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The earnings story may be improving with better revenue growth trends, and asset quality of corporate banks turning around, but a new risk has emerged in the auto and NBFC sectors, said Anoop Bhaskar, Head of Equities, IDFC Mutual Fund.
Subsequently, he believes that though the direction of the earnings revision is still trending down, broad-based revenue growth indicates a robust demand environment, which should help companies raise prices in the future, Bhaskar said in a presentation on Q3 (Oct-Dec) FY19 earnings review. The presentation was released on March 7.
He said the corporate bank cycle is appearing to be bottoming which should help reduce loan loss provisions and boost profitability in the future.
Historically, Q4 PAT has been higher than Q3 PAT. So, even assuming the same level of absolute profit in Q4 as in Q3 sets the stage for very robust profit growth in Q4FY 19, given the low base.
Q3 earnings review - sector positives
Bhaskar said the recently concluded earnings season witnessed broad-based sales growth across sectors, but auto was the only sector to post single-digit sales growth.
In the presentation, Bhaskar said IT companies posted good revenues with 2-5 percent constant-currency QoQ revenue growth, and he expects 10 percent plus YoY revenue growth going ahead.
“Employee base growth for the four IT majors at 8 percent year-on-year was at an 11-quarter high, reflecting the management’s confidence of revenue growth visibility,” he said in a note.
Giving an update on the banking sector, Bhaskar pointed out that NPA (non-performing assets) ratios at the four large corporate banks (SBI, ICICI, Axis, BoB) declined 1.0 percentage point in the third quarter and cumulative 1.8ppt from their March 2018 high.
"~60 percent coverage ratios and significant earnings upgrades in the Oct-Dec quarter indicate the bad loan cycle has likely ended," Bhaskar said.
Among other sectors, that indicated a positive trend was consumer discretionary companies.
Small-ticket consumer discretionary reported good Oct-Dec quarter earnings with same-store sales for retailers and restaurants rising by 10-20 percent. He feels the delayed festive season may have boosted Oct-Dec quarter demand.
On pharma front, US sales for pharma companies surprised positively across the board including Sun Pharma and Cadila Healthcare posting sales growth of slightly over 8 percent and 46 percent, respectively.
Q3 earnings review - sector negatives
Among the negatives in Q3 earnings, EBITDA (earnings before interest, taxes, depreciation, and amortization) for auto, telecom, and energy sectors fell by 14 percent, 12 percent and 17 percent, respectively.
"Staples saw in-line volume or revenue performance, although margin challenges rose, partly due to volatility in commodity prices driving 1-5 percent earnings cuts for select companies," Bhaskar said in its note.
Barring HDFC Ltd and LIC Housing, NBFCs had a weak quarter with disbursements shrinking with companies focussed on managing near-term liquidity.
On a consolidated basis, for the 9M FY19, excluding financials – sales, EBITDA and PAT grew 21.3 percent, 14.8 percent, and 11.5 percent, respectively.
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