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Published on 9/07/2020 12:49:02 PM | Source: Motilal Oswal Financial Services Ltd

Voices India Inc on Call - Cautious commentary; Uncertainty reduces demand visibility By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Motilal Oswal #Sector Report

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In this report, we present detailed takeaways from the 4QFY20 conference calls as we refine the essence of India Inc. ‘Voices’.

* The 4QFY20 corporate earnings were muted but in line with our expectations for both the Nifty and the MOFSL Universe. Nifty EBITDA/PBT/PAT declined 4.8%/28.6%/20.1% YoY (v/s est. -8.8%/-21.2%/-20%). PAT was dragged by Autos, Oil and Gas (O&G), Metals, Private Banks and NBFCs. Our FY21/FY22E Nifty EPS estimates have been cut by 9%/6% to INR454/INR637. We now expect FY21 Nifty EPS to decline by 3.7%. Direction of earnings revision for the broader markets still remains downward – with 113 companies in the MOFSL Universe witnessing an earnings cut of >5% and 25 witnessing upgrades of >5%+ for FY21. Corporate commentaries expectedly conveyed uncertainty and demand weakness given the disruption due to the COVID-19 pandemic.

* Banks have guided that the COVID-19 outbreak would lead to weakening of credit demand in Consumer Retail, MFI and SME/Business banking segments. Banks will exercise caution while lending in the near term with focus on preserving the balance sheet and keeping liquidity levels high. On the asset quality front, banks expect the incidence of moratorium to show stable/declining trends under moratorium 2.0 as economic activity is picking up. However, they also expect increase in slippages during 2HFY20 from certain retail and SME/business banking segment. Commentaries of NBFCs across suggest that most are sitting on adequate liquidity for another 3-4 months. During the lockdown phase 1.0, disbursements and collections came to a standstill across product segments. However, this has witnessed meaningful improvement over the last one month for most players. HFCs have seen significant decline in customers opting for moratorium phase 2.0, while the same has been modest for VFCs. Most of the managements have re-iterated that rural recovery is likely to be much faster than urban.

* Consumer companies with large staples portfolio seem to be doing well with higher in-home consumption. Further, they are benefiting by focusing on the Health and Hygiene segments, which have gained significance amid the COVID19 crisis. Most Consumer companies have been able to resume operations at ~70-90% of their normal levels and it is getting better with every passing day. Stringent cost cutting will be a key focus area for all Consumer companies in the near term to fight the current challenging times

* In Autos, all OEMs refrained from providing guidance for FY21 due to the uncertain demand outlook; however, most expect recovery in 2HFY21. With uncertainty in demand, there is high focus on cutting cost/capex and conserving cash. This is evident from the cut in variable/fixed costs and slashing of capex budgets for FY21 across companies.

* In IT, deal wins were a mixed bag. While TCS and HCL saw strong deal wins, INFO and Tech-M saw some impact. Overall, companies did well in adapting to the current situation by shifting to remote operations with agility and enabling over 90% employees to WFH in a short span of time, thereby reducing the impact.

* Capital Goods companies have taken a cautious stance on working capital and gone slow on execution. Most migrant workers are still returning to project sites with execution yet to ramp up fully.

* In Cement sector, managements have indicated that Apr’20 was a washout due to the shutdown of operations till 19th Apr’20. Post this, operations ramped up gradually. Cement prices have witnessed a hike across regions and are higher by INR10/bag over Mar’20 on an average. Demand recovery in the East/Central India fared better (v/s the North/West India) due to lesser spread of COVID-19

 

Autos

Industry volumes remained weak in 4QFY20 due to the BS6 transition, and were further impacted by the lockdown during the last 10 days in Mar’20. With the lockdown being lifted in May’20, Auto industry has seen demand recovery on the back of (a) preference for personal vehicles, (b) pent-up demand from preCOVID bookings, and (c) high disposable income in the rural market. For Jun’20, most OEM plants were operating at 50-70% average utilization (ex-tractors) with >90% of dealer outlets operational. While demand outlook is uncertain across segments resulting in no guidance for FY21, most OEMs expect recovery in 2HFY21. With uncertainty in 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

 

Capital Goods

4QFY20 was marked by disruption in businesses and supply chains owing to the COVID-19 led shutdown toward the second half of Mar’20 with most companies reporting loss of sales. Companies are now cautious on working capital and have gone slow on execution. Most migrant workers are still returning to project sites with execution yet to ramp up fully. Order inflows for ABB and L&T were surprising and provided some comfort on execution going ahead, provided working capital does not stretch further. Higher Inventory in Room AC companies needs to be closely watched as quick liquidation is key for primary sales going forward.

 

Cement

Industry cement volumes declined ~13% YoY in 4QFY20 due to the nationwide lockdown and plant shutdowns from 24th Mar’20 to combat the COVID-19 pandemic. Managements indicated that Apr’20 was a washout due to shutdown of operations till 19th Apr’20, post which operations ramped up gradually. Cement prices have witnessed hike across regions and are higher by INR10/bag over Mar’20 on an average. Demand recovery in the East/Central India has fared better than the North/ West India due to lesser spread of COVID-19. A large part of the recovery has been driven by robust demand from rural and semi-urban areas, but managements are still cautious on the demand outlook. Industry is likely to benefit from lower fuel and other input costs, as energy prices (oil/pet coke/coal) have been on a downtrend. However, this benefit is likely to be negated by higher per ton fixed cost (staff and other expenses).

 

Consumer

Consumer companies with large staples portfolio seem to be doing well with higher in-home consumption. Further, they are benefiting by focusing on the Health and Hygiene segments, which have gained significance amid the COVID19 crisis. Most Consumer companies have been able to resume operations at ~70-90% of their normal levels and it is getting better with every passing day. With smaller players affected on the liquidity front, large branded players are poised to improve their market shares. Discretionary portfolios of companies across the board have been affected, including those of largely staple companies. For example, ice creams for HUL and VAHO for Marico have been affected. However, on an overall basis, these companies are well placed due to their large staples portfolio. On the other hand, companies with major discretionary portfolios are likely to be significantly impacted in 1QFY21 and in some cases for the full-year FY21 as well. The largely benign commodity environment is likely to provide some relief on margins. Stringent cost cutting will be a key focus area for all consumer companies in the near term to fight the current challenging times.

 

Financials

Banks

The outbreak of COVID-19 would lead to weakening of credit demand in Consumer Retail, MFI and SME/Business banking segments. Thus, loan growth trends should moderate due to the consumption slowdown. Banks would exercise caution while lending in the near term with focus on preserving the balance sheet and keeping liquidity levels high. Margins should come under pressure due to the sharp reduction in the repo rate. This should lead to moderation in yield; however, the sharp cut in TD/SA rates by various large banks would offset margin pressure to some extent. On the asset quality front, banks expect the incidence of moratorium to show stable/declining trends under moratorium 2.0 as economic activity is picking up. However, an increase in slippages during 2HFY20 from certain retail and SME/Business banking segments is expected. Thus, banks would continue to strengthen their provision coverage, and thus, credit cost trends would remain elevated. Most private banks have taken board approval to raise capital over FY21E to manage the current crisis.

NBFC

Commentaries of NBFCs across suggest that most are sitting on adequate liquidity for another 3-4 months. During the lockdown phase 1.0, disbursements and collections came to a standstill across product segments. However, this has witnessed meaningful improvement over the last one month for most players. HFCs have seen significant decline in customers opting for moratorium phase 2.0, while the same has been modest for VFCs. With gradual opening of economic activities, businesses are expected to resume in a phased manner. Most of the managements have reiterated that rural recovery is likely to be much faster than urban.

 

Healthcare

There has been supply chain disruption in the domestic formulation (DF) segment in terms of manufacturing as well as logistics due to the lockdown implemented on account of COVID-19. While, capacity utilization has improved 50-60% and distribution is moving toward normalcy, managements have cited that patient-doctor connect is gradually improving. This is positively impacting demand for medicines, especially for products related to acute therapies. Companies have been aggressively pursuing digital marketing and looking to further strengthen relationships with doctors. On the US generics front, the ANDA approvals and volume-off-take was higher, particularly for medicines associated with COVID-19. Companies, post completion of remediation measures, are pursuing virtual inspections to ensure regulatory compliance at sites. Overall, there could be near-term weakness in the DF segment, while outlook remains steady for the US generics segment.

 

Media

Media industry has been facing demand slowdown in advertisements. The onset of the lockdowns led to a drastic cut by corporates/government toward ad spends. This is likely to continue in FY21 until the economy revives, however, subscription revenue is likely to remain on track. Sun TV has guided that ad revenues could potentially decline 15-20% while subscription revenues may grow in double-digits in FY21. In movie exhibition, PVR expects demand once cinemas commence operations with a good line-up of movie releases. Some producers have released their films on the OTT platform foregoing the big screen, but majority still prefer the big screen for movie releases.

 

Metals

Managements highlighted that domestic steel demand has been hit hard in 1QFY21 due to the COVID-19 lockdowns in different parts of the country. Both JSW Steel and Tata Steel stated that capacity utilization was below 50% in Apr’20 but subsequently improved to ~80% in May-Jun’20. Companies also guided that exports are likely to contribute ~50% of volumes in 1QFY21 and ~30% of volumes in 2QFY21 as against the usual levels of ~15%. Tata Steel stated that while domestic prices corrected by just INR500-1,000/t QoQ in 1QFY21, higher exports could dent blended realization by INR4,000-5,000/t QoQ. On the other hand, aluminum companies highlighted that while their capacity utilization remained elevated at normal levels in the entire quarter, even they have resorted to higher exports to balance the weak domestic demand during the quarter. Hindalco guided that exports are likely to contribute ~80% of its volumes in 1QFY21.

 

Oil & Gas

OMCs expect refining margin to remain subdued in 1QFY21 due to poor product cracks, which are weighed down by demand destruction. Also, discounts from Middle Eastern suppliers (enjoyed in 4QFY20) have come off. However, OMCs have guided that improvement in product demand would translate into higher cracks, leading to better GRMs in the latter part of the year. OMCs are seeing faster-than-expected recovery in refining throughput and product marketing, which should lead to normalization of GRMs and gross marketing margins. RIL’s refining margin is set to improve with the enhancement of delayed coker and distillate yields, while petrochemical cracks are expected to improve with feedstock flexibility. The company’s strong growth avenue remains in its retail business. MAHGL continues to struggle with lackluster volume growth and expects some volume relief from development of the Raigarh geographical area (GA). IGL expects CNG volumes to return to normalcy by end-FY21; however, margins are likely to remain strong owing to lower domestic and spot prices. GUJGA has stated that total sales currently stand at 70-75% of normal volumes, with strong demand from Pharma/Agrochem units in Ankleshwar, Panoli, Vapi, etc. PLNG expects strong volume off-take at Dahej (on expanded capacity) from the Power/CGD sectors and foresees capacity utilization of 30-35% from the ramp-up at Kochi post completion of the Kochi-Mangalore pipeline (by endJul’20). For FY21, GAIL has stated that gas sales in Apr’20 reduced to ~70% of normal levels; however, it has now reached ~90% of normal levels, barring CNG (which is ~50% of normal levels). We expect full normalization in two months. Growth guidance for the company continues on the back of incremental volumes of ~7-8mmscmd from the commencement of two fertilizer plants and the Kochi-Mangalore pipeline, which should lower the risk on its US contracts.

 

Retail

Retail sector witnessed a complete shutdown during the lockdown period. However, since May’20, retailers are opening doors for consumers in select cites. Though footfalls have been lower, the conversion rate and bill size of customers have improved significantly. ABFRL/SHOP/V-Mart have guided for reduction in cost measures from an average of ~25-50% until majority of their stores are functional. Retailers are also keen to convert rentals as a variable of sales over FY21 and are seeking exemption of rent during the lockdown. Decision over these two requests has been fruitful with some landlords. ABFRL/V-Mart/SHOP have sharply cut their capex guidance in FY21 with no store adds for 1HFY21.

 

Technology

4QFY20 saw good performance in Jan-Feb’20, which was offset by the COVID-19 impact in Mar’20. Supply side challenges were more prominent as WFH was enabled for 90+% employees on short notice. Demand side challenges are expected to be more prominent going forward as clients are deferring discretionary spends, reprioritizing IT spends toward enabling business resiliency and looking for cost optimization. In terms of vertical – Retail (non-essential), Manufacturing / Auto, Aero and Energy have seen higher-order COVID impact while Healthcare /Life Sciences and Technology have been fairly insulated. Deal closures and deal ramp-ups are continuing virtually with delays in a few cases. Sequential contraction in margin was largely due to the dip in utilization, impact on revenues and one-time expenses (contribution to ‘PM Cares’ fund). The nearterm outlook remains challenging and managements expect 1QFY21 to see sequential decline in revenue and pressure on margins. Deferral in wage hike, reduced travel and facility expenses and currency depreciation should help partially offset the COVID impact on margins.

 

Telecom

Telecom companies have realized full benefits of the price hike with no downtrading, according to managements. They further indicated that ARPUs would reach INR200 in the near term and INR300 in the long term. Further, the incremental EBITDA margin on increased ARPU should be ~65% on stable-state basis. Network densification, massive MIMOs, core and transport infrastructure deployment and front-loading of investment led to an increase in capex, which should be lower in 1QFY21 and FY21. Bharti Infratel’s management mentioned that gross tower addition has doubled since last year. Management is confident of towers being taken by the second tenant due to coverage needs of operators. BHIN is also looking for rental renegotiation if an opportunity arises. TCOM’s management is looking to achieve double-digit profit growth in the data business and is also targeting net debt to EBITDA of ~2.5x in the long term.

 

Utilities

The nationwide lockdown has impacted execution with PWGR noting issues on resource mobilization and NHPC noting temporary stoppage of work for Subansiri. PWGR has set up FY21 capitalization target of INR200-250b. Much of this though is toward commissioning of Raigarh-Pugalur (INR150b). The company has indicated resolving much of the ROW issues faced and plans to commission Bipole-I by Jul’20. Bipole-II and VSC for the line are expected to come up by Dec’20. NTPC expects capitalization momentum to continue and is targeting ~5.9GW for commercialization in FY21.

 

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