Sectors with positive outlooks are real estate, small appliances and branded apparel, while outlook on autos, select staples and global commodities is more cautious.
Corporates are worried that the economic slowdown that started in financial year 2019 will continue for at least first half of the current fiscal and then the signs of recovery will emerge.
Their concerns are not unfounded, as the first quarter earnings of FY20 were below analysts’ expectations. Whatever growth in earnings was seen, it was majorly in banking and financial sector but on a low base.
"Overall corporate commentary was cautious compared to last year. FY19 annual reports have been written in the context of a weakening economy and slower global growth. While firms are excited about political stability, lower risk appetite and financing challenges temper their enthusiasm," said CLSA after analysing 100 Indian annual reports.
Overall profitability for CLSA coverage increased 15 percent in FY19, but gains were concentrated in financials, excluding which profits were up 1 percent and return on equities were down more than 1 percentage point, the brokerage said.
ROEs (excluding financials) at 11.2 percent were at a 14-year low, with the highest year on year (YoY) expansion in banks and IT, and contraction in autos and telecom sectors.
But, this does not mean all data points are painting a pessimistic picture, the global brokerage said.
The job data for listed companies showed a surprising improvement in FY19, but it was mostly concentrated in the IT services sector.
"Focusing specifically on employment, analysis of companies with more than 4.5 million total employees reveals that job creation, contrary to perception, was a comfortable 4.1 percent in FY19 against 1.4 percent in FY18 (excluding temporary staffing solutions companies). Strong hiring in IT sector drove jobs growth. Hiring at NBFCs was also positive, but surprising and is likely to be a source of job losses ahead," it said.
The spending on corporate social responsibility (CSR) activities, mandatory since 2014, was a serious business in FY19, as it increased sharply compared to FY17.
"Nifty companies spent more than $1 billion on corporate social responsibility (CSR) activities, up 35 percent against FY17, largely led by a legal push. Note that 47 percent of spends was directed towards health and education. Most companies have dedicated board members, staff and foundations for CSR," CLSA said.
The top-10 spenders, including Reliance Industries, HDFC Bank and Tata Consultancy Services from the private sector, accounted for nearly 60 percent of the Nifty CSR spends. Tata Steel and UPL surpassed their CSR targets.
Indian companies also continued to strengthen boards, with 55 percent independent directors and 15 percent women, both at a record high, said the brokerage.
Real estate, small appliances and branded apparel were sectors with positive outlooks, it said. Its outlook for auto, select staples and global commodities was cautious.
CLSA highlighted stocks that are well suited to the emergent macro situation and which are its top buys: ICICI Bank, HDFC, HCL Technologies, Reliance Industries, ICICI Prudential Life, Godrej Properties, Bharti Airtel and Sun Pharma.The brokerage remained bullish on these top 8 stocks and expects them to give double-digit return over the next one year:
Note: The current price date is for September 5.
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