Information Technology companies along with some of the Cement, Automobile and Banks have announced the results for the quarter ended March 2017. In the Information technology space Infosys, TCS and Wipro have reported results while in the automobile space only Maruti Suzuki has announced results. Ultratech Cement and Ambuja Cement in the Cement sector and HDFC Bank, Federal Bank, Kotak Mahindra Bank, Axis Bank and Yes Bank in the private Banking sector have reported quarterly earnings.
Information Technology
Infosys and TCS have reported further weakness in their revenue and profit for the fourth quarter of FY 2016-17 as compared to the fourth quarter of FY 2015-16. The guidance for Infosys was already revised in the lower side in the third quarter of FY 2016-17 but there has been a further downward revision in the last quarter of FY 2016-17which is disappointing news for the Information technology space. The Company has reduced its guidance for the FY 2017-18 for a constant currency growth in the range of 6.1% to 8.1% from an actual annual growth of 7.4% in FY 2016-17.
Another area of concern is Infosys’s lower profitability estimate of 23-25% for the current fiscal year—it has operated in a 24-26% band over the last few years, which implies that even as the firm sees pricing pressure for commoditized deals, it has been unable to sell more value-added services. In terms of dollar denominated revenue and profit growth on a sequential quarter on quarter basis Infosys and TCS have shown dismal performance. Companies such as Infosys and TCS have low penetration in the digital transformation segment of the Information Technology sector.
TCS’s banking, financial services and insurance (BFSI) segment, which accounts for over 40% of its revenue, grew 4.8% from a year earlier in constant currency terms. North America, which brings 54% of its business, reported a 4.3% rise. These numbers are significantly lower than the previous years as spending by companies in the BFSI space has reduced drastically. TCS’s growth in 2016-17 was slower than in 2015-16: TCS’s revenue growth in constant currency terms was 3.6 percentage points slower than the 11.9% increase in 2015-16. TCS added $1.03 billion in incremental revenue in the year ended 31 March 2017, less than $1.09 billion added in new business in 2015-16 when it reported a 7.1% increase and half of the $2.01 billion in new business added in 2014-15.
The IT industry may continue to grow but the overall growth rate continues to slow quarter after quarter. To add to that worry the rupee has appreciated 5.83% in the January to March 2017 quarter. Appreciation of the INR decreases the rupee earnings for export oriented companies in India and IT sector majorly earns revenue from US and Europe.
The price to earnings ratios for these companies are in the range of 14 to 17 in the current scenario, which were in the range of 13 to 19 after results were declared for Q3FY17.
Cement
Only two companies in the Cement space have reported quarterly results for the year ended March 2017. Ambuja Cements reported an over four-fold surge in first-quarter net profit, as higher cement sales volume and favourable pricing offset rising costs.Better pricing in the north, which contributes a large chunk of the company’s revenues, mainly led to sales growth.Volume growth surprised at 2.73% year-on-year basis at 6.02 million tonne.
Ultratech Cement is the largest cement manufacturer in India with a cement capacity of 67MTPAand has a pan India presence. Domestic grey cement sales were reported at 47.62 MnT vs 47.13 MnT for the full year and 13.35 MnTvs 13.32 MnT for Q4FY17. The volume and sales growth has recovered but is not very encouraging for the company.
The demand scenario continues to remain optimistic in the eastern region of India due to increase in the number of Infrastructure projects. The demand for affordable housing and Metro and Rail projects is expected to maintain demand for cement in the Western region.
The price to earnings ratios for Ambuja Cement and Ultratech Cement are 43 to 44 respectivelyin the current scenario. The valuations continue to remain expensive for these two companies as further uptick in demand is expected due to infrastructure projects.
Automobiles
The Automobile industry sales growth for the Financial Year ended March 2017 has been impressive for Utility Vehicles in the Passenger Vehicles segment and for Scooters and Mopeds in the Two Wheeler segment. Commercial Vehicles have shown recovery to some extent but Medium and Heavy Commercial Vehicles segment have grown marginally on a year on year basis.
The sales of Passenger Vehicles grew by 9.23 percent in April-March 2017 over the same period last year. Within the Passenger Vehicles, Passenger Cars, Utility Vehicles and Vans grew by 3.85 percent, 29.91 percent and 2.37 percent respectively during April-March 2017 over the same period last year.
The overall Commercial Vehicles segment registered a growth of 4.16 percent in April-March 2017 as compared to the same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) grew by 0.04 percent and Light Commercial Vehicles grew by 7.41 percent during April-March 2017 over the same period last year.
Three Wheelers sales declined by (-) 4.93 percent in April-March 2017 over the same period last year. Passenger Carrier sales declined by (-) 8.83 percent and Goods Carrier sales grew by 12.75 percent in April-March 2017 over April-March 2016.
Passenger and Commercial Vehicles have shown some decent growth in exports but the overall auto industry export sales have declined due to decline in sales of Two and Three Wheelers.
For Maruti Suzuki standalone revenue has increased 20.38% to Rs.207512 million from Rs.172735 million on a year on year basis for the fourth quarter ended March 2017. The company has reported a growth of 15.77% in the Profit After Tax (PAT) to Rs.17090 million as compared to a figure of Rs.14762 million for the quarter ended March 2016. The EBITDA margin was reported at 14.38% in Q4FY17 as compared to 16.52% in Q4FY16. The PAT margin was reported at 8.24% in Q4FY17 as compared to 8.56% in Q4FY16.
The growth has come largely off the back of the new models that were sold in the market – Baleno, Vitara Brezza, Ignis and Ciaz. Growth in volumes , increase in share of the Company’s higher segment models, benefits due to full capacity utilization and cost reduction efforts contributed to increase in profits. The P/E ratio is now at 26 after taking into consideration the earnings per share for the FY 2016-17.
The Union Budget announced tax cuts for the Rs.2.5 lakh to 5 lakh slab which would increase the disposable income in the hands of the middle class people. The implementation of the 7th Pay Commission and decent monsoon in the year should give a boost to automobile demand in the near future and help for the lost ground due to demonetization.
Banking
Except for Axis Bank the results for most of the private sector banks have been good in terms of growth in income and profitability. But on the other parameters such as Non-Performing Assets (NPA) the scenario has not changed. Most of the private sector banks have reported rise in the NPA levels for the fourth quarter of FY 2016-17.
Several banks reported higher bad loans, a concern for the sector which has been battling slowdown in economic activity and stalled projects over the past two years. Banks including HDFC Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank posted increase in their gross non-performing assets (NPAs) but indicated a recovery in the financial year 2018. Federal Bank posted recovery in the levels of NPAs. Gross NPAs slipped 11.5%year on year to Rs 17271 million and net NPA declined 14.6% to Rs.9412 millionin the fourth quarter of FY 2016-17.
For HDFC Bank, country’s second largest bank by asset size, profit grew by 18 percent but it also reduced its employee base through less recruitment and expansion during the year. Digitisation of banking activities has decreased the need for addition of more employees to do some specific jobs.
Axis Bank, third-largest private bank in terms of asset size, posted a 43% slump in its net profit at Rs.12250 million due to worsening asset quality woes.
In Q4FY17 asset quality continues to remain under pressure for Banks, as RBI has asked them to clean up their books and be proactive towards NPAs accounting and implementing. The worsening asset quality and muted credit growth would remain a concern for banks in first half of FY18.
The Price to Book value for Banks remains in the broader range of 2 to 5.5. The Banks that are managing the NPA levels efficiently are able to attract rich valuations compared to others.
