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    Q2 results: Weakest topline growth in 8 quarters; but here's why equity market is still upbeat


    Among the factors leading to weak topline growth, the most important is the inventory clearing strategy adopted by the auto sector in the second quarter. Despite this, companies reported good bottomline growth thanks to the cut in corporate taxes.

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    Though the growth in aggregate revenues was weak, India Inc has reported net profit of 25% y-o-y during Q2.
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    India Inc reported decent numbers during the first quarter of 2019-20, raising hopes of a similar performance in the second quarter. However, the aggregate topline growth disappointed once again. “As per the current trend from Nifty and NSE 500 companies, topline growth in the second quarter is the weakest in eight quarters,” says Sunil Sharma, CIO, Sanctum Wealth Management.

    Among the factors leading to weak topline growth, the most important is the inventory clearing strategy adopted by the auto sector in the second quarter. For example, the second quarter aggregate revenues of auto and auto ancillary sectors fell by 12% and 20% respectively y-o-y. Why is the market not reacting negatively to these weak numbers? Since auto companies release their sales volume on a monthly basis, the market already knew this data and everyone was looking for realisation figures. Since the discount offered by auto companies during August and September were not as high, the actual fall in revenues was less than expected.

    Global recessionary fears and the resultant fall in metal prices is the other reason for weak aggregate revenue growth. For instance, the aggregate revenue from steel and non-ferrous metal sectors fell by 13% and 3% respectively y-o-y. With 7% and 6% revenue cut q-o-q, their problem is acute. Slowdown in construction (aggregate revenues came down by 10% y-o-y and 9% q-o-q) was majorly a result of the erratic monsoon. The telecom sector too saw huge revenue cuts of 38% y-o-y and 23% q-o-q in the second quarter.

    Weakest show in 8 quarters
    Compiled By ETIG Database. Data as on 6 Nov.

    Bottomline zoomed
    Though the growth in aggregate revenues was weak, India Inc has reported net profit of 25% y-o-y during the second quarter. Corporate tax is the main reason behind this. “Since companies had already paid high tax in the first quarter before this reduction and they have reversed it in the second quarter, what we are seeing is a two quarter impact,” says Sharma.

    However, the tax reduction impact was not the same for all sectors. While aggregate auto net profit remained flat, the FMCG sector was able to report 25% net profit growth as most of the FMCG companies are high tax payers. However, this factor did not benefit the infotech sector much as most of the companies were already enjoying several tax exemptions.

    As expected, banks and non-banking finance companies (NBFCs) reported good numbers, especially retail facing banks like HDFC Bank and Kotak Mahindra Bank. With the reduction in new stressed assets, turnaround in corporate facing banks is still continuing. While results from SBI was on expected lines (reported net profit growth of 486% y-o-y and 14% q-o-q), the other two large corporate facing banks failed. “The weak numbers by ICICI Bank and Axis Bank during this quarter was the result of the write off of deferred tax assets, which more than neutralised the tax reduction benefits,” says Anil Sarin, CIO - Equities, Centrum Broking.

    Improvement in margin, especially by domestic companies, is the third reason for the aggregate net growth. The fall in global commodities, triggered by global recession fears, helped margin improvement in several sectors like auto, FMCG, etc. For example, fall in prices of steel, aluminium, copper, etc will help auto companies to bring down their costs. However, the margin improvement in FMCG surprised the market. “FMCG numbers were better than expected as most companies reported decent volume growth and gross margin expansion’, says Naveen Kulkarni, Head of Research, Reliance Securities.

    How did the external oriented sectors, mostly infotech and pharma do? As usual, pharma sector is a mixed bag and company specific. However, good numbers by companies like Dr Reddy’s Lab helped the sector exhibit decent aggregate growth. “While large cap IT companies report better than expected numbers, mid cap companies were not able to do that,” says Sarin.

    The auto sector was the pain point for the second quarter. However, it is expected to do well in the coming quarters. With decent Diwali sales, most of the inventory has been cleared and the sector is coming out of the slump. “Since they have cleared inventories, incremental pressure will be less. But commercial vehicles segments might continue to face trouble,” says Sarin.

    As mentioned earlier, the second quarter net profit also includes a part of the tax impact of the first quarter. Since the same will not be available in the third quarter, be ready for a lower net profit growth.
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