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MOSL: VOICES | INDIA INC ON CALL-Domestic Cyclicals led by Banks take center stage-Strong commentary in Corporate Banks and Financials

VOICES | INDIA INC ON CALL: Domestic Cyclicals led by Banks take center stage

As India Inc bids a goodbye to the December earnings-report season, we – like always – look at corporate commentaries to understand how businesses across sectors have been performing amid a challenging backdrop and an upcoming very crucial political event. In this report, we present detailed takeaways as we refine the essence of India Inc ‘Voices’.

** 3QFY19 earnings for both Nifty companies and our broader MOSL Universe were largely in line with our expectations. Revenue growth fast-tracked to multi-quarter highs, underscoring the gradual demand improvement, largely led by commodities. However, the margins trajectory was sluggish, dragged by Automobiles and OMCs. In Financials, corporate banks’ performance and commentary were sequentially better, providing visibility on a broader earnings pick-up in FY20. NBFCs reported sequential moderation in disbursements and profit growth. Consumption remains on a strong footing. IT reported another quarter of revenue growth acceleration amid concerns about margins. Auto commentaries, however, indicated some demand moderation. Cement profitability, however, disappointed.

** In BFSI, net slippages moderated in the quarter as the NPL cycle appears to be nearing completion, and banks cited an improved trend in recoveries and upgrades. Most corporate banks expect a further improvement in the slippage trajectory over FY20, which, coupled with NCLT resolutions, is likely to drive a sharp fall in provisioning expenses. Majority of the slippages continue coming from the disclosed watch-list/vulnerable pool (ILFS downgraded in 3QFY19). Most banks remain optimistic on the demand environment and guided for a stronger trend in credit growth, led by retail loans (including portfolio buyout), although corporate growth remains modest. Banks expect a gradual recovery in margins, which until now for many were in a compression mode. In NBFC, the performance was divergent across sectors, and more so, across companies within a sector. Some companies, especially in the housing finance space, have guided for lower AUM growth. For vehicle financiers, the upcoming central elections, coupled with developments on monsoon, hold the key to performance in 1HFY20. In 2HFY20, CV financiers are likely to benefit from pre-buying ahead of BSVI transition from April 2020.

** Consumer had a steady quarter. It turned out to be the sixth consecutive quarter of rural sales growth outstripping urban sales growth. Commentary, too, remains positive, given the expected election spending by political parties and the government’s schemes for farmers/tax relief for middle class (as announced in the recent budget). Almost all companies under our coverage guided for a recovery in the gross margin from 4QFY19. In Autos, demand was impacted by (a) fuel inflation and a rise in insurance cost, (b) weak buying sentiment in rural areas and (c) liquidity crunch. While most OEMs have slashed their growth guidance for FY19, the demand outlook for 4QFY19 is better, as most of the prevailing headwinds are subsiding. PV industry is expected to grow at 4-6% in FY19 (prior expectation: 7-8%) and the tractor industry at 10% (prior expectation: 10-12%).