BSE Sensex: 40,284
Refer our Sep-19
S&P CNX: 11,884
2QFY20 results review: Operationally in line; tax cut
drives PAT beat
Nifty EPS estimates stable for now
The second-quarter corporate earnings season was in line with our modest
expectations. While the corporate tax rate cuts helped in arresting earnings
downgrades, commentaries do not suggest any imminent recovery. Demand concerns
in the economy are now coming to the fore, continuation of which can raise the risk
for earnings downgrades in FY21.
Nifty sales/EBITDA/PBT/PAT grew -2.5%/2.1%/-3.1%/8.3% YoY (our estimate: -2.1%/-
2.4%/-3.9%/-8%). Excluding Corporate Banks, Nifty PBT was down 10.6% YoY (our
estimate: -11.8%). For the MOFSL Universe, sales/EBITDA/PBT/PAT grew -2% /2.1%/-
0.6%/11.7% (our estimate: -1.1%/-1.1%/1.7%/-6.1% YoY). The divergence between the
PBT and PAT performance can largely be attributed to the corporate tax rate cut. We,
however, note that not all companies have shifted to the new tax regime.
Of the 19 sectors that we track, 4/8/7 sectors posted PBT that was above/in
line/below our estimates. Financials accounted for 90% of incremental profits for the
quarter. At the PBT level, the contribution of Financials is even starker.
Sales for both the Nifty and the MOFSL Universe declined for the first time since
Jun’16, dragged by Automobiles, and Commodities like Metals and O&G. Consumer
companies continued reporting a deceleration in top-line growth. Cement, Auto,
Healthcare and Utilities marginally exceeded expectations on sales.
Private Banks posted in-line 46% PBT growth led by Corporate Banks, but loan growth
moderated given the weak economic environment. Our NBFC Universe delivered in-
line 11% PBT growth led by HDFC and Bajaj Finance, while other players posted
moderation in disbursement growth.
Auto PBT was down 21% but still exceeded our estimate of a 47% decline. Utilities also
delivered an impressive beat with 8% PBT growth. PBT for Metals and O&G Universe
declined by 67% and 20% YoY, respectively – a miss to our estimates.
Pharma, Consumer and Technology Universe posted in-line 3%, 6% and flattish PBT
growth YoY, respectively, while Capital Goods and Cement missed our estimate with -
7% and 23% YoY PBT growth, respectively.
Despite the cushion of lower taxes, one third of the MOSL Universe delivered YoY PAT
Nifty EPS stable for FY20: Our FY20/21 Nifty EPS estimates have been revised to
INR538/INR683 (prior: INR539/INR691). We expect Nifty EPS to grow 12% in FY20.
Corporate Banks are expected to contribute two thirds of incremental FY20 PAT for
the Nifty, while Financials are expected to contribute ~95% of incremental PAT.
The direction of earnings revision for the broader markets still remains downward,
with 80 companies in the MOFSL Universe witnessing an earnings cut of 3%+ and 60
companies witnessing upgrades of 3%+. Ratio has improved sequentially (3x in
1QFY20) owing to tax cuts.
For the MOFSL Universe, at the sectoral level, Automobiles, Technology and NBFCs
have seen an earnings upgrade of 8.4%, 1.6% and 2.5%, while Capital Goods, Private
Banks, Metals and Oil & Gas earnings saw a downward revision of 6.6%, 2.5% and
4.4%, respectively. Consumer, Cement and Life Insurance Universe’s earnings
estimates remained stable for FY20.
Top Upgrades (FY20E): JSW Steel, Maruti Suzuki, Eicher Motors, Tata Steel and Hero
MotoCorp have seen EPS upgrades of 29.2%, 17.6%, 15.9%, 12.3%, 9.6%, respectively.
Gautam Duggad – Research Analyst
(Gautam.Duggad@MotilalOswal.com); +91 22 6129 1522
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.