Our recent travels to highlight our India story gave us some interesting insights about how the world is viewing us. While we haggle over 25 bps rate cut, overseas investors think India has space to cut by a full 100 bps and even wonder why the RBI has not yet done so. Value investors see this as “more money less ideas” market, though many are keen to hear about upcoming primary issues. Two points on which a lot of time was spent on, explaining why rising domestic liquidity is here to stay and the status of NPA resolution.
While FII equity flows may have slowed, investor interest in the Indian market has not disappeared. Rupee appreciation only adds to the allure.
Q1FY18 Company results thus far: Pre-GST de-stocking was expected to be a bit of a dampener on volumes, impacting the Consumer Discretionary space such as Agri-inputs, Durables and FMCG wholesale channels. However, this issue seems to be easing off and expected to normalize going ahead. Thus far, ~90 companies within our coverage universe have announced results. Aggregate operating profits are below our expectations by ~120 bps at 5% YoY, impacted by higher input cost. However, earning is in line with our expectations of ~5% YoY. As expected, Pharma (continued headwinds in US) and Power missed estimates, while Cement and Retail (advancing the end-of-season sale to June, led to strong growth) performed better than our expectations.
For the 21 Sensex companies that have announced results, earnings growth for Q1 is 2% YoY vs. 5% YoY expectations. The underperformance was mainly driven by HDFC Ltd (unfavorable base), Pharma and Power cos. Our Sensex EPS estimate for both FY18 and FY19 thus far remains unchanged. EPS growth for FY18 currently stands at 14% (Rs 1,639) and rises to 20% (Rs 1,966) in FY19.
Watch out for
July CPI (14 August) – will it be below or above 2%
RBI annual report (end August) – for the size of dividends
Q1FY18 GDP result (end August)
Result summary, trends and quick insights from analysts on results
GST led to de-stocking in June ’17, which is typically product placement time, thereby impacting Q1FY18 performance for agri-input companies. However, demand recovered in July ’17 and likely to remain firm in Aug ’17 as well, which will boost Q2 revenues.
GST pain is behind us: All auto OEMs have effectively transitioned to GST with all backend and frontend partners now complying with GST
Volume outlook improves: OEMs are witnessing strong FY18 post demonetization and GST disruption. This coupled with forecast for a normal monsoon augurs well for the sector
Commodity cost impacts margin: Commodity prices have been rising and companies expects the impact in H1FY18. The input cost rise along with increase in prices due to change in emission norms (shift from BS III to BS IV from April 2017) should put pressure on companies to hike prices
Retail businesses continue to dominate, with private banks gaining significant market share. CASA accretion across various new banks has gained traction. Corporate lenders face heat from RBI directed NPA recognition and provisioning norms. MFIs are bleeding from losses related to state specific issues/ waiver proposals. Some CV financiers forecast a slowdown in Q2 on GST related impact on demand and hope revival in H2.
Realization increase was highest in North and West based companies in Q1. Despite news about multiple price increases, South based companies disappointed on profitability front.
Companies that have reported earnings so far posted poor sales because of massive de-stocking in the trade channel ahead of GST. In addition to negative operating leverage, companies were hit by sharp rise in raw material prices which could not be completely passed on, compressing the margin meaningfully. Indication is that restocking has begun, but will be gradual; it will take atleast 6 months for the trade channel to normalize.
Domestic demand driven by government capex; initial signs of recovery in private capex: Domestic order inflow is picking up driven by increase in government capex on roads and railways as well as increased level of investment in power T&D segment. Investments in renewables continue to grow well. Private capex in conventional sectors (steel, oil & gas) remains subdued, however, there are initial signs of recovery in the private capex as well
Domestic execution picks up on higher government disbursement: Execution in government projects has grown strongly in Q1 driven by advancing of the budget reading by a month, facilitating faster disbursement
Pricing pressure in T&D, renewables continues: Competitive pressure in T&D is increasing due to reverse auction process adopted by some state utilities apart from Power Grid Corp. Under the previous bidding system, the lowest bidder (L1) used to get the order. Under the new system of reverse auction, other bidders are allowed to lower their prices after submitting their initial bids to get the order. Even in renewables, prices for EPC/equipment suppliers are challenging due to low tariffs bid by the developers
Cost of production has been rising for most companies particularly due to higher coal prices. Highest impact was on Aluminium, as it is the most energy intensive metal.
BFSI and Retail recorded decent growth in Q1FY18. Retail vertical is passing through structural weakness. BFSI commentary was mixed – with some players indicating decision making delay (especially in US) while some players highlighted growth in H2
Automation tools are being used to optimize run-the-business IT spends. Investments in Digital/ IoT/ Cloud/ Cyber Security segments continue to increase with focus on linking the core to the front end
Clients continue to see discretionary IT budgets channelized towards disruptive technologies. On non-discretionary budgets, clients are looking to optimize spends
Margin disappointed across majority of players due to INR appreciation, visa costs and wage hikes for select companies
Oil & Gas
Refining business: Singapore complex GRMs remained firm at USD 6.4/bl (flat QoQ) in Q1FY18. Premium of RIL’s GRMs to Singapore GRMs continued to rise, as RIL increased proportion of Brent-linked crude in its overall crude slate to take benefit of weak Brent-Dubai spread. OMCs reported extremely strong core GRMs at ~USD 9/bl, after adjusting for inventory losses of ~USD 3/bl
Lubricants: GST-led destocking impacted June ’17 volumes by 10-15%. The major decline was seen in PCMO segment (high realization), where end-users/ dealers waited for price correction (GST at 18% vs. earlier tax rate at 28%) before making purchases. Demand recovery was weak in July ’17, and likely to normalize only in Aug ’17
Continued headwinds in the US with double digit pricing erosion (~10-12% YoY) because of increased generic competition (higher no. of ANDA approvals) coupled with buyer consolidation. Expect pricing pressure to continue in the near term
Operating margin of pharma companies was further weighed down in Q1FY18 on decline in India formulations revenues given channel destocking in June'17 ahead of GST rollout. Companies are witnessing gradual channel restocking in July, with further recovery expected through Aug-Sep'17. Companies expect double digit growth in the India business for the rest of FY18/9MFY18
Retail & Paints
Apparel and footwear industry advanced the end-of-season sale to June before the implementation of GST, leading to strong growth in the quarter for most retailers (20% SSSg at Shoppers Stop, 10% SSSg at Bata). Despite higher promotions, margin broadly improved due to positive operating leverage. Specific to jewellery, strong sales growth (TTAN Q1 jewellery sales grew 54%) on a low base was helped by substantial buying before GST (management estimated Rs 2.5 bn sales were pre-empted) and should not be extrapolated. In paints, volume growth was under pressure in June from destocking ahead of GST rollout and we expect transition to GST to take a couple of months before things normalize. We estimate margins to decline from peak levels, as input costs continue to rise.
Data revenue: Data volumes grew >100% QoQ vs. ~50% decline in Average Revenue per MB
Voice revenue: Voice minutes grew ~8-10% QoQ vs. 6-9% decline in ARPM
4G feature phones: Incumbents will not subsidize handsets but work closely with handset manufacturers to bring down the price of smartphones to mitigate the impact of Jio’s announced 4G feature phone
Headwinds persists in form of 4G feature phone, IUC cut (incumbents key recipient) and, VoLTE deployment which may signal another round of price decline and/or RMS loss. Full pricing effect of RJio is yet to play out (recent launch/VoLTE).