Telecom, Consumer Durables, Engineering and Capital Goods and Metals and Mining sector companies have announced the results for the quarter ended March 2017. The trend appears to be concerning for most of the metal and mining companies due to decline in the respective commodity prices in the last few months. Telecom companies continue to face headwinds in terms of stiff competition from Reliance Jio. Consumer Durable companies are set to further show recovery in volume growth as the demonetization effect fades away. Engineering and Capital Goods companies have shown healthy growth in revenues but only due to inflow of orders from the Government due to spending on infrastructure.
The results and sector specific financial performance is discussed below:-
Most of the Consumer Durables Companies have reported healthy rise in revenues for the fourth quarter ended FY 2016-17. The rise in profitability has been tepid or lower than the revenue growth due to the rising costs of raw materials which the companies were not able to pass on to the customers. The margins came under further pressure as a result which were already down due to the demonetization effect.
For Havells India margins were impacted due to gradual withdrawal of demonetization schemes and deferred price escalation to compensate cost increase. Electrical Consumer Durables segment margins for the company were weighed down by demonetization schemes that the company launched to tackle the temporary setback in demand. Havells India Ltd stock fell 6.4% since it announced its March quarter results in May. Even after this decline, its share is still up by 31% over a year ago and trades at rich valuation on the hope that recovery would gather pace in the FY 2017-18.
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 consumer durables demand in the near future and help for the lost ground due to demonetization.
The P/E ratio continues to be on the higher side for Havells India (60) and Whirlpool India (46) due to the expected growth in their respective business segments. Hawkins Cookers and Bajaj Electricals continue to witness relatively lower valuations due to relatively lower growth with both at a P/E of 33.
The Indian telecom industry has started witnessing consolidation which in turn is expected to reduce the number of telecom operators thus increasing the industry’s efficiency with companies coming together to share their network coverage assets.
Consolidation has gained momentum in the industry with the intention of telecom operators to maintain their market share in order to compete with the new entrant Reliance Jio. The entry of new player has gained subscribers and has also affected the industry’s sales and profits.
The number of telephone subscribers in India increased from 1,188.55 million at the end of Feb-17 to 1,194.58 million at the end of Mar-17, thereby showing a monthly growth rate of 0.51%. The urban subscription increased from 692.15 million at the end of Feb-17to 692.9 million at the end of Mar-17, and the rural subscription increased from 496.39 million to 501.61 million during the same period.
As on 31st March, 2017, the private access service providers held 91.06% market share of the wireless subscribers whereas BSNL and MTNL, the two PSU access service providers, had a market share of only 8.94%.
The market share in terms of wireless subscribers was the highest for Airtel at 23.39% followed by Vodafone at 17.87%, Idea at 16.7% and 9.29% for Reliance Jio as of 31st March 2017. The top four telcos cornered slightly less than three-fourths of the wireless subscriber market share in the industry.
The P/E ratio continues to be on the higher side for Bharti Airtel (39) due to the higher market share of the operator in terms of wireless subscribers. Idea Cellular and Reliance Communications have reported losses for the FY 2016-17 and hence the P/E ratio is not calculated.
Metals and Mining
Barring Coal India all the metal and mining companies in the table below have reported stellar rise in revenues and profitability in the last quarter of the FY 2016-17. Iron ore prices which rose to 52 week high in the month of March 2017 are on a downtrend and currently at USD 54.71 a ton.
For the Financial Year 2016-17 NMDC’s production and sales have reached highest level as the Company has produced 34.03 million tonnes and sold 35.62 million tonnes of Iron ore. But the stock price corrected 30% from levels of Rs.150 to Rs.105 since the month of February 2017.
The reason for the correction in the stock price of NMDC was the crash in Iron ore prices, which have dropped to a 7 month low after China’s credit rating was downgraded by Moodys. From the start of 2017 the market was worried about iron ore stockpiles in China which were at record highs. According to a report – Umetal, total iron ore inventory in China is about 133 million tonnes, which is the highest ever. A huge amount of inventory will dampen the import of iron ore in China, due to which prices of iron ore are declining.
The valuations seem reasonable for most of the metal and mining companies (P/E in the range of 12 to 21) as a year on year rise in revenues and profitability got factored in the stock prices. The downtrend in commodity prices reflect the valuations getting trimmed to lower levels for most of the metal stocks.
Engineering and Capital Goods
The revenue and net profit growth was healthy for Larsen and Toubro and to some extent for ABB India but it was poor for companies such as Bharat Heavy Electricals and Siemens. The order book for companies such as Larsen and Toubro and Siemens remains robust.
L&T has given a growth guidance of 12-14 per cent for order inflows and 12 per cent for revenue growth for 2017-18, which hinges primarily on government spending. The value of the order book of the company stood at Rs 2.61 trillion at the end of March 2017 (up 5% y-o-y). During the fourth quarter of 2016-17, the order intake grew 9.6% (y-o-y) or Rs 472.89 billion. At Rs 90.44 billion, international order inflow grew 19% in the quarter.
Siemens Ltd, referred to as the trains-to-turbines company, reported a 96% year-on-year jump in order inflows to Rs.128 billion. Siemens said its business focused on government spending is doing well. Order inflows at ABB India Ltd grew 28%. Traction in the transportation sector, led by railways, helped ABB India maintain the momentum in order inflows.
Order inflows fell sharply at Thermax Ltd, reflecting the weak private sector investment trends in the domestic economy.
For most of the Engineering projects in the country related to infrastructure Government spending was responsible for the inflow orders in the recent quarters. Private spending and investment related to infrastructure has not shown any recovery in the last quarter of FY 2016-17 and is not expected to pick up in the FY 2017-18 as well. Firms with exposure to government investments in power transmission, railways and infrastructure sectors are seeing increased order inflows.
The valuations seem overtly expensive for companies such as ABB India (P/E – 77) and BHEL (P/E – 71) while those for L&T (26) and Siemens (15) look relatively reasonable if we compare the overall business outlook for the FY 2017-18.