Sensex consensus EPS estimates for FY17 & FY18 have remained largely unchanged during Q1FY17 results season so far. However, since the beginning of Apr-16, both FY17 & FY18 consensus EPS estimates have seen a marginal decline of ~1%. EPS growth for FY17 currently stands at 17% (Rs 1,598) and FY18 at 20% (Rs 1,909).
Of the ~120 companies from our universe that have declared results, YoY growth for PAT and EBITDA has been ~100 bps and ~360 bps above expectations at 11% and 5% respectively while revenue expectations have lagged (4% vs 7% est). Sequential growth is likely to be the best of the past 10 quarters as highlighted in our preview note, and thus far, earnings for these ~120 companies on a sequential basis have grown by 12% vs. a decline of 9% in previous quarter.
The troughing out of earnings is becoming more evident now (though, later result announcements are quite often weaker) and the pay commission awards, good monsoons and lagged effect of rate cuts augur well for the coming quarters.
Refer overleaf for analyst comments on results summary, key trends and quick insights for each sector.
Result summary, trends and quick insights from analyst on results
Commodity cost to see uptick: Companies are seeing some increase in commodity prices, and expect impact in Q2FY17. Passenger car players have taken price hikes in Q2 to pass on the impact
Volume growth: CV growth has moderated on slowing replacement demand and possible shift of buying to FY18 (from Q4FY17) on price benefits under GST. Two-wheeler companies expect subdued volumes in H1FY17 but are optimistic of growth in H2 on the back of a strong monsoon
Polarity in growth trend continued to strengthen with retail advances growing in high teens and corporate loans being run down, as banks consolidate their large exposure to groups
Slippages for most corporate-facing banks remained elevated with GNPA ratios touching double digits (mainly PSU banks). NBFCs witnessing pressure on reported GNPA due to change in bucket for NPA recognition norms
Recoveries and upgrades continued to elude most banks. Most have guided for aggressive recovery targets in FY17, which will remain the key monitorable for an earnings fillip and rerating from here
NIM of most banks was under pressure due to reversal of interest income on NPAs. However, retail-lending NBFCs witnessed expansion in their NIM due to changing funding mix and lower borrowing costs
Demand in used CV finance, micro finance and LCV finance has picked up in past few quarters
MFI’s have held up their pricing power in spite of increase in number of players, and reported stellar results
Newly-listed SFB applicants also continued to post explosive growth while maintaining margin and asset quality
Cement prices in north and central India have moved up since end of Q4FY16. Cement price drop in Andhra and Telangana regions during Q1FY17 has also been reversed fully on the back of consecutive price hikes. We expect cement demand to pick up in H2 due to good monsoon and higher government spending. Overall profitability scenario for the industry is positive even after considering increase in certain cost items.
Stress in rural and no pickup in urban market places continue to impact topline of consumer companies. Amid benign raw material cost environment, corporates have stepped up consumer and trade promotion in Q1FY17, which has led to below-expected growth for consumer staple companies. Volume growth decelerated further with ~4% growth for Hindustan Uniliver (vs. expectation of ~5%) and Dabur (vs. expectation of ~6-7%). Price and mix changes restricted to low single digit (increase of 0-3%) for most staple companies. Double-digit volume growth sustained for paint companies (Asian Paints and Berger Paints).
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. This is reflected in order inflow growth of ~44% in Siemens, ~13% in L&T, and ~8% in ABB. ABB is also L1 in a large T&D order worth Rs 70 bn (listed entity share could be 30-40%), which is 25% of CY15 orders
Private capex in conventional sectors (steel, oil & gas) remains subdued, but investment in renewables is picking up. Initial signs of improvement in orders from cement industry. Signs of improvement in power BTG ordering during the quarter
Overall commentary is optimistic on sustainability of revival in domestic market on the back of strong and positive steps being taken by the central government as well as macro tailwinds such as GST, declining interest rates, and rising construction and mining activities
As expected, agrichem companies have reported weak revenue growth in Q1FY17 due to delayed monsoon and higher channel inventories. However, EBITDA margin has expanded substantially across the players, which has surprised us positively. Strong margin in Q1FY17 implies dealer discounting (hence working capital) is well under check and that the stage is set for strong demand recovery in Q2FY17.
Weak Q1 results signal FY17 growth rate for IT sector will be lower (especially BFSI vertical). Short-term uncertainty will persist due to Brexit and US Elections. Majority of vendors stated “no change seen in decision-making cycle as yet due to Brexit” but remain in a “wait and watch” mode
Growth in tech spends is driven by efficiency-related initiatives and digital adoption
Pricing in traditional services continues to be under pressure and vendors continue to adopt automation/ new delivery models to manage the pricing pressure
Digital is mainstream. Enterprises are investing in IoT, cloud models etc to drive growth
Incremental headcount addition will be lower, as companies continue to reskill their work force and accelerate adoption of automated tools
Indian IT players will continue to make business investments in digital technologies and differentiated delivery models to drive deal wins. This will impact margin
Consumer durable companies particularly those having a summer skew in their product base (such as Havells, V-Guard, Crompton Greaves Consumer Electricals, Voltas; Whirlpool still to report) had a good quarter on the back of a harsh summer season. ACs, fans, stabilizers, and inverters posted double-digit growth during the quarter. While most companies are witnessing green shoots and expect FY17 to be a better year, demand recovery is still inconsistent and patchy with growth mainly coming from tier 2 and 3 towns, with tier 1 towns still lagging.
Oil & Gas
Oil prices: Oil prices have weakened to ~USD 45/bl level due to high U.S. inventories and expectations of higher supplies from Iran
Refining margins: After the sharp decline in Q1FY17, Singapore complex GRM has continued to remain weak in Q2FY17 (YTD) as well due to weak gasoline, LPG and FO margins. Note that inventory gains are likely to more-than-offset negative impact of weak GRMs in Q1FY17
Marketing margins: Despite volatile oil price CYTD, OMCs have successfully tweaked fuel prices and maintained their marketing margins. From current trend, it appears that OMCs will benefit from firm marketing margins and inventory gains in Q1FY17
Domestic formulations have seen weak growth of 3-8% YoYvs 12-15% growth due to pricing policy issues in India, companies expect growth to rebound to double digit in 2HFY17. Increasing competition in key products in US has led to margin pressure. Companies expect a part of the margin pressure to be offset by new launches in US.
Import of steel in India during the quarter came down by 26% due to MIP (Minimum Import Price). However, it is still below the targeted 50% reduction in import, as importers are taking advantage of some loopholes in the policy.
Voice: Encouraging signs of easing competitive pressure, as pricing was up during the quarter. Idea Cellular’s ARPM increased 3% QoQ to 34.3 paise and BhartiAirtel’s was up ~1% QoQ. For Idea Cellular, pricing had increased even in Q4FY16
Data usage -- mixed trend: Data consumption growth (QoQ) moderated for BhartiAirtel (7.7% in Q1FY17 vs. 9.6% /16.5% in Q4FY16 / Q3FY16) while that for Idea Cellular increased ~13% QoQ in Q1FY17 (1.5% QoQ in Q4FY16)
Capex: Based on FY17 capex guidance, aggressive investment in data networks is expected to continue for both BhartiAirtel (~USD 3 bn vs. USD 3.1 bn in FY16) and Idea Cellular (Rs 65-70 bn vs. Rs 77.7 bn in FY16)