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Earning season round up - Q2

Updated: Nov 9, 2019

Macro Outlook

India Inc’s Q2FY20 earnings saw a decline in revenue growth of 3% on year in the second quarter (excluding BFSI, Oil) according to a CRISIL report covering 300 companies constituting approximately ~60% of the NSE market cap owing to slowing demand. “The slowdown in consumption demand is reflected in the Reserve Bank of India’s Consumer Confidence Index as well that declined to 89.4 in September 2019 compared with 95.7 in July 2019,” according to India Ratings report. The global markets uncertainties due to the ongoing US-China Trade war continued to impact the commodities and trade markets, however signs of a resolution are being anticipated. The complete effect of the corporate tax cuts will be seen later in the coming quarters and cannot be completely attributed to this quarter. EBITDA margins of industrial sectors also took a hit due to underutilisation owing to weak demand, In the sample of 300 companies, the overall revenue grew at ~11% year on year during the past 4 quarters period. The major drag was caused due to the automobile industry with record low sales month after month, with a sharp decline of 24-26% in revenues due to reasons like higher cost of ownership, deferment of purchases in anticipation for tax cuts and shifting emission norms to name a few. This had a ripple effect on auto-parts industry and created drag on the steel industry which saw a decline of 15% in realisations hurting the revenue targets of major steel players. Slowdown in rural consumption caused moderation in revenue growth of FMCG sector coming down to 7% from earlier 9.5% in past three quarters. IT sector showed revenue growth despite the general slowdown owing to increased spend from BFSI sector in their investment in digital infrastructure especially from US, with revenues of Large cap IT companies growing by 12% y-o-y.

EBITDA margins of steel and cement industries improved due to lowering fuel costs and raw material costs especially pet coke and auctioning of new mines which provided some respite from lowering revenues. Airline industries also saw a positive movement in the margins of 1800-2000 bps due to lowered fuel costs (approx. 10% per litre), favourable foreign exchange contracts and IND AS 116 which changed the standard operating lease into a right to use asset allowing depreciation to be charged boosting EBITDA margins. Petrochemicals and Aluminium industry saw a decline in revenue owing to subdued pricing and lower production.

1. Automobile Sector

Companies in the automobiles sector have posted a sharp decline of 24-26% in revenue. This can be attributed to the decline in sales on account of muted consumer sentiment amid high cost of ownership for passenger vehicles (PVs), deferment of purchases because of expected Goods and Services Tax (GST) cuts, lower freight demand aggravated by the new axle norms, and weak financials of commercial vehicles (CVs). In a rub-off of the impact, auto components revenue is estimated to have reduced by 14-16% due to production cuts.

With the introduction of BS- VI norms and also other regulations for the automobile sector consumers are expecting increased cost of ownership of the vehicles which creates the demand postponement in the minds of consumer.

There is a drag in the revenue growth and revenue growth declined 9.2%. The first time it happened in the past two years – as demand slowed further. Revenue of passenger vehicle (PV) OEMs declined more than 12%, due to lower volume, while those of CV OEMs declined 17% on-year. Revenues of two-wheeler makers dipped a marginal ~0.6% on-year, despite a 10% slide in volume, as higher realisations helped.

Tata Motors Q2 Performance: Key Takeaways

  • Where their JLR market improved but there was sharp market decline in India.

  • In the company Volumes were y 242K down 25%; and revenues were ₹65.4 KCr down 9%.

  • The export market of tata motors helped it to leverage their Indian market revenue loss due to slow down.

Ashok Leyland Q2 Performance: Key Takeaways

  • Earnings expansion is relatively subdued.

  • Competitive pressures and rampant discounting resulted in realizations lagging expectations.

  • Besides, costs and margins expanded by a mere 50 basis points (compared to the expectation of 100 basis points-plus) to 10.6%. Net profit at ₹ 460 crore is at least 10% lower than Street estimates.

2. FMCG Sector

India’s fast-moving consumer goods (FMCG) market slowed to a five-quarter low in the July- September (Q2) period as consumer sentiment remained tepid. As per the report of CRISIL Fast-moving consumer goods (FMCG expects a lower on-year aggregate revenue growth of 5-7% in Q2 fiscal 2020. The sector is facing a slowdown, especially in rural consumption, which dragged down FMCG growth. Even the rural distribution growth has continued to inch downwards. Revenue growth moderated to ~7% on- year from the ~9.5% run-rate of the previous three quarters, because of a slowdown in rural consumption. In FMCG margins are stable. An increase in the prices of raw materials such as copra, sugar and milk, is likely have been offset by a decline in prices of crude-based raw materials. Margin expanded by 104 bps on-year.

HUL Q2 Performance: Key Takeaways

  • · Posted a 21% growth incorporating the reduction in the corporate tax.

  • · The company said that the near-term outlook for demand especially in rural India remains challenging. As compared to previous quarters the results are declining given the overall slowdown.

Britannia Q2 Performance: Key Takeaways

  • Britannia Industries’ Q2FY18 consolidated results for the quarter came in mixed versus street estimates

  • Revenue came in lower than the estimated but net profit came as per estimated

  • Net profit managed to be as per estimate because of the increased price to mitigate slowdown effects although the revenues are lowered

  • Biscuit as a food product is price elastic and has a huge market penetration across the country, thus the growth in sales of the company had halved in terms of value as a result of slowdown.

3. Banking Sector

The last two trading sessions saw the banking sector and the key stocks moving up between 12-15%. This was largely on the back of an 11-15% recurring earnings upgrade across banks led by a cut in the marginal corporate tax rate to 25% versus 35% earlier. Liquidity flow (and we refer specifically to the fixed income or debt segment) in the broader market has remained constrained. It's quite unfortunate that we remain in pretty much the same situation with a broad credit market freeze even after more than a year since the IL&FS default.

ICICI Q2 Performance: Key Takeaways

The bank posted a nearly 28 per cent year-on-year (YoY) drop in the September quarter net profit at Rs 645.96 crore on account of one-time additional charge on re- measurement of accumulated deferred tax

  • Interest income rises- Net interest income (NII) increased by 26% YoY to Rs 8,057 crore in Q2FY20 from Rs 6,418 crore in Q2FY19

  • Margins expand- The net interest margin came in at 3.64 per cent for the quarter ended September 2019 compared with 3.61 per cent in the same quarter last year and 3.33 per cent in June quarter of this year

  • Asset quality improves- The bank's asset quality improved with percentage of gross non-performing assets (GNPAs) easing to 6.37% during the quarter against 8.54 per cent in the corresponding quarter last years. The percentage of net NPA improved to 1.60 per cent from 3.65 per cent YoY. It stood at 1.77 per cent for the quarter ended June 2019.

SBI Q2 Performance: Key Takeaways

The bank posted a 218% jump in standalone net profit for the September quarter to Rs 3,011.73 crore

  • Asset quality improves- The asset quality of the bank improved with gross non-performing asset (NPA) ratio coming in at 7.19 per cent, down 276 bps yearly and 34 bps sequentially

  • Interest income rises- Net Interest Income (NII) of the lender increased to Rs 24,600 crore in Q2FY20 from Rs 20,906 crore in Q2FY19, an increase of 17.67 per cent.

4. IT Sector:

Analysts expect Indian IT companies to report a muted set of results in Q2FY20 owing to muted growth and largely unchanged margins. However, they expect the strong deal flow momentum to continue providing a bright outlook for the sector. According to analysts, most large-cap companies are expected to report steady growth, while mid-cap companies may stand out in Q2FY20.

Infosys Q2 Performance: Key Takeaways

  • The company reported a 2.21 per cent year-on-year fall in consolidated net profit at Rs 4,019 crore for the quarter ended September 30

  • The firm increased lower-end of FY20 revenue guidance. The revised guidance stands at 9-10 per cent in constant currency terms

  • The performance was robust on multiple dimensions – revenue growth, digital growth, operating margins, operational efficiencies, large deal signings and reduction in attrition.

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