Leaders and laggards: Sectors that did well in Q2, and those that didn't

Banking, oil and gas, pharma, tyres, cement, and FMCG (except tobacco) were among sectors to register a good performance for the quarter ended September. While lenders benefitted from the Supreme Court moratorium on loans, pharma companies gained from a general uptick in demand for medicines and health supplements owing to Covid-19. In contrast, cement and tyres gained from a sharp rise in retail prices of their products and lower input costs. In oil & gas profits got a boost from inventory gains as crude oil prices recovered, but Reliance Industries took a hit because of weak refining margins.

Likewise, FMCG was among the few sectors that saw companies report a year-on-year growth in sales as dealers restocked after the lockdown and lower commodity prices expanded  margins. Among the few that were a drag were automakers, whose volumes were still lower than last year. Companies catering to discretionary demand such as retailers and multiplexes continued to suffer and reported losses for the second consecutive quarter. 

While there are hopes for improvement in demand going ahead, profitability for many sectors may see some pressure or remain capped as costs are inching up. Here is how the 10 key sectors performed in the quarter.

Pharma

In good health

> Most firms reported better-than-expected results, led by an improvement in US and higher sales of active pharmaceutical ingredients 

> Lower marketing costs and an improving price environment in the US market helped improve profitability
 

> Companies with Covid-related drugs such as Ipca, Dr Reddy’s, Glenmark, Cipla, and Cadila saw their domestic sales grow faster than others
 

> Going ahead, the key for companies with higher exposure to the US market such as Sun Pharma, Cadila, and Lupin is regulatory approval
 

> The medium-term outlook for the best sectoral gainer over the last year continues to be strong led by higher pricing power, focus on profitable niche segments and increased healthcare spends

Information Technology
 

Strong connection

>  Broad-based growth across verticals and geographies on the back of higher technology spends by corporates helped IT companies

> Deals announced by tier 1 players were not only at record levels, but visibility was also high owing to strong deal pipelines
 

> Most companies reported margin expansion led by the higher proportion of offshoring, automation, and increased employee utilisation rates
 

> While further margin gains would be difficult as savings on account of travel costs and upcoming wage hikes would be reversed, companies are confident of maintaining margins at September quarter levels
 

> IT stocks have been among top gainers over the last year and could see further gains, given multiple earnings upgrades for both tier 1 and tier 2 players after September quarter results and multi-year growth visibility. Dividends and buybacks to support valuations

Cement
 

Concrete show

>  The better-than-expected rebound in demand saw most cement manufacturers report strong volume numbers for the September quarter

>  Rising cement prices, too, hel­ped drive realisations thereby lifting profitability
 

>  Further support came from cost controls and soft raw material prices, which boosted the operating performance
 

>  Shree Cement followed by UltraTech reported the strongest per tonne profitability amongst peers while Ambuja Cements and ACC, too, saw strong improvement
 

>  With monsoon season behind, further improvement in dema­nd helped by rising infrastruc­t­u­re activities continues to improve volume outlook for firms
 

>  Rising cement prices are exp­ected to take care of the rise in the price of key raw mat­erials such as coking coal, and in turn, keep earnings prospects firm

Banking & Finance
 

Cashing in on relief

>  It was one of the best quarters for lenders, especially banks, as they didn't have to report bad loans and provision for the same, thanks to Supreme Court moratorium on loans

>  The result was a sharp rise in banks’ profits despite muted growth in new loans
 

>  Earnings were also boosted by the decline in interest rates and expansion in spreads and net interest margins
 

>  Retail non-bank lenders such as Bajaj Finance and SBI Cards, however, showed Covid-19 stress with a sharp rise in bad loans and provisions
 

>  There was a sequential rise in retail lending in Q2FY21, but industrial credit remains flat raising a question mark over the earnings momentum seen in the banking sector
 

>  Banks also face the risk of a sharp rise in bad loans following December quarter and beyond, after the end of the moratorium
 

Auto
 

Getting a speed boost

>  Sharp volume recovery on a sequential basis, with production and sales at over 90 per cent of pre-Covid levels. Gains were led by pent-up demand and preference from public to personal mobility amidst the pandemic

> Companies with a higher share of revenues from the hinterland such as Mahindra & Mahindra, Hero MotoCorp, and Maruti Suzuki gained the most, given the resilient rural economy
 

> Higher operating leverage and lower costs led to the expansion of operating profit margins; some of the gains are likely to sustain going ahead, though higher commodity costs could play spoilsport
 

> Volume gains expected to continue in the first half of December quarter owing to the festive season, while opening up of the urban markets will add to the sales numbers

FMCG
 

Rising consumption

>  FMCG is one of the few sectors, which saw most companies report YoY growth led by steady demand across categories

> Food companies such as Nestlé and Britannia benefitted the most, given the surge from in-home consumption because of the pandemic; Hindustan Unilever’s food business posted double-digit growth led by higher volumes and price hike
 

> Health supplements and hygiene was another segment that saw strong growth rates (Dabur) through the pandemic
 

> Though discretionary categ­­o­r­ies within the FMCG such as personal care saw some weakness, these are ex­p­e­cted to see a pick-up as the urban unlock process gains pace
 

> Most firms reported margin expansion due to spending curbs, but increased advertising and commodity costs could keep margins under pressure

Oil & gas
 

Fuelling sentiment

>  Improvement in oil prices from March lows has led to earnings rebound for upstream players like ONGC, OIL India and Cairn India (Vedanta group)

>  While benchmark refining margins improved from negative territory in June quarter, refining segment remains subdued
 

>  Reliance Industries saw lower than expected refining margins, but an improving petchem segment and strong digital services and retail business revenues drove its performance
 

>  Oil marketing companies (OMCs) like BPCL, HPCL and IOC gained from improving auto fuel demand and strong marketing margins, which was partly offset by subdued refining performance
 

> City gas distributors remain on a firm wicket helped by higher demand for cleaner fuels and low gas prices
 

>  Despite subdued refining outlook and range-bound oil prices, prospects of OMCs remain firm led by marketing margins, while strong retail and telecom show is keeping Reliance Industries’ outlook stable

Consumer Discretionary
 

A mixed bag

>  Good quarter for consumer discretionary firms, especially durables and appliance makers, with many reporting a sharp rise in net sales and profits 

>  Companies such as Havells, Whirlpool, and Voltas exceeded expectations, while Polycab, Blue Star, and Finolex Cables disappointed with contraction in top line
 

>  Decorative paints, however, stood out with most companies recording double-digit growth
 

> Earnings were driven by the decline in raw material expenses,cost-cutting, re-stocking by deal­ers, and favourable movement in inventory
 

> Retailers, however, continued to struggle as footfalls yet to pick-up
 

>  The worst hit are lifestyle and fashion retailers and most of them were in the red 
 

>  Durable makers could face some earnings headwinds as re-stocking ended and metal prices are up sharply from their lows

Capital Goods
 

Finding their feet

>  Order flow, execution were weak in September quarter too, but outlook is improving

>  Sector bellwether L&T reported a weak performance in Q2 even as consolidated performance got a lift by services businesses
 

>  Strong balance sheet and large order inflows in October, however, have improved L&T’s prospects
 

>  Players such as ABB, which posted better-than-expected performance, remain best placed as their automation and digitalisation themes are finding favour with customers 
 

>  Private capex still remains weak, and analysts watchful onrecovery say that order flows will be driven by government and state-owned entities in the near term
 

> Defence sector suppliers, nevertheless, remain on a firm wicket with strong order flows

Metals & mining
 

Gaining sheen

>  Both ferrous and non-ferrous players benefitted from rebounding demand and better realisations; firm Chinese consumption is leading to a favourable environment

>  Prices of aluminium, copper, zinc and lead have seen strong recovery from their March-April lows; average LME realisations were higher by up to 22 per cent sequentially in the quarter
 

>  Vedanta’s performance was also supported by higher crude prices, while Hindalco gained further from the strong show by Novelis, its US subsidiary
 

>  While steel demand was strong, realisation improvement too supported operating performance
 

>  Tata Steel and Jindal Steel & Power's domestic operations led in terms of per tonne profitability. While JSW Steel also impressed, SAIL reported its best numbers in five quarters
 

>  While improved pricing outlook is keeping sentiments strong for base metals players, domestic steel realisations are also at highest levels since December 2018
 

>  Coal India, too, is seeing rebound in volumes and prices

Exp: Expense; RM: Raw material; PBIDT: Profit before interest, depreciation, and taxes; PAT: Profit after tax  Source: Capitaline