Some food for thought
"When good people in any country cease their vigilance and
struggle, then evil men prevail."
—Pearl S. Buck (American Writer, 1892-1973)
Word for the day
Minimoon (n)
A short, usually inexpensive honeymoon, often followed by a
longer honeymoon later on.
Mid-year review - Corporate
performance
Corporate
performance in past 6months has been mixed. While the headline growth numbers
have not been encouraging, some pockets of market have shown distinct signs of
recovery while many others continue to slow down.
BFSI and
construction sectors witnessed smart recovery from a low base. Whereas auto,
consumers, OMCs and metal were major drags.
Financials contributed
almost the entire earnings delta though still falling short of expectations.
Cements and power utilities also did well as both utilization and realization
saw some improvement.
Nifty Earnings Q4FY19:
- Nifty top-line growth slowed to 10% yoy in Q4 FY19. Muted demand sentiment.
- EBITDA Margin improved to 19% in Q4 against 17% in Q3.
- PAT growth stood at 19% yoy in Q4, led by banks. Ex. BFSI the PAT growth was 6% yoy.
- 12/50 companies beat estimates while 14/50 companies missed estimates in Q4.
Nifty Earnings for full year FY19
- Nifty revenue grew by 18% yoy in FY19 while PAT grew by 12% yoy.
- EBITDA Margin for Nifty universe came to 18% in FY19.
- Nifty FY19 diluted EPS from continued operations came to INR 488.
NSE 500 earnings
- Broad markets earnings were also driven by financials.
- Revenue growth in 4QFY19 was ~11%.
- EBIDTA margins, ex financials, improved ~18%.
- PAT growth was negative at -5%. However, ex BFSI, PAT growth came at healthy 30%.
Key highlight of the 4QFY19 results
Slowdown in
consumption demand
The results for
4QFY19 and monthly volume data for past two months indicates a definite
slowdown in consumption demand. The impact of the slowdown on earnings is
particularly strong in case of discretionary demand like auto, durable goods,
paints, personal care etc. A significant contraction in EBITDA margins was seen
for autos in particular. Overall FMCG growth came off from strong growth
reported in 2018.
For 1QFY20 also,
the outlook for demand growth is not encouraging, with most companies
forecasting recovery only from 3QFY20 onwards.
The factor cited
for slower demand growth include - (i) slower wage hikes; (ii) poor farm income
growth; (iii) lagged impact of high fuel prices in 2H2018; (iv) poor systemic
liquidity that constrained consumer financing; (v) NBFC crisis; and (vi)
indirect impact of slowdown in government spending and private capex.
Execution
improved at infra builders, road orders slow
In 4QFY19 saw
decent surge in revenue booking by most infra builders led by improved
execution. Most construction companies witnessed EBITDA margins improvement
driven by better revenue mix and operating leverage derived from strong
execution.
New order wins
for road developers remained weak as bidding from NHAI and other state government
agencies remained suspended in the run up to the central elections. On the
other hand, diversified companies reported robust order wins from segments like
buildings and housing, water, hydrocarbons, urban infrastructure, amongst
others. Order backlogs of construction companies reportedly remain very strong
with order backlog/revenue of 2.3-4x currently.
Debt levels for
construction companies rose in Q4FY19 led by front ended equity and working
capital requirement in HAM projects, but remain comfortable due to asset sales
and deleveraging efforts.
Asset quality for banks appears on the mend
Most banks reported a decline in fresh slippages, higher
recoveries/write-offs during the quarter. Though, credit costs for most
corporate banks remain elevated due to ageing-related provisions and a few new
big names getting added to the stressed pool, coverage ratios across several
banks have improved strongly.
Healthcare continues to remain a sore point
Pricing pressure from US generics segment and domestic generic
segment due to Jan Aushadhi scheme coupled with trade generics, continues to
hurt the Pharma companies.
Though the recovery may be imminent as US generic business has
shown clear signs of stabilization, inventory rationalization in domestic
formulations appears almost complete, momentum in ANDA approvals has
accelerated, environment for the API business is becoming favorable. The
frequency and intensity of adverse FDA actions is also slowing down.
Metals drag the aggregate earning down
Metals universe was a key drag on the Nifty earnings for 4QFY19.
Slowdown in global economy and domestic investments led to poor demand for most
metals.
Cement: Realization and utilization begins to improve
Cement companies witnessed a strong production and demand growth
in Q4 on a higher base. Demand remained strong in Infrastructure and government
driven housing segment. Signs of improvement in execution in road sector
improve the outlook for the sector.
ITeS: decent revenue numbers, but conservative commentary
IT and IT enabled services sector recorded decent revenue growth
4QFY19; though margin pressure was visible. The management commentary was in
general cautious for the 1HFY20. US pricing pressure, high attrition rate and
wage rate pressure is clouding the growth outlook.
1QFY20: Commentary cautious, expectations strong
For 1QFY20 results most managements have guided a cautious
commentary, though analysts are upbeat and expecting decent growth in both revenue
and as well margin fronts, leaving scope for disappointment.
Delayed monsoon, BS-VI, fresh credit slippages, poor consumer
sentiment, still high lending rates, large inventory levels are some of the key
concerns expressed by managements.
On positive side, managements are quite excited about the new
government initiatives that may materially boost capacity building and
productivity augmentations.
Market valuations
Nifty valuation above average, though not close to bubble as
yet
The headline Nifty valuations are not attractive, even
considering the still high earnings growth estimates.
At 1yr forward PE ratio of ~19, and PB Ratio of 2.8 Nifty still
trades above the long term average valuations. Though Nifty valuations are
nowhere near the bubble mark, but these call for cautious stance.
Mid and Small cap valuation eased considerably
Sharp correction in mid and small cap stocks has made the
valuations rather attractive for broader markets.
The Nifty Midcap 100 ratio to Nifty 50 PE is at almost 8yr low, as
Midcap PE has fallen to the long term average of ~15.
