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MOSL: VOICES | INDIA INC ON CALL-Another miss-earnings downgrade intensity increases; Commentaries reflect underlying economic slowdown

VOICES | India Inc on Call: Another miss; earnings downgrade intensity increases; Commentaries reflect underlying economic slowdown

 

In this report, we present detailed takeaways from the 1QFY20 conference calls as we refine the essence of India Inc. 'Voices'.

• The 1QFY20 corporate earnings-report was below our expectations for both the Nifty and the MOFSL Universe. Domestic Cyclicals continued driving earnings growth for the third consecutive quarter, led by Financials, which contributed almost the entire earnings delta but still fell short of expectations. The Nifty delivered 5% earnings growth for the quarter versus our estimate of 12%. The intensity of downgrades went up with 93 companies witnessing 3%+ earnings cut (v/s only 30 companies witnessing 3%+ earnings upgrades). We had cut our Nifty EPS estimate by 4% to INR560, and now expect 13%/16% profit/EPS growth in the Nifty for FY20, singularly led by corporate banks. Barring Cement, IT, Consumers, NBFC and Private Banks, all other sectors missed expectations in the quarter. Corporate commentaries have weakened across the board, especially on the Consumption front, as the impact of economic slowdown, coupled with muted sentiment, is reflected in demand.
• In BFSI, the asset quality situation has worsened sequentially with several banks witnessing higher slippages and guiding for new stress accounts. Many banks have guided for a moderation in loan growth, led by economic slowdown (both consumption and capex remain weak), tight liquidity and high promoter leverage (which has resulted in higher number of defaults). SBIN, AXSB and RBK reported an increase in stressed assets to select corporate groups (resulting in an increase in credit cost estimates), while ICICIBC, HDFCB and KMB delivered a steady performance. Overall, banks have improved their PCR to further strengthen the balance sheet. Recoveries from NCLT-related cases have been delayed but are expected in FY20, which could drive an improvement in asset quality. Commentary across most companies is cautiously optimistic. Vehicle financiers are expecting a slowdown in loan growth, despite considerable market share gains across products. While some players like SCUF expect a marginal increase in cost of funds, most NBFCs believe that the worst on cost of funds is behind.
• Consumer companies indicated the likelihood of a slowdown in the near term, mostly led by rural. Most companies have guided for a revival only in 2HFY20. If volume growth slowdown persists, promotional intensity could increase, leading to weak sales growth.
• In Autos, most OEMs have slashed their growth guidance for FY20, despite expecting a recovery in 2HFY20 led by normal monsoon, festival season demand and pre-buying ahead of BS6. However, companies have refrained from providing outlook due to the uncertain environment.
• In IT, most companies highlighted a robust deal environment, with INFY recording highest-ever deal wins (USD2.7b). 1Q also saw strong headcount addition by most companies, making a case for offshore migration of some of the onsite centric work. Margins remain a challenge across the industry amid investments in localization, digital capabilities and rising attrition rates with talent crunch.