Earnings season holds out sliver of hope
Buoyed by a perceptible easing of the margin pressure, especially on account lower raw material prices and declining forex losses, companies have largely done better than during the first quarter. While topline growth has been sluggish, both profits and margins have perked up, prompting analysts to suggest that the corporate downturn could have bottomed out and a rebound is likely in the coming quarters, especially with an interest rate cut round the corner.
For 742 manufacturing and services companies (excluding oil firms) that issued their results till November 15, the overall year-on-year EBITDA margin has expanded by 14 bps (basis points, one bps being one-hundredth of a percentage point), after a decline of nearly 100-150 bps in previous quarters, according to CRISIL’s latest results update for Q2 FY’13. Notably, small-cap companies, despite a tepid 7 per cent Y-o-Y revenue growth, have reported a sharp 114 bps improvement in margins compared to a decline of 12 bps reported for large-cap companies. Strong performance by sectors like cement, pharmaceuticals, textiles, agricultural commodities and media, which have a greater share in small-cap universe, have contributed to the perceptible uptick in margins.
Large-caps that delivered above estimates included Maruti, Bajaj Auto, Dr Reddy’s, IDFC, Sun Pharma, Zee Entertainment, NTPC Ltd, L&T, HCL Tech and ICICI Bank, with a number of sectors defying the subdued sales trend that was visible across most sectors. Those that disappointed in earnings included Tata Steel, SAIL, Cairn India, Tata Motors, PNB and ONGC.
A sectoral snapshot would provide greater insight into the companies that did well and the specific reasons for the uptick in the reported numbers.
On the whole, two-wheelers, cars and commercial vehicles have largely seen weak revenue growth due to pressure on volumes, in both, domestic and export markets. According to Motilal Oswal’s September 2012 quarterly review, among those bucking the trend, Bajaj Auto reported better than expected numbers, buoyed by higher realisations. Car market leader Maruti Suzuki too reported better than estimated results, buoyed by lower staff cost and royalty provision write-back, along with a favourable forex position. Tata Motors’s Jaguar & Land Rover arm reported in-line performance with quarter-on-quarter margin improvements driven by favourable market mix and forex gains.
The capital goods sector, considered a proxy for business investment plans, has been consistently battered in the government’s official IIP estimates released every month. Flat revenues y-o-y, due to weaker execution and lower off-take by industrial customers was seen, with order flows continuing to be under pressure. Private sector equipment majors L&T and Thermax, however, reported better than estimated numbers, even as ABB and Havells largely disappointed. L&T’s net profit was 11 per cent higher than estimates, driven by improved margins and higher other income. In power generation, the overall climate continues to remain constrained and BHEL maintained that the intake in FY’13 is expected to be limited.
The sector posted a mixed performance, with topline growing on a year-on-year basis due to capacity addition and higher tariff but declining sequentially due to lower plant load factor and availability, according to a research report by IndiaNivesh. PSUs witnessed strong PAT growth, led by 21 per cent YoY net profit growth for NTPC (on higher capacity addition). However, independent power producer(IPPs) like Adani Power and JSW Energy disappointed due to higher dependency on imported coal. Tata Power reported a net loss due to impairment charges for Mundra project.
In the consumer goods sector, bellwether stock Hindustan Unilever surprised positively on margin expansion, ITC met cigarette volume expectations but surprised on margins from the tobacco business, Britannia disappointed on Biscuits volume growth that was up just 2 per cent. Moderation in volume growth was visible across companies in the sector, with Britannia, HUL, Dabur and Marico showing a perceptible moderation in volumes, even as ITC posted a sequential increase in volumes.
In the Healthcare space, Dr Reddy’s Labs reported higher EBITDA margins driven by strong topline growth, while Sun’s better than expected operational performance was led by strong profitability at overseas arm Taro and favourable currency equation, according to the Motilal Oswal report. Cipla reported higher than expected EBITDA, driven by better sales mix in its export business and favourable currency. Ranbaxy witnessed higher than expected core profitability led by higher Lipitor sales and partly due to favourable currency.
In the technology space, TCS surprised positively with volume growth of 5 per cent quarter-on-quarter while Infosys’ margin decline of 170bps QoQ despite no impact from wage hikes. In Telecom, all three listed operators –Bharti, Idea and Reliance Communications –beat estimates by 2.5-3 per cent at EBITDA level led by better-than-expected cost control. Mobile revenue, though, was below estimates due to pressure on traffic growth.
Keeping with the trend, the current results season does leave us in a better position in terms of the outlook for the coming quarters, both in terms of financial outlook and stock performance. In the auto sector, Maruti Suzuki has indicated better demand due to festive season and new Alto launch, with the order book for diesel vehicles remaining strong. Tata Motors guided better second half 2012-13 while L&T has maintained its guidance in its second quarter guidance. Among consumer goods players, HUL indicated a moderation in discretionary categories volume growth. Pricing component to continue to fade while ad-spends will be kept competitive to deal with any rise in competitive intensity on the back of input cost deflation. Among tech firms, Infosys retained its 2012-13 US Dollar revenue growth guidance of 5 per cent. Wipro guided for 1.2 per cent-3.2 per cent quarter-on-quarter US$ revenue growth in the second quarter of 2012-13. TCS and Cognizant expect furloughs (temporary unpaid leave) to impact growth in the third quarter of the fiscal. Among telecom firms, Bharti’s capex guidance unchanged at $3-3.2 billion (as against 2011-12 capex of $2.8b).
So at a time when the economy is certainly slowing and the pressure on the fisc is mounting, for investor at large, the latest quarterly results come augur hope. In the final analysis, going by the latest quarter’s results, small-cap companies seem to have fared much better, mainly in terms of being able to rein in material costs as well as maintaining better margins. Some of the larger-sized companies too managed to turn the corner by sourcing materials cheaper and managing inventories better. Mid-caps have struggled to fend-off margin pressure.
FMCG (Fast-moving consumer goods), cement, IT services and hotels have largely done well during the quarter. Troubled sectors such as infrastructure, real-estate and consumer durables too have shown a mild revival. Beyond these sectors, leaving aside some strong individual performances, subdued topline numbers do carry a warning note. For investors, though, it might be prudent to keep in mind the fact that stronger realisations for cement and agricultural commodities – sugar and tea, decline in raw material prices for textiles, healthy revenue growth for media and pharmaceutical sectors has resulted in the improvement in profitability for small-cap companies in these sectors. From a sectoral perspective, these sectors look like good bets, if the latest quarterly performance is anything to go by.
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