In the famous play by Samuel Beckett, which premiered in 1953, Vladimir and Estragon wait almost endlessly for the arrival of Godot. While a lot of other discussions happen during the play, Godot never arrives. Since then, “Waiting for Godot” has been used to lyrically describe any situation where the expected arrival involves an endless wait. To an extent, the wait for an earnings recovery continues for one more quarter; like waiting for Godot.
Earnings for December 2019 quarter – the macro picture
A total of 3,659 companies out of nearly 4,248 listed companies had announced their results by the middle of February. Most of the mid-sized and large companies have already announced their results. Of course, there is the odd delay by the likes of Yes Bank, but they are more of an exception than the rule. On a yoy basis the total revenues for the quarter of this universe of companies was up by 29.7%. However, the net profits of this universe was sharply down (-23.5%) on a yoy basis. On a qoq basis (compared to Sep-19 quarter), the sales revenues were virtually flat. But, the net profits were up nearly 5-fold. That can be attributed to two factors. Firstly, there was a wider acceptance of the lower tax structure of 22% offered. Secondly, telecom companies took massive write-offs in the September quarter to provide for the AGR dues. Hence, this five-fold growth in net profits may be slightly misleading.
Sectoral performance in the Q3 results
Here are some highlights of the Q3 performance analyzed sector wise.
Autos continued to disappoint for another quarter (-14.2%) with fall in sales revenues and fall in net profits (-45%). Sales continued to be weak due to low consumer confidence and high ownership costs.
The other sector that showed weak performance was capital goods which saw fall in sales revenues (-14.3%) and a whopping fall in the net profits (-90%). Order cancellations by key states like Maharashtra and Andhra Pradesh led to pressure on the order books.
Aviation companies saw revenues grow by 21.4% and net profits grow by 40.1%. While sales revenues are understandable due to good volume growth, the net profit growth was lopsided due to the front ending of Boeing compensation booked by Spice Jet.
Even as banks saw 10.5% growth in revenues, the overall sector ended in losses due to write-offs by PSU banks. Of course, NPAs continue to be a challenge. Financials did better than banks growing revenues at 22.7% and net profits at 55.4%. But, this was largely driven by just two companies viz. Bajaj Finance and HDFC.
FMCG continued to show the trend of tepid top-line growth and robust bottom-line growth. Sales grew by just 5.8% in the quarter with weakness seen across urban and rural market. However, net profits were up by 45.6% as weak crude prices and better cost control mechanisms helped FMCG post good profit numbers.
There was an element of surprise from the relatively smaller hospitality industry with sales revenues growing by just 4.3% but, profits growing by 57.9%. This can be largely attributed to most hotel companies reducing the pressure on the income statement, having completed their capital expenditure programs.
There was little surprise in metal companies with sales revenues down (-9.1%) and profits down (-69.2%). Weak demand from China was only accentuated by the virus threat. Most metal companies have been facing rising costs and an inability to pass on these costs seamlessly to the end user.
Software and IT services continued to be a market performer growing roughly in tandem with the Sensex returns at a little over 9% on the top-line and the bottom-line. Most of the large IT names have managed to successfully reposition their business models to suit the digital demands.
Thank God, street estimates were pessimistic
One thing that favoured the earnings from a stock markets perspective was muted earnings expectations. If you look at the 49 companies in the Nifty that announced results (Yes bank put off results announcement), there is an interesting mix. A total of 10 companies managed to beat street estimates including names like Bajaj Auto, Bajaj Finance, Dr. Reddy’s, Hero Moto, HCL Tech, and UPL among others. A total of 12 companies actually missed the street estimates including names like Adani Ports, Grasim, Kotak Bank, L&T, Maruti, RIL, etc. However, 27 companies announced results in line with estimates and this included marquee names like Asian Paints, Britannia, HDFC Bank, Hindustan Unilever, ICICI Bank, Infosys, Nestle, SBI, TCS, among others. In a way, it was the pessimism ahead of the results that ensures the markets do not get overly impacted by the numbers.