* Beats outpace misses while forward earnings remain steady: In a significant departure from recent trends, corporate earnings in the listed space have seen more beats than misses (146 beats; 117 misses and 57 neutral) while the forward earnings of the NIFTY50 index for FY21 and FY22 have been maintained without any downgrades.
* Operational results based on sales and EBITDA are largely in neutral territory with equal number of beats and misses: Tax cuts have positively impacted the earnings of companies in the higher tax bracket (although it did cut the other way for the ones with DTA). Key positive from the Q2 results season is that even at the operational front (sales and EBITDA) the misses did not exceed the beats and were largely neutral.
* Momentum of positive earnings surprise holds the key: Despite the larger number of beats, the forward earnings have just been maintained, not upgraded. This could possibly allow the ‘positive earnings surprise’ to continue as it did in the US post the tax cuts. Bulk of the profit up-swing expected during FY19-FY22E is coming from: (a) banks which could further benefit from NCLT resolutions, credit growth revival and tax cuts; and (b) industrials along with TAMO. We expect the NIFTY50 index EPS growth to be ~17% over FY19-FY22E as the economy comes out of transient growth issues. Our 1-year ahead target for Dec’20E stands at 13,100 based on a 1-year forward target multiple of 17.85x (+0.5 s.d. of LTA).
Top picks: TVS Motors, L&T, UltraTech, Dabur, HDFC Ltd., Torrent Pharma, GSPL, Bandhan bank, Tata Steel, SBI Life, Interglobe Aviation, Jubilant Foodworks, Page Industries.
Mapping the Q2FY20 results to corporate GVA / GDP:
* Drivers of corporate GDP balanced: PAT growth (adjusted for extraordinary losses) of the listed space (~2250 stocks) was at 6% yoy. Others drivers of corporate GVA - Growth of capital consumption at 22% and Employee cost at 9% were robust for the listed space. Corporate tax growth was weak at -19% due to the recent tax cut.
Consumption mixed but largely ahead of expectations:
* Aggregate sales growth in staples and discretionary space was at 7% while volumes for large staples companies were better than expected in the 5-10% range. Even for auto, which witnessed decline in sales, the results were largely better than expected especially for two wheelers. Paint companies defied the slowdown observed in other consumer categories with double-digit volume growth. Modern trade and e-commerce channels continued to show high growth.
* Retail credit growth continued to be robust for most banks and NBFCs indicating continued strength in discretionary consumption.
* Commentary on rural consumption by companies in FMCG and auto sector indicated rural growth was slower than urban (exception: Dabur).
* Residential real estate sales remained flat YoY on a high base.
Financials – No major stress but growth muted as lending risk aversion remains high:
* NIMs expanded while deposit rates dipped for large banks which should open up space for rate transmission going ahead.
* Credit costs and stressed assets remained elevated.
* Growth for affordable housing remained robust while mid and luxury housing along with developer loan growth remained muted.
Capex heavy sectors mixed as private investments continue to be weak amidst transient impacts of slow government spending and weather conditions:
* Private capex is clearly missing from the narrative and continues to be a key negative. Utilities, cement and coal mining were clearly impacted by the additional twin effects of slow government spending and weather conditions in the form of extended monsoons. Despite these transient challenges, the mentioned sectors delivered largely sanguine earnings in Q2 due to better profitability on declining input costs.
* Oil & gas: Lower oil prices and disappointing GRMs impacted companies in terms of lower realisations, inventory losses and refining margins.
* Subdued metal prices (base metals and steel) and rising power costs impacted profitability of metal companies.
Exports of large pharma companies weak while steady for IT:
* Large-cap pharma companies’ exports of generics to the US continued to be weak due to increasing competition and higher number of USFDA issues, which has also resulted in several large players vacating unviable products thereby creating short-term opportunities for smaller players.
* IT exports saw mixed trends amongst players (robust for Infosys and muted for TCS). BFSI and retail verticals showed weak growth while lifesciences and manufacturing saw better demand.
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