Q2FY19: Nifty 50 earnings largely in-line with expectations

The quarter ended September 30, 2018 results for Nifty 50 companies (40 non-BFSI and 10 BFSI) have been announced. The earnings for this quarter have come largely in-line with expectations, despite higher oil prices, currency volatility and global trade issues. The revenues of some companies witnessed fair growth vis-a-vis the high base in Q2FY18 owing to re-stocking post GST implementation along with the shift of festive season to Q3. Some other companies (in non-BFSI) reported lower profitability on account of margin pressure owing to currency volatility and higher commodity prices. On the BFSI, some banks reported higher provisions due to exposure to the Infrastructure Leasing & Financial Services (IL&FS) group, whereas NPA resolution is yet to gather pace.

Net sales of 40 non-BFSI (out of Nifty 50 companies) grew by 26.8 per cent YoY, whereas net profit grew by 10.9 per cent. Net interest income (NII) of 10 BFSI (out of Nifty 50 companies), grew by 16.5 per cent YoY, whereas net profit grew by 3.9 per cent. 

In the BFSI segment, Bajaj Finance was yet again the best performer in NII terms (for the third consecutive quarter). In net profit terms, Axis Bank was the best performer with a PAT growth of 82.6 per cent, owing to lower provisions. None of the companies in the BFSI space reported negative NII growth, however the least growth was reported by ICICI Bank at 12.4 per cent, along with net profit decline of 55.8 per cent. Profitability of YES Bank and IndusInd Bank were hit due to the exposure to IL&FS.

In the non-BFSI segment, the best performing companies are: Reliance Industries (in net sales terms) and Coal India (in net profit terms). Bharti Airtel was the worst performer in terms of net sales and Tata Motors (which reported a loss on the back of challenges faced by its subsidiary Jaguar Land Rover in UK) was the worst performer in terms of net profit, for the second consecutive quarter.

Result summary snapshot

Of the Nifty 50 companies, 11 companies (22.0 per cent of the set) have reported numbers above expectation, 15 companies (30.0 per cent) have reported results in-line with expectation, 13 companies (26.0 per cent) have reported mixed set of numbers and 11 companies (22.0 per cent) have reported numbers below estimates.

Conclusion

The earnings growth of Indian corporate during Q2FY19 has been decent with about 10 per cent YoY profit growth. In the context of macro challenges such as weak rupee, elevated crude oil prices and higher bond yields, the corporate earnings performance was reasonable.

Some of the non-BFSI Nifty companies witnessed lower profitability on account of margin pressure given the currency headwinds and higher commodity prices, although the revenues saw fair growth given the shift in festive season in Q3 for FY19. This reflects that Indian companies couldn’t pass-on the impact of higher costs to customers, resulting in margin pressure despite impressive top line performance.

In the BFSI space, higher slippages and provisions have continued to keep the Nifty earnings momentum capped. The asset quality issue (especially in the PSU Banks), slower than expected NPA resolution pace and default of IL&FS group are top concerns for the banking sector; and resolution of the same would be a key trigger for stronger balance sheets. The government and RBI have undertaken steps to help this sector; and some resolutions in the insolvency accounts under IBC would help both the public and private sector banks in terms of NPA recovery.

Given the current market scenario, the earnings reported by companies suggest a gradual recovery setting up. However, sustenance of the same would be a key monitorable, along with the demand scenario during the pre-election period. Centrum wealth maintains its view that once asset quality in banking stabilises, they are optimistic that the corporate earnings revival can be quite strong.

Source: Centrum Wealth