate picture for the BSE Small cap index (significant decline in profitability) that has a meaningful representation of state-owned banks.
Sectoral trends – consumers, CVs and metals strong
For the market’s favourite mid-cap space, the performance of the BSE Mid Cap index was reassuring with significant improvement in operating performance (operating profit growth of 23%) leading to 7% growth in profit, against a profit decline of 13.4% reported in the immediately preceding quarter.
The notable trends within the broader universe was a decent performance of large number of consumer companies, both discretionary as well as staples (thanks to the low base of demonetisation) with encouraging volume performance and positive commentary about revival in rural demand.
In the automobile pack, commercial vehicles along with ancillary companies catering to this sub-segment were the stand out performers.
Cement companies had a modest quarter where despite some improvement in volumes, cost pressures took away the sheen.
In the infrastructure space, road and railway capex related companies continued to report robust performance. While private capex still remains elusive, many of the companies alluded to green shoots in order recovery.
Metals space had a strong show and the effect trickled down to smaller companies in the ecosystem.
The largely positive sectoral trends had their reflection in the aggregate performance of BSE 500 index that reported significant improvement in profitability.
A decline in interest cost pushed up the performance of the BSE 200 aggregate as well.
The truly winning sector - IT
However, the sector that truly deserves a mention in this quarter is Information Technology (IT). While the commentary from large and mid-sized companies seem to suggest a stronger pipeline of deals and a better year ahead, some of the midcap companies are beginning to see better days with ramp up in their digital revenues. The worst clearly seems to be behind for the sector, but investors need to differentiate men from the boys.
How should investors be positioned?
In sum, the result season broadly was an incremental positive for the markets. Now the tailwinds from earnings will confront several headwinds like the continued strength in commodity prices and hardening of G Sec (government securities) yields on inflation outlook etc.
The recent circular directing banks to recognise asset quality stress upfront will not only warrant higher near-term provision but can push the capex recovery beyond 2019 elections besides exerting pressure on yields (should the government commit more funds for salvaging banks).
The trend in GST collection also remains a critical monitorable in impacting the direction of government finances as well as interest rates.
Finally with the global economy is on a strong footing, the hardening of rates in developed world could lead to outflow of capital from emerging markets.
The street is pinning hopes on a very robust earnings recovery of the order of mid-twenties. The debacle in the baking space raises serious doubts about the magnitude of the earnings recovery.
While we expect earnings momentum to sustain in Q418 aided by the weak base partially, we are still not convinced about heady growth numbers in FY19 and believe that the aggregate growth in profitability could be in high-teens.
Nifty is fairly valued at 18.5x FY19 projected earnings. However, the current phase of consolidation (also led by introduction of LTCG tax) could throw up interesting investing opportunities.
Looking beyond the near-term noise of populism and politics, a stable political formation post FY19 could set the stage for reforms version 2 and support secular recovery in the markets. Selective buying of high conviction ideas in this consolidation phase would therefore prove rewarding.
MORE WILL UPDATE SOON!!
0 comments:
Post a Comment