Q2 earnings: Which stocks made the cut and which fell short

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Amar Ambani of India Infoline in an interview with CNBC-TV18's managing editor Udayan Mukherjee takes us through his reading of stocks which posted their second quarter earnings and the road ahead for the companies.

Below is a verbatim transcript. Also watch the accompanying video.

Q: The market seems to be a bit unhappy with United Spirits results. Were you disappointed as well?

A: Partly yes. We did know that the performance will not be as strong as the other quarters. If you split it into four quarters then this is the weakest quarter for the company and it has always been the case. We were expecting numbers not matching up to Q1 or Q4 of last year.

Overall, we are a bit disappointed because the expectation on the revenue front was 31% year-on-year (YoY) growth and what they have delivered is a 26%. While we knew traditionally it is a weak quarter, it has been weaker than even consensus estimates.

If you look at the operating margins, again, what the street was expecting was around 19.5% or close to 20% kind of operating level margins. What the company has delivered is around 16.5% or so.

The one adjustment that everybody needs to make here is there have been some brand launch expenses to the tune of Rs 25 crore or so and all of that has been charged in this quarter itself. Once you make the adjustment for that Rs 25 crore then the operating margins would fall in line.

The other thing that has happened is the interest costs have gone up. It has risen by 31%. For the consolidated entity while the numbers have not been given out by the management what they have mentioned is that the interest cost has reduced slightly which is a positive sign. On the standalone basis, however, it has gone up by 31%. PAT has just seen a 7% growth.

Q: What about Union Bank where the stock has corrected about 9% in two days. Do you think it needs to adjust more after the results?

A: Bank stocks have rallied a lot. Even if you slightly disappoint in your earnings, you could see a heavy selloff on the stock and that is what has happened. The management has been guiding all along for 25% kind of loan growth for this year.

What it has actually ended up achieving is about 4% in the first half which means that from this base onwards, it needs another 20% kind of jump from here for the rest of the year, which seems a bit stretched. Not impossible to achieve but a bit stretched.

The management maintains that it will grow at 5% higher than system growth which is quite material but if that is to happen; it needs to start showing it in the numbers. We will have to wait and see what happens in Q3, but overall business growth was marginally higher at 2.5% QoQ whereas the street expected much more.

Loan growth was just 1% up on a QoQ basis which meant that the credit to deposit ratio also took a bit of a hit and there was a 200 bps drop in that. The biggest negative that happened in the results was that the provisioning went up a long way to meet the RBI requirement of 70% provisioning to credit ratio. Because of that you had a severe issue with the profit as such.

Overall a 28% kind of growth in its GPAs was not something which the market took very well and the stock corrected heavily yesterday. Fundamentally, based on our estimates, there could still be a further 5-6% downside.

Q: What did you make of Usha Martin's numbers?

A: Usha Martin is a bit of a miss. We have a buy rating on the stock though. The stock did do well in the last couple of months and has now corrected. On the volume growth front, they were pretty good. I think they marginally beat our expectations.

On the realization front, there was a 4-5% drop. That is one place where they were affected. The other part is the operating margins which were down by 4% both on a YoY and a QoQ basis. This was due to the fact that their DRI plant was under maintenance and they have to buy it from outside.

The other part is that coking coal prices were also slightly on the higher side for this quarter so that has affected the operating margin front as well. Interest costs are higher, the tax outgo is higher and therefore the PAT levels have not done so well.

If you look at their consolidated picture and the subsidiaries abroad, their subsidiary in Thailand is not doing so well because of political unrest, is what the management tells us. At the same time if you look at their UK subsidiary, there too volumes are under pressure as such. On the overseas subsidiary front there is a bit of a problem.

Q: What happened to the margins of Phillips Carbon Black ? Why did they get beaten up so much?

A: The core business of Phillips Carbon Black is doing pretty okay. If you look at the carbon black business, it has shown a volume growth of 26% and even realizations have jumped very heavily by 23% or so. So the fundamental and the core business are in place.

What hit the margins and the EBIT level was the power business. Power rates are much lower than what they were last year and they have taken a hit there. They were at 65-70 megawatt capacity and those realizations have dropped severely and which is why at the PAT level, you see a 25% kind of YoY drop and a 15% kind of QoQ drop.

But if you leave that part aside, the core business is doing strong and we believe that the stock which is now trading at about 4.5-5 times P/E FY12, it is definitely attractive for long-term investors, if they can ignore this quarter. The wait is slightly longer though.