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MOSL: VOICES | INDIA INC ON CALL- In-line quarter-Financials drive performance off low base-Commentary weakens in Autos and Consumption

VOICES | India Inc on Call: In-line quarter; Financials drive performance off low base; Commentary weakens in Autos and Consumption

 

As India Inc bids a goodbye to the FY19 earnings-report season, we - like always - choose to look at corporate commentaries as a sidelight to questions of how businesses across sectors have been performing in a constantly changing environment. In this report, we present detailed takeaways as we refine the essence of India Inc 'Voices'.

• The 4QFY19 corporate earnings-report season was in line with our expectations for both the Nifty and the MOFSL Universe. Domestic Cyclicals continued driving earnings growth for the second consecutive quarter, led by Financials, which contributed almost the entire earnings delta but still fell short of expectations. The EBITDA margin for the MOFSL (ex-Financials & OMCs) Universe shrank by 100bp to 19.1%, dragged by Automobiles, Consumer, Metals, O&G and Telecom. On the other hand, Cement and Utilities delivered YoY expansion in the operating margin. Corporate Banks continued reporting an improvement in the slippage/asset quality trends. Domestic Cyclicals drove the quarterly performance, led by Financials. Defensives' growth was dragged by Telecom losses, while Global Cyclicals reported flattish growth with Metals and Oil & Gas delivering better-than-expected numbers.
• In BFSI, asset quality worries appear to be diminishing, with banks reporting a decline in stressed assets, led by benign slippages and higher recoveries/write-offs during the quarter. However, credit costs for most corporate banks remain elevated due to ageing-related provisions toward NCLT accounts (Essar Steel, Alok and Bhushan Power), downgrade of the ILFS exposure, and a few other names getting added to the stressed pool. Coverage ratios across several banks have improved strongly. AXSB/ICICIBC among private corporate banks and SBIN among PSBs guided for normalization in credit cost. Most banks like HDFCB, AXSB, KMB and ICICICBC guided for faster growth in retail term deposits. Most NBFCs continue facing a key challenge of liquidity. Nevertheless, they have managed this situation well but curtailed disbursements. All vehicle financiers have guided for a slowdown in growth in FY20 too.
• Consumer companies across the board indicated a near-term slowdown, mostly led by rural. During the past quarter, the operating environment was marred by subdued consumer demand, liquidity crunch in the channel and prolonged winter. However, companies have started witnessing some improvement in the liquidity situation post elections in their respective regions and are anticipating rural markets to benefit from government measures over the coming quarters. In Autos, demand was impacted by (a) weak buying sentiment in rural areas, (b) liquidity crunch and (c) a high base. While most OEMs have slashed their growth guidance for FY20, demand is likely to be driven by BS-VI-related pre-buy from 2QFY20. In FY20, the PV industry is likely to grow at 3-5%, 2W at mid-single-digit and the tractor industry at 5-8%.
• In IT, revenue growth was healthy, but there was a pause in acceleration with commentary and guidance suggesting moderate conservatism on the growth front in the coming quarters. Pressures continued on the margins side. Low unemployment levels in the US, high attrition and a tightening visa regime have been the main factors behind the contraction in the gross margins.
• In Healthcare, the base business in the US generics segment continues facing pricing pressure, albeit at low intensity. Companies are selectively looking at opportunities stemming from portfolio rationalization by peers and are directing their R&D spend mostly toward high-value complex generics with low competition.
• In Capital Goods, overall execution was healthy, given the liquidity crunch in the economy. Order inflows declined due to weakness in domestic ordering in the run up to the general elections. Management commentary suggests that small- and medium-sized orders are flowing in, but large-ticket orders are on hold and should see finalization now that election uncertainty is behind.
• In Cement, managements indicated that demand slowed down in Apr-May'19 due to the unavailability of labor on account of elections. However, the long-term demand outlook remains optimistic, given the government's increasing focus on housing, infra and irrigation projects.