Earnings in line with expectations, no big recovery seen going forward: Gautam Duggad

The sales decline is a first after June 2016 and EBITDA growth at 2% is also the lowest in the last nine quarters. Says Gautam Duggad, Head of Research, Institutional Equities, Motilal Oswal Securities. Excerpts from an interview with ETNOW.

How would you sum up the earning season gone by? We saw the impact of the tax cut but revenues are still muted. Were there specific highlights that stood out?
The earnings season was in line but the expectations are very muted to begin with. The modest expectations were met on an operational front. The headline numbers at the profit level obviously are better than expectations because of the tax cuts but the EBITDA growth for Nifty is 2% and PBT has declined by 3% for Nifty. Sales have declined by 2%. The sales decline is a first after June 2016 and EBITDA growth at 2% is also the lowest in the last nine quarters.

PBT has just declined 3%. So, clearly on an operational front, the numbers were quite weak. These were backed into the expectations which is why you have not seen much of a market reaction. In fact, if you slice the numbers a little bit more, you will find that the Nifty PBT x of the three corporate banks has actually declined by 11%. But again, that was backed into the expectations.

One good thing which has happened is lower tax rates has tamed the earnings downgrade. For us, in this quarter, there has been no downgrade in the Nifty EPS for FY20. It is stable at around Rs 538 which is the level where we went into the quarter. So no change in EPS estimate because of the tax benefit, which have happened. Besides that, operationally the numbers were pretty weak.

On PBT front, if you look at the 19 sectors that we track, except auto and utilities, none of the sectors have beaten PBT expectations. Large sectors like consumer, technology, private banks, NBFC were in line but I must also add that some of the commodity sectors, metals, oil and gas have actually dragged the aggregates big time this quarter. Autos, obviously on very low expectations, managed to beat that. That is how I will summarise this quarter. In line with modest expectations but it does not herald a big earnings recovery going forward.

Revenue growth was quite flat. Did you see the overall tax cut advantage playing out in Q2? Going into the coming quarter, with the festive season and overall monsoon, could we see a better print when it comes to India Inc. profits?
As far as our profit expectations are concerned, we are expecting around 12% Nifty EPS growth for FY20. The first half the EPS or rather the profit growth is 6%. Clearly, there are expectations of some pick up built in for second half and the base is also favourable for some of the sectors going into the second half.

As far as revenue is concerned, it is more a function of demand revival if any. Right now, if you go by the management commentaries across the sectors, none of the sector has come out and clearly said that things are improving or things have bottomed out.

Most of them are sounding a bit ambivalent saying that things are bottoming out but we are not sure whether the recovery will be there in third and fourth quarters. The best one can say is that there is a probability of a gradual recovery ahead. As of now, data points like the high frequency data which is coming out, the GDP growth data, IIP and auto fuel consumption are pointing towards a well entrenched demand slowdown.

RBI has taken some steps but it will take some time for those steps to percolate and reflect in the numbers going forward. On balance, the probability of earnings downgrade is still higher than upgrades. This quarter, we have been saved the embarrassment of earnings downgrade because of the tax cuts.

Going ahead, what are you focussing on if consumption is meant to be a theme. Do you see some of those pockets doing better in the following quarter and not only just FMCG but auto as well?
We are positive on financials because that remains the driving force of the earnings growth to whatever extent we are seeing.

For example, if you look at FY20 numbers for Nifty, we are expecting 12% earnings growth -- roughly 95% of incremental earnings for FY20 is coming from financials. If you remove financials, rest of the Nifty is showing 0% earnings growth. So, financials clearly remain the focus area and obviously with the judgment that came last week from the Supreme Court on IBC related processes, it provides a shot in the arm for a lot of the corporate banks.

In fact, for the quarter itself, we have seen corporate banks delivering reasonably good performance versus expectations. The second pocket that we are focussed on is on consumption because consumption right now is going through a bit of a bump due to the overall growth slowdown. This offers a pretty good opportunity for somebody who has missed buying into consumption stocks. They are now going to stay sideways for some time in my view, given the way valuations are stacked up for many of these names on a one-year forward basis. Anybody who has a view which is longer than one year, must use this opportunity of a sideways movement in a lot of consumer stocks to add on to it.

Let us get in the hits and misses by way of stocks in Q2?
In financials and corporate banks, we have seen a reasonably strong performance coming in from SBI or ICICI. Asian Paint has been a reasonably strong bit on profit but I must also add that a lot of the beat that you have seen in Nifty companies for the quarter is also happening because of the tax cut that has happened.

On the PBT front, if you were to analyse, then the beat is not as strong as it is on the PAT front. As far as the misses are concerned, cement has been a miss despite the absolute numbers being reasonably strong but the expectations were quite high. So, UltraTech has been a miss. We have seen a beat on operational numbers from Bharti Airtel also even though the sector remains under cloud. These are some of the sectors and stocks where they have been a clear-cut hits and misses.