If we look at aggregates of ex-financials, be it Nifty50, Next150, Next300 or Top 500 market cap stocks, revenue and operating profit de-grew on YoY basis, say experts.
The words “mixed bag” best describe the September quarter results. A muted demand environment amid a general economic slowdown weighed on corporate earnings in Q2FY20, say experts.
Year-on-year numbers are not comparable, as many companies moved to lower corporate tax rates and reduced their deferred tax liabilities or assets to account for the lowered tax.
“The Q2FY20 results season has been a ‘mixed bag’. Given the slowdown in economic growth, one should see the results season sector by sector,” Pankaj Bobade, Head of Fundamental Research, Axis Securities Limited, told Moneycontrol.
The Q2 numbers were dismal barring banks and non-banking financial companies (NBFCs), Dharmesh Kant, Head, Retail Research, IndiaNivesh, said.
“If we look at aggregates of ex-financials, be it Nifty50, Next150, Next300 or Top 500 market cap stocks, revenue and operating profit de-grew on YoY basis,” Kant said.
Largecaps continued to outperform midcap and small-caps in these challenging times. Despite tax rate benefits, profitability was still muted in the midcap and small-cap space.
“At the Nifty level, including banks & NBFCs, sales were largely flattish, while the bottom line grew a healthy 15% YoY (adjusted for Bharati Airtel) due to a recovery in earnings in banking space and overall tax-related benefits,” ICICI Direct said in a report.
“For the listed universe (~3,000 companies), topline de-grew 1.1% YoY while bottom line de-grew 16.6% YoY. Large bottom line decline is owing to a one-time special charge at Bharati Airtel and Vodafone Idea. Excluding this, the aggregate bottom line increased 7.7% YoY,” it said.
A list of 10 stocks that were downgraded by brokerage firms after the September quarter results:
HDFC Securities Ltd downgraded New India Assurance (NIA) to sell, with a target price of Rs 116.
NIA is India’s largest insurer but continues to make high underwriting losses (1H COR: 116.4%). The company’s competitive positioning is only weakening and the brokerage firm remains concerned about NIA’s ability to get high quality (profitable) business in the near future.
HDFC Securities estimate an FY22E adjusted return of equity (RoE) of just 7.2 percent, and can at best assign a valuation of just 0.6x Sep-21E ABV (less 10% discount for expected 10.4% supply). Given the recent run-up in the price, HDFC Securities downgraded the stock to sell.
HSBC downgraded GIC Housing Finance to hold after the September quarter results but raised its target price to Rs 285 from Rs 265.
Flood losses, hurricane claims and crop losses resulted in deterioration of loss ratio, HSBC said in a note. The gross written premium was up by 14 percent over Q2FY19.
The investment income fell 17 percent on a YoY basis to Rs 1,800 crore. Shareholders’ funds fell 9 percent from Q1FY20, while the solvency ratio fell too. After the recent rally seen in the stock, the upside remains limited which resulted in the downgrade.
Edelweiss Securities Ltd downgraded Future Consumer to hold from buy and reduced its target price to Rs 27 from Rs 34.
The brokerage firm took into account the performance on revised parameters and increasing losses in subsidiaries/JVs, not to mention the need to improve cash flow and strengthen the balance sheet.
The company is revamping its growth strategy—rationalising stock-keeping units (SKUs) to notch up profitable revenue growth. Together with this FRL’s stance of not expanding small-format store resulted in the pruning of revenue growth guidance to 10–15 percent for H2FY20 and 15 percent for FY21 (from 20-25%).
Emkay Global downgraded National Aluminium Company Ltd (Nalco) to sell post and reduced target price to Rs 37 from Rs 43.
Nalco reported a very weak set of Q2FY20 numbers, driven by weak commodity prices and shortage of linkage coal due to strikes at Talcher fields resulting in the shutdown of 80 smelter pots.
Extended monsoon also disrupted coal supplies, hence operationally Q3 should be weak. In addition, plans to diversify into unrelated minerals outside India at a peak of euphoria for lithium and cobalt could be value-dilutive, the brokerage said.
Emkay revised its FY20E EBITDA/PAT by 62%/66%, factoring in dismal Q2 results and also cut FY21/22E EBITDA by 24%/3% factoring in lower profitability.
Emkay Global downgraded SAIL to sell, with a target price of Rs 29, as the company’s numbers were below expectations due to a weak economic environment and operational challenges.
Operational EBITDA stood at a two-year low; revenue recognition of old contracts and inventory gains boosted reported EBITDA.
High debt, continuing capex and operational issues at blast furnaces were the reasons for the downgrade.
Geojit Financial Services downgraded Voltas to reduce and put a target price of Rs 648. Voltas is India’s leading air-conditioning and engineering services company.
Top line and margins remained under pressure due to weak consumer demand and slower economic growth. The net revenue remained flat YoY at Rs. 1,415cr, as a higher unitary cooling products (UCP) segment revenue was largely offset by a weaker revenue from electromechanical projects (EMP) segment amid a sluggish consumer demand.
In FY19, Voltas derived 51 percent, and 45 percent of its turnover from EMP and UCP segments, respectively.
The brokerage firm reduced its FY20-21E estimates as they are yet to see pick up in private investments and revival in consumer demand.
The margins would remain under pressure as signs of economic recovery that would increase consumption were yet to be seen.
Emkay Global downgraded Vedanta to sell and reduced its target price to Rs 131 from Rs 177.
Vedanta reported operationally in-line Q2FY20 results. Vedanta disclosed advances to promoter entity Konkola Copper Mines (KCM) toward the purchase of copper cathodes. KCM is under official liquidator since May 2019, and Vedanta has sought international arbitration in the matter.
The brokerage firm downgraded Vedanta to sell due to potential write-off of the KCM advances, the possibility of further impairments related to AvanStrate, the outcome of Corning lawsuits and reduced guidance for H2FY20.
Edelweiss Financial Services downgraded Galaxy Surfactants to hold but raised its target price to Rs 1,542 from Rs 1,405.
Galaxy Surfactants (GSL) posted Q2FY20 results largely in line with estimates, as higher volume growth (10% versus 6% estimate) was counterbalanced by a weaker margin. This kept EBITDA growth muted at 1 percent on a YoY basis.
Volume growth perked up by a recovery in Egypt even as India market sagged. The brokerage cut revenue estimates but maintained EBITDA as key input prices fell. It raising PAT by 6 percent each for FY20E and FY21E, factoring in the lower tax rate.
Operating challenges coupled with GSL’s 28 percent rally since June 2019, prompted the brokerage firm to downgrade the stock to hold.
Geojit Financial Services downgraded Vinati Organics Ltd (VOL) to reduce from accumulate, with a target price of Rs 1,816.
VOL enjoys global leadership in two specialty chemicals, with a market share of 70 percent in IBB (isobutyl benzene) and 80 percent in ATBS (2-Acrylamindo 2-Methylpropane Sulfonic Acid).
Q2FY20 revenue de-grew by 3 percent on a YoY basis, but PAT grew by 69 percent YoY led by higher operating profit and a corporate tax cut.
The brokerage maintained a positive outlook on VOL, given the capacity expansion in ATBS and launch of Butyl phenols, which is expected to drive growth for two-three years.
However, in the near-term revenue growth is likely to be impacted by lower off-take from the IBB segment and slowdown in ATBS business.Despite this, the higher contribution of ATBS business in the sale mix and lower cost will cushion the profitability.
Geojit expects earnings to grow by 17 percent CAGR over FY19-21E. Given lower-than-expected revenue growth and premium valuation, the brokerage firm values VOL at 24x (26x earlier) on FY21E.
YES Securities downgraded Siemens (SIEM) to reduce, with a target price of Rs 1,491 as rich valuations remain a concern.
SIEM is banking on its digitalisation offerings to help grow the company in the absence of large projects. Its order book stood at Rs119bn (~0.9x TTM sales) and hence it would have to post strong order inflows in the next two or three quarters to maintain revenue and profitability growth in FY20E/FY21E.
“We downgrade FY21 EPS estimates by 5% to factor in lower revenue visibility and profitability assumptions. We expect SIEM to post revenue/EBITDA/PAT CAGR of 6%/6%/10% over FY19-21E respectively,” said the note.
After a 35 percent stock rally in the last three months, SIEM is trading at 44x/41x to FY20E/FY21E earnings, implying rich valuations, added the note.
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