What earnings revival? Non-BFSI Nifty firms take first hit in profit growth in 6 quarters
Cumulative profit of 40 non-BFSI firms fell 36 per cent year-on-year.
Cumulative profit of 40 non-BFSI firms fell 36 per cent year-on-year after growing 18.37 per cent in the same quarter last year. Net sales increased 22.13 per cent YoY during the quarter against a 12.02 per cent rise in the year-ago period.
During the quarter, India Inc witnessed headwinds in the form of liquidity tightening, rupee volatility, slowdown in government spending (with onset of elections) and global trade issues.
“Some companies recorded decent revenue growth with volume support from the consumption space, while a weak rupee aided incremental revenues in certain sectors (IT). Some other companies (in non-BFSI) reported lower profitability on account of margin pressure owing to currency volatility, higher costs and commodity prices along with slower-than-expected revenue growth,” Centrum Broking said in a report.
Besides Tata Motors, oil marketing companies IndianOil (IOC), HPCL and BPCL too had a depressed quarter, which resulted in a drop in profitability for the non-BFSI Nifty pack.
Brokerage Motilal Oswal has 'buy' ratings on Nifty stocks ONGC, Mahindra & Mahindra, YES Bank, Hindustan Unilever and Tech Mahindra, with price targets of Rs 181 and Rs 840, Rs 270, Rs 2,120 and Rs 860, respectively.
While the performance of OMCs continued to be impacted by lower gross refining margins (GRMs) and inventory losses, auto companies suffered due to subdued consumer sentiment leading to higher discounts and also higher raw material and advertising costs.
Brokerage Prabhudas Lilladher is cautious on the OMCs. It has a 'hold' rating on HPCL with a target price of Rs 225.
BPCL posted 77 per cent YoY drop in profit for the quarter, while HPCL saw profit shrink 87 per cent and IOC 91 per cent.
Among auto firms, bottom lines declined 1.03 per cent for Bajaj Auto, 7.85 per cent for Hero MotoCorp, 3.09 per cent for Maruti Suzuki and 3.05 per cent for Eicher Motors.
If Tata Motors and OMCs are left out from the list of 40 companies, then net profit of the remaining 36 firms grew 17 per cent YoY on a 24 per cent rise in net sales.
In the non-BFSI segment, Reliance Industries emerged the best-performing company in terms of sales growth (up 56 per cent), while Sun Pharmaceuticals came out on top in terms of profit growth (up 286 per cent YoY). Vedanta was worst performer in terms of net sales (down 2.84 per cent), while telecom major Bharti Airtel reported a 72 per cent drop in profit.
JM Financial has a 'buy' rating on Sun Pharma with a price target of Rs 575. “Post multiple false dawns, Sun Pharma returned to a normalised earnings trajectory in 3QFY19 with various elements of a diversified earnings engine on display. There was incremental comfort on concerns including terminal decline of US generics, domestic pharma growth being slower than historical trends, slower than anticipated ramp-up of key specialty assets, discomfort around certain corporate transactions and structures and capital allocation discipline,” the brokerage said.
Tata Motors continued to face challenges given the weak performance by its subsidiary Jaguar Land Rover owing to market conditions in China. Ambit Capital has a ‘sell’ rating on Tata Motors.
Tata Motors’ consolidated bottom line was hit in Q3 due to Rs 27,838 crore asset impairment in its British arm Jaguar Land Rover (JLR).
“JLR lost share in China’s premium car market from 9 per cent at the beginning of 2018 to 4 per cent now. JLR’s volumes declined around 27 per cent last year and are now contracting by 40 per cent YoY per month. Note that the Chinese premium car market didn’t shrink YoY even a single month in 2018, implying JLR’s underperformance was caused by Audi’s 400 bps share gain in the second half (H2) of 2018 over H1,” Ambit said in report.
Nifty’s BFSI companies, on the other hand, posted over 35 per cent year-on-year rise in net profit for the quarter. Axis Bank posted 131 per cent growth in profit at Rs 1,680.90 crore. Bajaj Finance, HDFC Bank, Kotak Mahindra Bank and IndusInd Bank posted 48 per cent, 20 per cent, 13.53 per cent and 5.21 per cent YoY rise in profit.
On the other hand, State Bank of India reported a net profit of Rs 3,954.80 crore for the quarter against a net loss of Rs 2,416.40 crore in the same quarter last year. Indiabulls Housing Finance, YES Bank and ICICI Bank posted 60.12 per cent, 13.73 per cent, 6.97 per cent and 2.75 per cent YoY drop in profit.
HDFC posted a net profit of Rs 2,113.80 crore on a standalone basis against Rs 5,300 crore profit for the year-ago quarter. However, the numbers are not comparable as the mortgage lender had a one-time gain from its insurance arm IPO last year.
Of the 50 Nifty companies, 16 (32 per cent) posted earnings above expectation, 15 (30 per cent) had them in line with expectations, 10 (20 per cent) reported a mixed set of numbers and nine (18 per cent) reported numbers below estimates, Centrum Broking said.
“The earnings season has been a mixed bag. Incrementally, in FY19, we are pencilling in about 9-10 per cent earnings growth for Nifty, but we see an improving trajectory going into FY20 where we are looking at 16-18 per cent earnings growth,” said Shibani Sircar Kurian, Kotak Mahindra AMC
Kurian said if earnings growth does play out as per expectations, a lot of the valuation concerns that are there, especially in the minds of some of the FII investors when they are looking at India vis-à-vis the emerging markets pack, would start getting corrected. From here on, she expects to see improvement in the earnings growth trajectory and that, she said, should start playing out post elections.