Commentary improves on Demand; COVID caveat remains!
In this report, we present detailed takeaways from the 1QFY21 conference calls as we refine the essence of India Inc. ‘Voices’.
* The 1QFY21 corporate earnings were better than our muted expectations for both the Nifty and the MOFSL Universe. Nifty sales declined 29% YoY (v/s est. decline of 30%), while EBITDA/PBT/PAT declined 6%/30%/26% YoY (v/s est. decline of 11%/39%/35%). Six sectors posted YoY profit growth - Healthcare (27%), Utilities (16%), PSU Banks (10%), Life Insurance (4%), Private Banks (1%) and Technology (1%). The sectors that posted losses in line with our expectations were Automobiles, Metals, Retail and Telecom. Our FY21/FY22E Nifty EPS estimates have been marginally revised upwards by 2.1%/2.7% to INR477/INR664 (prior: INR467/INR647). We now expect FY21 Nifty EPS to grow 2.4% YoY. Breadth of earnings revision was positive - 84 companies in the MOFSL Universe saw upgrades of >5% while 40 witnessed downgrades of >5% for FY21. Corporate commentaries were cautiously optimistic based on gradual demand recovery Jun'20 onwards due to easing of the lockdown restrictions.
* Commentaries of Banks suggest that business trends are gradually picking up MoM. The rural economy is picking up faster than expected and has reached ~70-80% of pre-COVID levels. Overall, banks would continue accessing the onground situation over the next few months, and accordingly, decide their growth strategy. In terms of asset quality, collection efficiency (CE) trends improved further in Jul-Aug'20 with ~75-85% collections in MFI and above ~80% in Affordable Housing. While banks do not expect higher restructuring in large ticket sized corporate accounts, it is expected in mid-sized corporate/SME segments. Commentaries of NBFCs across suggest that improving macros across most business segments has led to increased optimism on CE as well as on growth across product segments. In terms of restructuring, most financiers are awaiting Sep'20 CE trends given the end of the moratorium period.
* For the Consumer sector, the outlook on rural is positive on account of strong monsoons, good harvest and higher government spends. Rural is expected to grow faster than urban in the near term. The commodity environment remains benign, providing some relief in these challenging times. While in 1QFY21 companies had cut down their A&P spends, they are not sustainable going forward.
* In Autos, 2W/4W demand recovery post the lockdown surprised OEMs and dealers on the back of (a) preference for personal vehicles, (b) pent-up demand from pre-COVID bookings, and (c) high disposable income in the rural market. While there is still some uncertainty over sustainability of demand, there is high focus on cost cutting, capex and conserving cash, which is evident from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.
* In IT, despite the COVID-19 led disruption in 1QFY21, revenue saw limited impact while deal wins were healthy. Supply side challenges are largely behind as ~99% employees are working from home (WFH). Demand side challenges are also expected to subside given that clients are now prioritizing IT spends and deal discussions. These had earlier come to a standstill and have picked up again.
* Managements of Cement companies have informed that cement prices have softened across India in Aug'20 and are down by INR15/bag over Jun'20 on an average. Demand recovery in the East/North India has fared better than the South/West India due to lesser spread of COVID-19. A large part of the recovery was driven by robust demand from rural/semi-urban areas. However, managements remain cautious on the demand outlook due to the spread of COVID to rural areas.
* In Healthcare, COVID-19 led impact on domestic formulation (DF) segment was recorded due to limited MR-doctor connect and lesser footfalls at clinics. Companies have been aggressively pursuing digital marketing and looking to further strengthen relationships with doctors to improve DF sales gradually. DF sales growth outlook is expected to gradually pick up, but cost calibration should keep margins at elevated levels over the near term.
2W/4W demand recovery post the lockdown surprised OEMs and dealers alike on the back of (a) preference for personal vehicles, (b) pent-up demand from pre-COVID bookings, and (c) high disposable income in the rural market. For Aug’20, most OEMs were able to meet current demand in a seasonally weak month and are inching up toward inventory refilling for the upcoming festive season. 2W/4W demand sustaining in Aug’20 is a positive sign. CV demand recovery is expected only toward 2HFY21. While there is still some uncertainty over sustainability of demand, there is high focus on cutting cost, capex and conserving cash, which is evident from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.
Due to disruption caused by the COVID led shutdown, managements across companies highlighted the need to focus on working capital (execution has been slowed down on purpose). While ABB’s management indicated positive outlook for Automation in F&B and Electronics industry, Cummins’ management was cautious on the Hospitality sector and indicated slower pace of recovery for it. For ACs, Voltas’ management alluded to higher-than-normal inventory in the channel; however, it expects the same to get normalized over the next few months.
Cement industry volumes declined ~38% YoY in 1QFY21 as Apr’20 was a washout due to shutdown of operations till 19th Apr’20, post which operations have ramped up gradually. Managements informed that cement prices have softened across regions in Aug’20 and are down by INR15/bag over Jun’20 on an average. Demand recovery in the East/North India has fared better than the South/West India due to lesser spread of COVID-19. A large part of the recovery was driven by robust demand from rural/semi-urban areas, but managements remain cautious on the demand outlook due to spread of COVID-19 to rural areas. The quarter witnessed sharp decline in fixed costs due to lower admin, traveling, and maintenance and advertising expenses. While, a part of fixed cost reduction is likely to sustain in FY21, with an increase in volumes, some costs are likely to return. Further, while fuel costs had bottomed out, they are looking up in 2QFY21. As a result, margins are likely to decline
* The sector saw broad-based recovery toward the latter part of 1QFY21, which has sustained for most companies in Jul’20 and early-Aug’20 as well. Overall, rural demand held up well during the quarter and the outlook is getting even better with good progress of the monsoons. Even among urban centers there is a big divergence between performance as well as recovery outlook for metros, non-metros and Tier-1/2 cities. Performance and outlook of in-home food consumption categories were exceptionally strong in 1QFY21 and the same was the case for cleansing and herbal products. Down-trading is a fear called out by most companies, which along with slower pace of recovery for discretionary products, means that premiumization is unlikely to be a material factor for the full year. On the other hand, benign material cost outlook and strong focus on cost savings are likely to shore up margin outlook for the rest of the year particularly as sales declines are likely to be lower from 2QFY21. Channel inventory days are also declining sustainably as companies are culling their tailend products.
Commentaries of banks suggest that business trends are gradually picking up MoM. The rural economy is picking up faster than expected and has reached ~70-80% of pre-COVID levels. Overall, banks would continue accessing the onground situation over the next few months, and accordingly, decide their growth strategy. Among business segments, retail growth is picking up faster with some segments like tractors, 2Ws, gold disbursements and affordable housing seeing the fastest improvement. On the other hand, MHCVs (especially linked to large fleet operators/commercial vehicle segment) continue to see challenges. On the asset quality front, CE trends have improved further in JulAug’20 with ~75-85% collections in MFI and above ~80% in Affordable Housing. While banks do not expect higher restructuring in large ticket sized corporate accounts, it should occur in mid-sized corporate/SME segments. Overall, slippages are expected to rise in the coming quarters, and thus, credit cost trends should remain elevated.
Commentaries of NBFCs suggest that improving macros across most business segments has led to increased optimism for collection efficiency (CE) as well as for growth across product segments. In terms of restructuring, most financiers are awaiting Sep’20 collection trends given the end of the moratorium period. Improving liquidity and a higher risk appetite on account of better collection performance has given companies the confidence to lift disbursements. Improvement in the rural segment is a consensus view of most NBFC companies.
* The COVID-19 led impact on domestic formulation (DF) segment was a result of limited MR-Doctor connects and lesser footfalls at clinics. Companies have been aggressively pursuing digital marketing and looking to further strengthen relationships with doctors to improve DF sales gradually. The DF sales growth outlook is expected to gradually pick up, but cost calibration should keep margins at elevated levels over the near term.
* Capacity utilization has improved 70-90%. The trade generics segment has seen better off-take as compared to branded generics in 1QFY21. On the US generics front, ANDA approvals were higher but volumes for certain products were impacted in 1QFY21 due to stock piling in 4QFY20. Companies, post completion of remediation measures, are pursuing virtual inspections to ensure regulatory compliance at sites. Thus, the outlook remains steady for the US generics segment. The vaccine development for prevention of COVID is on at a rapid pace. Specifically, Bharat Biotech and Cadila Healthcare are expected to complete Phase-II clinical trials and subsequent statistical analysis by end-CY20.
Gradual opening up of the economy has led to rise in advertisement spends by corporates, which has led to healthy recovery in ad revenues of broadcasters. Commencement of production and shooting of daily shows should further drive viewership, aiding ad revenues. Subscription revenue is likely to remain on a steady track and threat from NTO 2.0 regulations is expected to have a shortterm impact on major broadcasters like ZEEL and SUNTV. SUNTV has guided that ad revenues could potentially decline 15-20% while ZEEL expects to grow ad revenues from the 2HFY21. Subscription revenues would moderate in FY21, after witnessing strong growth in FY20, led by NTO 2.0 regime.
Companies have highlighted that domestic demand has improved in 2QFY21 as the economy opened up post the lockdown. Exports are likely to remain elevated YoY; with domestic volumes picking up, share of exports in total volumes should decline sequentially to 30%. Managements of Tata Steel and JSW Steel have guided for higher capacity utilization in 2QFY21. Tata Steel has guided for >95% utilization and improvement in realization in 2QFY21 on the back of repetitive price hikes in the domestic market, better product mix and higher export realizations. It has also guided for sequential improvement in realization in excess of INR3,000/t. For FY21, both Tata Steel and JSW Steel have guided for flattish sales volumes whereas JSPL has guided for volume growth in the range of ~15% on the back of unutilized capacity and its ability to sell excess volumes in the export market. On the other hand, managements of Hindalco and Hindustan Zinc have highlighted that domestic demand for base metals has improved resulting in lower dependence on exports. Hindalco has guided that exports are likely to contribute ~65% of its volumes in 2QFY21.
Oil & Gas
OMCs expect some more time before 100% demand is retained, with further pickup in demand from the industrial and commercial space. Thus, refining margins are also likely to remain subdued due to poor product cracks, which are weighed down by demand destruction. However, the OMCs have reiterated that marketing margins and GRM trends over the longer term would stand at normalized levels. RIL is further planning to streamline its O2C integration business and focus on expanding its fuel marketing business. In the current challenging operating environment, RIL’s ability to optimize between feedstock and sales mix provides an edge in improving its performance. The company’s strong growth path remains in its digital and retail business. MAHGL and IGL stated that CNG volumes have recovered to 70-75% of pre-COVID levels, although it is likely to range between 80-85% of pre-COVID levels in the near term. However, margins are likely to remain strong owing to lower domestic and spot prices. GUJGA has mentioned that current sales volume stands at 9.5mmscmd (v/s 9.4mmscmd of average sales in FY20), aided by strong recovery post the lockdown. Apart from probable benefits of the NGT’s stringent norms to curb industrial pollution, the company also plans to set up ~60 CNG stations in FY21 (out of 100 planned), which would increase the reach of CNG in Gujarat and encourage conversion. Post completion of the Kochi-Mangalore pipeline, PLNG expects utilization to increase to ~30-35% and reach 40-45% after 2-3 years. Utilization levels at Dahej should remain at current levels even 4-5 years down the line, primarily due to back-to-back tie-ups despite competition coming in. GAIL has stated that Gas trading, Gas transmission and Petchem operations are back to pre-COVID levels. Growth guidance for the company continues on the back of incremental volumes of ~8-12mmscmd from the commencement of fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk on its US contracts.
Retail sector witnessed a complete shutdown during the lockdown period and has seen almost insignificant revenues during Apr-May’20. However, since Jun’20 pace of store reopening has been significant across states. Though footfalls have been lower, the conversion rate and bill size of customers has improved significantly. ABFRL/SHOP/V-Mart have negotiated rents during the lockdown period and reduced rental expense in FY21 as business is expected to remain muted. Retailers are also focusing on increasing their sales via the online channels and invest in marketing, branding and logistics to scale up online sales. ABFRL/V-Mart/SHOP have guided for muted capex/store adds in FY21 until normalcy returns. V-Mart; however, might look at expansion opportunities via attractive deals from 2HFY21.
Despite the COVID-19 led disruption in 1QFY21, revenues saw limited impact while deal wins were healthy. Supply side challenges are largely behind as ~99% employees were enabled for the WFH model. Demand side challenges are also expected to subside given that clients are now prioritizing IT spends. Deal discussions, which were earlier at a standstill have picked up again. Deal pipeline is healthy and has returned to pre-COVID levels. In terms of verticals, BFSI, Healthcare and Hi-tech remained largely resilient and are expected to be growth drivers in the near term. Retail, Energy and Utilities and Manufacturing were the most impacted verticals and will continue to see further challenges over the next couple of quarters. Deal closures have been slower than usual given that clients have added another layer of decision making. However, deal ramp-ups have been largely on track. The near-term outlook is positive and the worst is now behind. Expect 2QFY21 to see largely stable revenues and margins.
Telcos have reiterated their stance that ARPUs should reach INR200 in the near term and INR300 in the long term for the industry to be sustainable. Further, managements have noted that 2G would exist in the market for at least the next 3-4 years and telcos would continue to offer 2G services until revenue share from these services become insignificant. Capex remained muted this quarter due to the nationwide lockdown; however, the companies would start deploying capex with the opening up of the economy. Bharti Infratel’s management mentioned that energy margin should reduce from 3-5% to 0-3%. However, it is continuously engaging with telcos to move back to the long-term fixed energy contract that is expected to bring back margins to previous levels. TCOM’s capex guidance remains intact and the company would keep investing in business opportunities. Further, it does not have any immediate plans to monetize its land parcel and would look for other means to deleverage.
PWGR has witnessed a pickup in RE related projects in Rajasthan. The PugalurThrissur project is also progressing well. But, overall execution pickup is uneven. On the supply side, manufacturers are having difficulty in restoring production. Nevertheless, PWGR has maintained its FY21 capex and capitalization target of INR105b and INR200-250b, respectively. For the sector, while receivables did increase in 1QFY21, it has now started to normalize. For PWGR, receivables increased from INR49b in Mar’20 to INR82b in Jun’20, but reduced to INR75b in Jul’20. Collection efficiency has increased and is >100% for Jun-Jul’20. For NTPC, outstanding over-dues have reduced to INR145b from INR164b at end-Jun’20. The company is hopeful of squaring off past dues by end of the quarter. In terms of capitalization, NTPC expects its capitalization run rate at 5-6GW per annum over the next 3-4 years
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