Sales rebounded in the important festival quarter; with discretionary consumer spend holding up well and the Auto sector bounced back with decent set of numbers.
Viewed cumulatively, in Q2FY10, Sensex stocks posted a revenues growth of 3.4% y-o-y and 7.7% over the previous quarter, according to a Motilal Oswal report. Ebitda was up 7.2% y-o-y and 6% over the first quarter of this year with lower input and borrowing costs boosting margin expansion in most sectors. Net profit growth stayed in negative territory (2.7% y-o-y) while there was a 3.6% improvement over Q1 FY10 numbers.
Numbers which propped up the growth included Auto, Banking, FMCG and Pharma with Real estate, Metals, Oil and Gas, Telecom and Infrastructure dragging numbers down.
Net sales for all listed companies which have declared their quarterly results to date were down 13% y-o-y while they trended up about 7.8% over Q1FY10. Operating profits (EBITDA) were up 21% over Q2FY09 while reported post tax profits were up 43.5% in the same period. Sequentially, over Q1FY10, both EBITDA and reported PAT dipped by 1.7% and 4.4 % respectively. Adjusted for one-off gains/ losses, PAT was up 35.5% y-o-y and down marginally by 1.7%.
Automobiles
This was a truly festive season for Auto companies which saw volumes grow over 16%. All segments put in a strong showing and commercial vehicle sales also chipped in with a strong showing. Two- wheelers continued to shine as did car sales this quarter, boosted in part by easier financing available from PSU Banks. Maruti posted nearly 40% y-o-y sales growth and M&M saw a 31.5% growth.
Operating margins were at a high this quarter as companies realized the full benefits of lower raw material costs even as borrowing costs headed south. Bajaj Auto (OM of 22%), M&M (17.2%) and Hero Honda(17.9%), led the pack.
Going ahead, operating margins are expected to decline as raw material prices rise and competition intensifies in the industry, says an India Infoline report. Volume growth should continue at these levels, it adds, stating that growth will look dramatic given the strong base effect of H2 FY09.
Banking
The quarter saw a marked divergence between PSU banks and private banks. Led by government policy directives, most PSU banks saw loan growth rates averaging 19% y-o-y with PNB, BOB and Canara Bank Bank of Baroda well beyond 20%. Private banks saw more muted loan growth with HDFC growing 11% and Axis bank 18% in this period. ICICI Bank continued to degrow its loan book which dipped by 14% y-o-y as per a Motilal Oswal report.
While Net Interest income remained stable as yields were down only marginally, net interest margins (NIMs) were up over Q1FY10 numbers as cost of deposits declined significantly and low cost deposit share increased as term deposits declined. Fee income growth continued to be strong except for Bank of India (BOI), ICICI Bank and PNB.
Asset quality deteriorated on a sequential basis and was sharper in a few banks; negative surprises came from BoI, SBI and Axis Bank. Most banks have indicated that further delinquencies are possible, though not at an alarming level.
Cement
Strong demand especially in northern, eastern and central India helped volume growth in the industry (up 11% y-o-y) with strong revenue growth for ACC and Ambuja Cements. Revenue growth was also helped by steady realizations of Rs 252/bag with some pricing pressure felt post –August 09, as per a Motilal Oswal report. EBITDA/Ton declined 4% QoQ (but was up 38%y-o-y) to Rs1,262/ton.
Lower coal cost and savings in power due to higher captive power consumption benefited some players with operating margins expanding significantly. Grasim saw a 13ppt expansion on account of strong operational performance by VSF division (where there was a 20ppts margin expansion), according to India infoline. Margins for Ambuja Cement contracted 51bps on account of 179% increase in raw material cost due to higher purchase of clinker.
All of these helped PAT growth with Grasim showing a 61% y-o-y jump, ACC up 54% and Ultratech 53%.However India cement saw a 15% dip because of lower realization and higher costs.
Overcapacity in the sector will put pressure on realizations and margins wil also be hit by higher input costs, according to india infoline.
FMCG
Strong volume growth defined the performance of the sector except for HUL. Revenue growth averaged about 13% for the sector led by mid caps like Dabur Colgate GSK Consumer Nestle. ITC saw a strong cigarette sales impact (21% value and 7% volume growth).HUL saw revenues rise 5% and Brittania sales grew 2.4%.
Advertising spend increased sharply this quarter but margin expansion was still robust because of lower raw material costs. Lower input cost and base saw Godrej consumer post a margin expansion of 760 bps while Colgate went with a decision of lower ad-spend to clock in margin expansion of 710bps.
Net profit growth for the sector averaged 30.5% y-o-y ahead of analyst expectations as per India Infoline. GCPL (including Sara Lee) registered robust 168% y-o-y growth although of a smaller base and was followed by Colgate at 41% y-o-y. Nestle saw a 39% y-o-y growth boosted by strong volume growth (18% growth in domestic business). ITC registered 26% y-o-y growth led by the strong performance of the cigarette and agri segments (EBIT up by 24% and 128% respectively).
IT
This was a strong quarter for IT companies. Revenues in Q2fy10 were ahead of analyst expectations driven by resurgence in business volume. Volume growth ranged between -1.5-6 % during the quarter. TCS saw a healthy upswing (5% q-o-q) along with KPIT (5.9% q-o-q).
Reported dollar revenue growth averaged 2-4% qoq with cross currency trends (GBP and Euro appreciation against US$) boosting growth by 1-5% q-o-q. Higher utilization, improved offshore mix along with currency benefits boosted margins this quarter.
However, pricing continues to be weak for most players, feels India Infoline adding that the pricing improvement for Wipro mainly reflected productivity gains. With improving macro environment, the sense is that pricing should stabilize from Q3.
Management speak was more upbeat about the business outlook. India infoline believes that the stron quarter showing and improving outlook may justify the steep valuations for companies in the sector.
Metals
Revenues, while down on a y-o-y basis registered stronger growth on a sequential basis, however , they were below street estimates. Lower than expected volumes for steel companies was the main reason for the difference. Realizations were also lower forTata Steel. The non-ferrous space, except NALCO, benefitted from stronger environment for copper and posted higher than expected revenues this quarter. Sale of metal concentrate led to the boost in HZL’s topline, according to india Infoline.
Stable realisations and a decline in raw material costs due to lower coking coal prices boosted margins for steel companies. Aluminium business saw margins under continued pressure because of a sharp rise in power & fuel costs. The copper smelting business, however, saw strong margin expansion on account of better by-product prices. Hindustan Zinc saw margins boosted on a sequential basis by better pricing and lower costs. The non-ferrous space saw a 209 bps qoq contraction in OPM. In contrast, steel companies saw margins expand by 331 bps.
JSW Steel posted a 351% qoq and 42% y-o-y growth in earnings while most other companies showed negative y-o-y PAT growth with the overall sector PAT growth dipping 295 y-o-y. Hindalco (down 75%) and Nalco (down 64%) were the bottom of the pile.
Oil & Gas
NO oil bonds this quarter changed the environment for the sector as losses on auto fuels were
completely compensated by upstream companies.. The subsidy burden was lower in absolute terms, observes India Infoline, but non availability of bonds strained cash-flows for Oil marketing Companies.
OMCs put in better than anticipated operating performance without the impact of bonds and saw revenues dip almost 30% y-o-y. For GAIL, earnings were hit further(0.8% y-o-y growth) because of lower petrochemical margins. RIL ( 4.6% revenue growth y-o-y) saw lower gross refining margins compensated for by better petrochemical margins and better E&P revenues.
Lower production and realization for ONGC was offset by removal no margin sale of MRPL products and revenues were down by 13% y-o-y. While for Cairn9 revenue dip of 32% y-o-y) it was offset by one time write-backs. The subsidy sharing patterns and ril-rnrl litigation are ket to outlook for this sector.
Telecom
Tata DoCoMo led a flurry of tariff cuts in the sector and per second plans have become the standard in theindustry. Wireless revenues dipped as per minute realizations declined whilethe sectors fabled elasticity in MOUs didn’t respond in kind.
Tata Comm saw nearly 24% y-o-y drop in Q2 revenues as wholesale voice revenues plunged 35%. OnMobile suffered collateral damages of the rate war and domestic sales fell 5% due to pressure on VAS revenues at major telcos. Bharti saw revenues grow 16% y-o-y and dip 0.7% q-o-q. RCOM dipped 6% sequentially while Idea revenue growth was flat q-o-q and up 23.5% y-o-y.
Bharti managed to keep margins stable but for other companies it was a losing battle as higher network operating expenditure led to operating margin contraction. Onmobile saw margin dip to their lowest since the stock listed.
The sector is in the midst of an intense rate war and the concern on earnings will be a major overhang for stocks.
Utilities
Power generated this quarter in India was up 7.6% inspite of poor monsoon and low capacity addition. Except for CESC and GIPCL which reported lower generation, all the other players witnessed 7-17% higher generation, in line with analyst expectations. Tata Power witnessed 17% higher generation as most units output stabilized apart from the commissioning of 120MW capacity unit at Jamshedpur. NTPC’s generation rose 7% boosted by higher capacity, more available gas and better performance of existing stations.
Traditionally Q2 is a weaker quarter in the year for utility companies and it was no different this year. Lower fuel prices translated into lower realizations for all the companies, except CESC. CESC however reported 25% improvement in realizations as it revised its tariff structure effective April ’09. Tata Power’s revenues dipped 12% yoy despite merchant sales. NTPC’s realizations remained flat at Rs2.23/unit.
The sector saw improvements in operational performance but operating profit growth for the universe was offset by higher depreciation, interest and tax outgo. Due to change in the MAT rate, all the companies reported higher tax outgo, according to India Infoline. Pat for the sector dipped 26% , with a sharp fall of 50% for GIPCL acting as the main drag. NTPC , whose post tax profits were down 16% y-o-y and Reliance infra (PAT down 8.5%) disappointed.
Suzlon faced earnings downgrades reported a net loss of Rs3.3bn because of low volumes .Also, the management reduced its FY10 volume guidance the year. Its order book was down 41% yoy to 1.5GW, but remained flat q-o-q.
