Published on 12/07/2019 3:00:03 PM | Source: Equirus Securities Ltd

1QFY20 Earnings Preview - Equirus Securities


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1QFY20 earnings are likely to be muted as demand across sectors was weak during the quarter primarily due to liquidity issues. Sector-wise earnings expectations from our coverage are provided below:


Auto Parts

* Volume growth has been tepid in 1Q in both PV and 2W. Volumes for Royal Enfield declined ~19 yoy, HMCL volume de-grew 12.5% over last year. Only Bajaj has been able to clock the volume growth of ~5% yoy. PV segment is also facing the slowdown in the volumes MSIl volumes decline 18% yoy.

* The slowdown is due to the increasing cost of ownership owing to the regulatory changes, higher base of last year and liquidity issues

* Exide and Amara Raja are expected to post a marginal positive revenue growth owing to the increase in the Automotive replacement volumes.

* Margins are likely to be under pressure due to operating de-leverage and discounts



* Ordering and tendering activity came to a standstill on account of code of conduct during the elections. Appointed dates for many projects awarded in FY18 have now started trickling in and will be one of the NHAI’s key focus area before it starts awarding new projects.

* Tendering for big ticket size projects like Delhi Mumbai Expressway, AmritsarJamnagar Expressway, Bundelkhand and Gorakhpur Expressway are underway while awarding is likely to take place in the month of August-September.

* NHAI plans to award 6000kms this year with focus on awarding projects with adequate land availability rather than just awarding projects with inadequate land available and facing issues in future. It will not only help NHAI, but all the parties involved (banks, concessionaires etc).

* NHAI has also invited bids for Toll operate transfer (ToT 3) which has 9 packages spread across states like Uttar Pradesh, Bihar, Jharkhand, Tamil Nadu etc with an Estimated Concession Value of ~Rs50bn. Monetization of assets would be another key focus area for NHAI as its balance sheet and cash flows are getting stretched.

* Suggestions have been invited for revival of BOT mode of awarding and Industry players have made a representation to the ministry for the problems faced by them. Few of the concerns raised by the players like delinking of termination payments post operation of assets, 80% land availability at 3H stage etc are very critical in nature and will go a long way if these issues are resolved.

Majority of the players have their plates full and are sitting at healthy order books offering us revenue visibility of next 2.5 – 3 years.

* We continue to prefer players who have strong balance sheets, execution capabilities and focus on working capital management. We maintain our positive stance on PNC Infratech, Ahluwalia Contracts etc.



* Volume growth for FMCG companies (staples) is likely to be volatile with demand environment being uncertain especially in rural markets. Gross margins are likely to remain stable for most of the staple companies resulting in moderate EBIDTA growth. From our coverage paint companies are likely to deliver best volume growth while VIP is also expected to do well in volume terms.

* We believe that the names in the Indian home appliances space are likely to register strong top-line performance on the back of strong summers and normalization of inventory levels. We expect robust operational performance for WHIRL, VOLT, BLSTR, OEL and SYML on the strong demand during the current quarter. However, we expect some pressure on margins for the AC brands on the back of limited price hikes taken during the current quarter.

* In the wires & cables space, we prefer KEI industries and expect strong operational performance while we expect steady operational performance from Polycab India. On the other hand, we believe that slowdown in real estate sector seems to weigh on operational performance for FCL.


Financial Services

* The Keys themes for 1QFY20 results will be:

* Systemic loan growth to remain soft as 1QFY20 is a seasonally weak quarter. Moreover, lending to NBFCs which was a key loan growth driver for banks up to 1HFY19 is likely to continue to remain soft.

* Private corporate lenders should continue to see a stabilizing asset quality trend. However, asset quality trends for financials like YES, LTFH, HFCs lending to developers (Indiabulls, PNB Housing who have a material exposure to real estate developers) remains a key monitorable for the quarter

* Mid-sized NBFCs continue to face challenges in raising liabilities and their strategy/ guidance on incremental borrowing mix coupled with incremental cost of borrowings remains a key monitorable. Moreover, many NBFCs have started co-lending arrangements with banks and quantum of loan growth for larger banks from such arrangement needs to be seen

* New vehicle sales have been weak which will impact VF portfolio growth of financials to large fleet operators like HDFCB/ICICIBC/KMB etc. Additionally, vehicle finance NBFCs will likely see a moderation in growth momentum.

* Most NBFCs will continue to see a NIM compression given pricing pressures and higher avg borrowing costs given change in borrowing mix.

* With bond yields moderating, we expect healthy treasury gains for regional pvt banks like KVB, SIB and FB.

* We expect all three SFBs to report above 40% AUM growth with both AUBANK/Equitas likely to report improvement in C/I ratios. Commentary from Ujjivan and Equitas on the progress on listing of SFBs will be closely watched.

* MFI segment is likely to report strong loan growth with stable asset quality trends. With merger of BHAFIN with IIB finally complete, IIBs commentary on the way forward needs to be seen.


IT Services

* 1QFY20 US$ revenue growth within our tier-I coverage universe could range -1.4% to 2.6% qoq as constant currency growth could be offset by ~1.3%, ~1.1%, & ~1.7% qoq depreciation in the average GBP, EUR and AUD vs. the USD.

* Across tier-I's, TCS (2.6%) could lead driven by large deal ramp-ups followed by Infosys, HCLT, and Wipro while Tech Mahindra revenues could decline 1.4% qoq. EBITM decline could range 48bps to 242bps qoq primarily driven by wage hikes, visa costs, company specific investments, and rupee appreciation partially offset by operational efficiency.

* Within our midcap universe Hexaware, Persistent and KPIT Technologies could lead while NIIT Technologies revenues could decline 0.7% qoq. Generally, growth across midcap would be led by momentum in top customer portfolio and deals wins. EBITM could range (+135bps to -114bps) but BFSI demand trends, competitive intensity, and supply constraint commentary could be of investor interest.

* Generally, demand trends in BFSI, hi-tech, retail verticals & discretionary projects continue to be investor interest.


Media & Entertainment

* Political advertisements were not that great for print companies this time to compensate for the decline in government advertisements (due to elections code of conduct) and the weakness in other key segments. Overall, we estimate negative print ad revenue growth for print companies.

* Softening newsprint costs shall help margins in 1QFY20 but the real positive impact of the same shall come from next quarter. For radio companies, we estimate high single digit revenue growth rates as the political ad spends were reportedly better for radio companies than print.

* Content performance in 1QFY20 was weaker than the previous 2 quarters. Indian box office saw ~12% growth in Bollywood and English collections mainly led by few movies which did well i.e. Avengers: Endgame, Bharat, Kabir Singh. Content pipeline for 2QFY20 also looks good.


Oil & Gas

* Transmission companies to report steady volume growth.

* GGAS will report strong volume growth driven by higher offtake by Morbi with EBITDA/scm expanding on higher operating leverage. IGL to see CNG/PNG volume growth of 12%/13% yoy. GRM to decline on decline in petrol/diesel crack. Polyester spread to decline post decline in polymer prices. PLNG volume will see marginal decline despite some improvement in Dahej volumes; this will be offset by higher realizations.



* Expecting a weak quarter for pharma space owing to a) dearth of new high value launches in the US market, b) Rupee appreciation against USD (~1.5%) and c) slowdown in the domestic market, while sequentially it will aid as 4Q is seasonally a weak quarter. Cipla and Lupin will continue to benefit from high value products viz. gSensipar and gRanexa, respectively. On sequential basis, we are expecting strong quarter for Ajanta and IPCA to be led by better domestic and anti-malarial tender revenues, Torrent to benefit from Unichem sales synergies, and Natco from profit sharing from gTamilu and gCopaxone, for which sales was done during the last quarter.

* Diagnostic companies are expected to see improvement in volumes mainly to be led by price rationalization for Thyrocare and geographic expansion of Dr. Lal Pathlabs despite price rationalization and increase in low value tests, overall realizations will remain intact with higher revenues coming from packaged (bundled) tests. While, Metropolis would see a moderate growth owing to slow ramp-up in newly expanded geographies.


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