Q3FY18 Results

Yogesh Supekar & Tanay Loya study the Q3FY18 results and find that the corporate India have performed better this time around. While banks and FMCG have dissappointed in Q3FY18 Auto companies have been impressive.

— No major downgrades
— Provides further evidence of steady recovery in the Indian economy
— Q3FY18 net profits of the Nifty-50 index increased 12.7 per cent YoY and EBITDA increased 16.5 per cent YoY
— SBI’s provisions jumped 84% YoY in 3QFY18 and it reported a loss of Rs24 bn 

There is one “E” that never goes out of fashion when it comes to stock market investing and that “E” is nothing but “Earnings”. Indeed, time and again, the importance of earnings is reinforced for the investors after the dust surrounding the markets settle down and a major events such as the Union budget concludes. Earnings are again in focus and the markets start discounting the most influential parameter that truly moves share prices. 

We are just done with the Q3FY18 results this season. The Q3 results have been good and it is heartening to see Corporate India's growth this time around better than the previous quarter. The underlying trend in Q3FY18 provides evidence of recovery in the economy with broad-based volume growth across sectors. Says Utsav Shrivastava, who has been investing in stock market since 1993 and is primarily a micro-cap and small-cap investor, “The Q3 results overall have been good and there have been very few disappointments. The highlight for me have been the results of industrials and manufacturing in the small-cap space. What is heartening to see is the volume growth and margin expansion on YoY basis in several of the small-cap companies.”

While the valuations may still be stiff in the Indian markets despite the minor correction in equity prices, the uptrend in the earnings provides some confidence to the long-term investors. The markets seem to be in a consolidation phase after a healthy bull run. A host of factors have been negatively impacting the stock prices lately, including the LTCG, global market sell-off, rising crude oil prices, rising bond yields both in USA and India and the banking stocks taking the brunt of the NPA menace. In such a tough environment for equities, earnings remain one silver lining for the stock prices. 

While the recent cooling off of crude oil prices augurs well for the equity prices, the rising bond yields may pose some headwinds for the equities in FY18. The improving economic conditions in the US are fanning market speculation that the interest rates will rise faster in CY18, also leading to increase in inflation. This does pose some problems for the bullish equity market set up. 

Says Mahendra Jajoo, Head- Fixed Income, Mirae Asset AMC, "Bond yields have risen sharply in the last few months. The benchmark 10-year govt bond yield hit a high of nearly 7.65% three weeks back. This spike in yields was largely caused by a sharp rise in global crude oil prices to a near 3-year high, a sharp increase in global bond yields across major markets, a steep increase in domestic consumer inflation to above 5% and apprehension of larger supplies due to fiscal slippage in federal budget.” He further estimates that the yields may remain at the present levels in a narrow range till further clarity emerges. 

While market participants will keep a close eye on what is happening on the interest rate front, it is the growth in earning in Q3FY18 that raises hope among the long-term investors for earnings upgrades. 

When we consider the Q3FY18 YoY data for all the listed companies and filter them for a minimum market capitalisation of Rs100 crore and remove all the BFSI companies, we find that there are almost 1534 companies qualifying for the study. These 1534 companies have reflected a growth of 8.58 per cent in sales for Q3FY18 compared to a growth of 17 per cent reflected in Q3FY17. The operating profits for these companies grew by 10.44 per cent in Q3FY18 while the operating profits grew by 13.53 per cent in Q3FY17. The PAT grew by 12.45 per cent in quarter ending Dec 2017 whereas the growth in PAT was 24.67 per cent in quarter ending Dec 2016.

We find that there are at least 361 companies whose net profits have more than doubled in one year, that is, if we compare the results of Q3FY18 with that of Q3FY17. On Q0Q basis alone, we find there are 150 companies whose profits have more than doubled. While the number of stocks that delivered negative net profits stands at 368, there are at least 318 stocks that delivered net profit growth between 25 per cent and 100 per cent. On QoQ basis, there are at least 261 stocks that delivered net profit growth in the range of 25 per cent to 100 per cent. 

If we look at sector-wise performance, sectors that stand out as clear winners are chemicals, auto, infrastructure, metal & mining and power. These sectoral stocks have shown improvement in earnings on YoY basis. 

The results were broadly in line with our expectations from our portfolio companies, many of which surprised positively. The low base of the demonetisation impacted quarter in the last financial year helped many companies report comfortable double digit growth in topline and profits. The recovery from Goods and Services Tax (GST) impact was also visible. 

Which sectors did better than expected this quarter and which sectors disappointed? 

Among our portfolio companies, automobile and auto ancillaries, oil and gas companies, NBFCs and private banks did much better than the market estimates. The companies that have raw materials derived from oil and metals did see their margins getting impacted. 

Will we see some earnings upgrade in the coming quarters? 

The expectations are already running high and it could be difficult in my view to see any major earnings upgrade. Input costs have also started increasing. 

Which sectors should investors focus on in your view from the earnings perspective? 

We are currently overweight on companies which are infrastructure-focused, industrial products and select capital goods. Other than these, oil and gas and automobiles and auto ancillaries are also sectors where we are overweight. We are also finding opportunities in the building materials space and companies which have a rural orientation.

Q3FY18 Sectoral Performance review 

Auto Industry 

The auto industry has reported robust performance in Q3 results, wherein these companies have reported double digit growth. What had affected the industry’s bottomline is the lower margins. Rising metal prices led to lower margins. Steel prices increased by 6.2%, lead prices by 7% and aluminium prices by 12.4%. However, the recovery in rural demand, coupled with festive offers, aided volume growth. Passenger vehicles grew by 7% for the quarter, while commercial vehicles volumes soared by 28% YoY. The strong pick-up in rural demand led to 18% growth in two-wheeler segment. 

Talking of the top nine companies operating in the auto industry, the total revenue grew by 14% YoY aggregating to Rs73,215 crore. Their PAT for the quarter grew by massive 44% YoY. The impact of demonetisation in the previous fiscal aided to its revenue growth. Also, the PAT margins grew by 100bps for the quarter. Maruti Suzuki, the largest company with a market share of around ~50%, reported flat numbers on a YoY basis and 28% on QoQ basis. Ashok Leyland had led the battle with 47% growth in its revenue to Rs7,113 crore. The rising sales of Jaguar Land Rover across the globe aided Tata Motors’ performance. Its revenue grew by 44% YoY aggregating to Rs16,101 crore. In the twowheeler segment, Bajaj Auto reported highest growth of 19% and 15% in its topline and bottomline, respectively. India is emerging as a priority market for global automotive companies. Automobile Mission Plan 2026 and NEMMP 2020 will augur well for the industry’s growth. Innovation is likely to intensify in the engine technology and alternative fuels space going forward. 

Nitasha Shankar
Sr. Vice President and Head of Research, YES Securities (I) Ltd. 

In your view - how have the Q3 results been overall? 

While expectations were set high given the favourable base (demonetisation impact seen last year), the performance was fair. If we look at the Nifty companies, the performance was largely in line with estimates. 

What are the highlights of the Q3 results in your view? 

As more companies announced their results, the Nifty EPS estimates began to be cut (which is something that has been happening for a while) driven by poor results of select large banks as well as telecom and pharma companies. Also, given the mixed bag of results, it seems there is only growth being seen in select pockets and we are still sometime away from a broad-based growth – especially the capex cycle revival that is being awaited. 

Select large IT companies announced positive outlooks. Considering that expectations from this sector have been low - as gauged from the low valuations and the fact that the IT index was one of the top underperforming indices in CY17 - this could be an interesting space to keep an eye on, going ahead. Select PSU banks disappointed on the earnings front, as asset quality deteriorated more than expected. 

Infrastructure :- 

During the third quarter of FY18, the 54 infrastructure companies that we have taken into consideration to analyse the performance of the infra sector have delivered a 6 per cent YoY growth as compared to corresponding quarter of last year. 

However, there were few outliers in these 54 companies which reported exceptional revenue growth in Q3FY18. MEP Infrastructure Developers, which operates Mumbai’s sea-link highway, reported sales growth of more than 200 per cent over the corresponding quarter of the last fiscal. Also, it reported significant jump in its bottomline to Rs10.84 crore, as against Rs1.97 crore in the corresponding quarter of last year. 

Another player which reported growth in sales of 150 per cent YoY is GMR Infrastructure. Other two infra players which reported growth of 74 per cent and 62 per cent YoY are Gayatri Projects and Gammon Infrastructure Projects, respectively. Both these companies also reported impressive PAT numbers with YoY growth of 229 per cent by Gayatri Projects and 317 per cent by Gammon Infrastructure Projects. 

In terms of operating profit, the 54 companies reported 8 per cent growth over Q3FY17. Further, looking at 54 companies’ standalone bottomline numbers, we found that their aggregate losses swelled to Rs163.1 crore from Rs157.25 crore in Q3FY17. 

Moreover, looking at frontline companies’ numbers, we witnessed that construction and engineering mammoth L&T reported rise in its topline by 11 per cent YoY and net profit growth of 15 per cent YoY for the third quarter of FY18. 

Chemical Industry Q3FY18 review 

The domestic chemical industry is the seventh largest in the world. In Q3FY18, the chemical companies have posted significant set of numbers. In terms of revenue, the companies have registered remarkable jump of around 42.6 per on a year-on-year basis. Talking about the operating profit level, most of the companies have suffered due to the rising cost of materials, even though these companies have registered tremendous evolution in the operating profits of around 64.5 per cent on a YoY basis. The bottomline has also posted a notable jump of 36.3 per cent on YoY basis. In the first half of this fiscal, their exports jumped by about 27 per cent and industry is continuously aiming to increase chemical exports. The government recently announced imposition of anti-dumping duty of up to USD 211 per tonne on chemicals imported from China and Turkey for five years. These chemicals are used mainly in textiles and pharma industry and the imposition of anti-dumping duty will open new doors for the domestic players and improve overall profitability in the coming years. In this regard, Rashtriya Chemicals and Fertilizers (RCF) and Balaji Amines had filed the application for commencement of the anti-dumping investigations. Also, the various initiatives taken by the government are likely to become effective from the current financial year onwards. However, the major concern is getting clearances from state pollution control boards as many companies are struggling for the same, which acts as a hurdle in capacity expansions and thereby hampers meeting the rising overall demand. This has affected the export revenues of various companies. However, the recent favourable budget announcement, coupled with various government initiatives, will further drive the growth of the chemical industry. 

Banking Q3 performance 

The December quarter for the banking sector reported mixed performances across-the-board. However, the asset quality pressures still remain in public sector banks, which command 70 per cent share in bank loan market, while growth in advances was mostly reported by private banks. Also, RBI’s divergence weighed on balance sheets of various banks, including country’s largest bank SBI, which posted its first quarterly loss. For public sector banks, the revenue from core financing business has been strong as total NII for the public sector banks has grown by 22 per cent YoY, while for private banks the NII grew by 17 per cent YoY. The provisions for the quarter also zoomed 95 per cent for PSU banks, while private 

Q3FY18 performance : 
Large-cap vs Mid-cap vs Small-Cap 

If we look at the Q3FY18 data for the small-caps, mid-caps and large-caps, we can see that there is a steady improvement in the sales growth. What should comfort the investors is the fact that the large-caps have grown with improvement in profit margins. The mid-caps have shown slight improvement in the margin, however their volumes have de-grown. For small-caps, the sales volumes have shown improvement, but their profit margins have shrunk. 

sector banks were better off with overall growth of just 7 per cent YoY in total provisions. This was the key trigger for the bottomline across the private banks as net profits for the private banks grew by almost 12 per cent YoY, while public sector banks were the worst performers. SBI posted first ever quarterly loss at Rs2,416 crore in Q3FY18 as against the net profit of Rs1518 crore in the previous quarter and Rs2610 crore in the corresponding quarter previous year. The asset quality pressure remained across the public sector banks. The net NPAs for the public sector banks grew by 5 per cent QoQ due to higher slippage accretions, while the private sector banks saw 3 per cent decline in total net NPAs. The advances growth is expected to be buoyant with private sector banks gaining more market share due higher accretion retail assets across the board. The government’s recapitalisation plan will provide necessary fillip to public sector banks. However, the rising slippages weigh high on the growth of public sector banks. 

In the NBFC space, housing finance companies have witnessed traction in AUMs due to rising demand from the construction industry. However, vehicle finance companies witnessed slowdown due to the impact of structural changes in the auto space, such as GST implementation. Further, a possible interest rate hike will be a major disadvantage for the NBFCs’ borrowing cycle. However, home finance companies have positive outlook with rising market share gains. 

Conclusion 

Overall, the Q3FY18 results were impressive and there is good amount of traction seen in large-cap performances. The growth in earnings is what will keep global investors glued to Indian equity markets. FY18 promises to be a volatile year for stock prices, however, the earnings are expected to show steady improvement in the upcoming two to three quarters. 

The market is indeed worried about the rising interest rate scenario; however, the economic growth in India and the growth seen in the developed world might ensure healthy earnings growth for corporates. 

The chemical, auto, power and metal & mining companies impressed with their performances in Q3FY18, while PSU banks disappointed with the performance. Going ahead, the banks may deliver superior results in terms of earnings, owing to the bottoming out process of the NPAs