The 4th quarter Fy 19 results and management guidance point to a slowdown in demand and headwinds across many sectors. The NBFC liquidity crisis is also weighing on financial sector, consumption sector and infrastructure sector. Global headwinds are hurting many sectors, with both price corrections (optical fiber prices have dropped by 50% globally on weak China demand) and decline in trade.
Auto sector is leading the slowdown with Maruti showing drop in sales and guiding for weak sales in fy 20. Infrastructure sector is seeing headwinds on lack of credit, with companies such was ACE showing drop in order book on lack of activity.
Pharma continues to be hit by negative US FDA observations. IT sector is showing mixed trends.
IT Sector:
March 2019 quarter earnings kicked off with index heavy weight stocks TCS & Infosys; Infosys reported revenue growth of 0.6% (Q-o-Q) and 19.1% (Y-o-Y) to Rs. 215 billion. Net profit increased by 10% (Y-o-Y) to Rs. 40 billion and company’s management has guided Fy20 revenue growth would be in between 7.5%-9.5% in constant currency terms. On a contrasting note to Infosys results, TCS reported better than expected earnings for the March 2019 quarter. TCS net profit increased by 18% (Y-o-Y) to Rs. 81 billion. Revenues for the quarter increased by 18.5% (Y-o-Y) to Rs. 380 billion and growth was witnessed in almost all the business verticals. Company declared a final dividend of Rs. 18 per share for Fy19.
Oil & Gas Sector:
Reliance Industries standalone net profit fell by 4.2%, which is the first decline in last 17 quarters. Gross refining margin fell to USD 8.2 per barrel from USD 8.8 in the previous quarter. The revenue from its refining business declined 21.4% over the previous quarter to Rs 878 billion. However, retail segment reported 89% (Y-o-Y) top-line growth while Reliance Jio witnessed a slight dip in ARPU for Q4Fy19. On the city gas distribution front, companies have reported robust top-line and bottom-line growth despite single digit growth in volume. CNG presently constitutes 4% of total gas consumed. This will grow progressively to around 8% in the years to come. With the completion of tenth CGD bidding round, CGD would be available in 228 geographical locations — comprising of 402 districts spread over 27 states and union territories, covering approximately 70% of India’s population and 53% of its geographical area.
Automobile Sector:
According to the data released by SIAM, a total of 23,63,376 units, including passenger vehicles, commercial vehicles, three wheelers, two-wheelers, and quadricycles, were produced during April 2019. It was 10.69% lower than 26,46,257 vehicles produced in April 2018.
In April 2019, passenger vehicles production declined 7.72% to 3,20,259 units, while the production of commercial vehicles slumped 9.53% to 82,329 units. The three-wheeler production dropped 4.72% to 92,714 units and there was a plunge of 11.55% in the production of two-wheelers to 18,66,934 units.
Market leader, Maruti Suzuki reported fall in EBITDA & Profitability due to adverse foreign exchange rates and commodity prices, higher depreciation and higher sales promotion expenses partially offset by cost reduction efforts. Management expects Fy20 will be a period of uncertainty due to regulatory transition (BS VI emission norm and ABS), management said they can’t judge the customer behavior as they can postpone their purchases after April 2020 to get advanced engine car or they can prepone their purchases, as the cost of BS VI vehicle will be high. Management also guides for volume growth of 4-8% in FY20.
Bharat Forge reported net sales of Rs 16.7 billion. Domestic revenue at Rs 7.1 billion grew by 8% YoY buoyed by strong growth in non-auto and PV segment while export revenues grew up by 18% YoY. Among export markets, America revenue grew by 26% YoY, while Europe declined 4% YoY. EBITDA came in at Rs 4.8 billion, EBITDA margin of 29.06% (-77 bps YoY, +28 bps QoQ), margin improved on a QoQ basis due to lower other expenses. Net profit stood at Rs 2.7 billion.
During the quarter, domestic CV revenue for the company declined 30% YoY due to capacity constraints and minor impact from new axle load norms. Domestic CV demand is likely to remain weak during 1QFY20. Pick-up in infrastructure and BS6 pre-buy is likely to aid demand recovery during 2HFY20. Bharat forge secured new orders worth over USD 50 million from the CV and industrial segment in FY19, management expects 3-5% growth at 335k units in the US class 8 truck orders in CY19 due to strong order backlog. Capex- In addition to its earlier strategic investment of GBP 10 million in Tevva Motors, Bharat forge might further invest GBP 3-5 million. Total growth capex during FY19 and FY20 is expected to be Rs 8.5 billion, including Baramati facility and new AP plant.
FMCG Sector:
As per the Nielsen consumer report, rural consumption growth fell to 15% from 20% growth witnessed in December quarter. The gloomy projection for consumption ties in with that for automobile sales, together painting a bleak picture of the Indian economy. Forecasts of a below-normal monsoon this year at 93% as against a normal range of 96-104% is another key factor to watch out for which would impact consumer spending levels in rural markets. Slowdown in rural consumption has affected many FMCG companies in the quarter ended March 2019.
Banking/ NBFC / Insurance Sector:
After a long period of stress, the banking sector appears to be on course to recovery as the load of impaired assets reduces; decline in gross NPA ratio since September 2015 and improving Provision Coverage Ratio, indicating positive signals. The asset quality of banks showed an improvement with the gross nonperforming assets (GNPA) ratio of SCBs declining from 11.5% in March 2018 to 10.3% in March 2019. Credit growth of scheduled commercial banks improved in H2FY19, driven largely by private sector banks. Public-sector banks control nearly 70% of the market share, we expect PSB banks market share to come down gradually replaced by private sector banks and NBFCs.
Second half of 2018, NBFCs including housing finance companies have seen sharp fall in equity prices and sharp rise in credit spreads, that has increased their borrowing costs post the IL&FS default. However, companies with robust business model have acquired market share and continued to post better than expected quarterly earnings.
The Indian non-life insurance size was at Rs 1.28 trillion on a GDPI (gross direct premium income) basis and posted a growth of 17.5% CAGR in the last 17 years and it can grow at CAGR of 15-20% in next 5 years.
Pharma Sector:
Investors in Indian pharma companies have seen large falls in values of top pharma companies on the back of US FDA observations on the manufacturing facilities. There are now more headwinds for the companies in the form of tolerant of the patent lawsuits and FDA clampdowns, but there is a steadily emerging set of lawsuits such as class action suits, anti-trust suits and whistle-blower suits that threaten to exponentially increase the risk in investing in pharma stocks. Price collusion, pay-for-delay arrangements and manufacturing malpractices are the issues that potentially invoke litigations involving these companies.
Click here to read our analysis on “Quality & Legal Risk Threat for Indian pharma”
Aviation Sector:
