Strategy
India Strategy
BSE Sensex: 40,284
Refer our Sep-19
Quarter Preview
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
decline.
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.
November 2019
1
 Motilal Oswal Financial Services
Strategy
Top downgrades (FY20E): BPCL, GAIL, IOC, UPL and Dr. Reddy's have seen EPS
downgrades of 21.2%, 18.1%, 16.5%, 12.8% and 10.8%, respectively.
Slow grind ahead; valuations now factoring in sharp earnings recovery: Barring the tax
rate cut-driven earnings beat, the 2QFY20 corporate earnings performance was in line
but muted. While the government and the RBI have stepped in to revive growth, we
believe that their efforts will take time to percolate. Meanwhile, the underlying
demand scenario has turned adverse. Recent high frequency data (IIP, Fuel
Consumption, Power Demand, Auto monthly data) clearly signal well-entrenched
demand slowdown, which has already resulted in sharp downgrades to our FY20 GDP
growth estimates. Hopes for 2HFY20 earnings recovery are driven by expectations of
earnings normalization in Corporate Banks, which have received a shot in the arm post
the recent SC judgment on Essar Steel’s IBC resolution case. We expect more policy
action from the government but do not foresee any sharp recovery in demand. After
the recent rally, we believe that the Nifty at 17.4x FY21E earnings is not expensive but
discounting the sharp earnings recovery. Our portfolio strategy remains premised on
the earnings visibility and valuation comfort.
Top Ideas: Large-caps: SBI, ICICI Bank, L&T, Infosys, Bharti Airtel, NTPC, HUL, HDFC,
UltraTech, Maruti.
Mid-caps: Indian Hotels, ABFRL, Ashok Leyland, Colgate, Federal Bank, Jubilant
Foodworks, JK Cement, Crompton Consumer.
Exhibit 1: Preferred large-cap ideas
Company
HUL
HDFC
ICICI Bank
Infosys
SBI
Maruti Suzuki
Bharti Airtel
Larsen & Toubro
NTPC
UltraTech Cement
MCap
(USD b)
62.0
53.3
44.9
44.8
40.0
30.1
28.1
26.9
16.1
15.6
CMP
(INR)
2,057
2,224
499
704
322
7,147
393
1,378
117
4,079
EPS (INR)
EPS CAGR (%)
FY19 FY20E FY21E FY19-21
28.9 33.2 40.8
18.8
43.9 52.1 59.8
16.8
5.2 17.0 29.3
136.8
35.4 38.0 44.0
11.5
2.6 24.2 35.5
271.1
247.7 177.8 256.6
1.8
-8.8 -5.5 -8.1
Loss
63.5 78.7 98.9
24.8
11.6 13.1 15.2
14.6
88.7 134.6 170.8
38.8
FY19
71.1
50.7
95.6
19.9
125.0
28.9
-44.9
21.7
10.1
46.0
PE (x)
FY20E
62.0
42.7
29.4
18.5
13.3
40.2
-71.1
17.5
8.9
30.3
FY21E
50
37.2
17.0
16.0
9.1
27.9
-48.4
13.9
7.7
23.9
FY19
58.1
5.2
3.0
4.7
1.3
4.7
2.2
3.1
1.1
3.9
PB (x)
FY20E FY21E
55.9 52.5
4.7
4.3
2.8
2.5
4.6
4.2
1.2
1.1
4.5
4.1
2.9
3.1
2.7
2.4
1.0
0.9
3.0
2.7
FY19
85.0
15.6
3.2
25.0
0.4
16.3
-5.0
13.6
10.7
8.9
ROE (%)
FY20E FY21E
92.0 107.4
15.8 15.9
10.1 15.7
24.8 27.3
9.7
13.0
10.7 14.3
-4.0
-6.1
15.7 17.2
11.4 12.4
11.8 12.5
Source: Company, MOFSL
Exhibit 2: Preferred mid-cap ideas
Company
Colgate
Ashok Leyland
Jubilant Foodworks
Indian Hotels
Federal Bank
Aditya Birla Fashion
CG Consumer Elect.
J K Cements
MCap
(USD b)
6.0
3.2
3.0
2.6
2.3
2.3
2.3
1.2
CMP
(INR)
1,579
80
1,622
155
84
214
260
1,161
EPS (INR)
EPS CAGR (%)
FY19 FY20E FY21E FY19-21
FY19
27.4 30.1 37.5
17.0
57.6
6.9
1.5
3.5
-29.0
11.5
24.1 27.6 35.6
21.6
67.3
2.4
3.2
4.5
37.7
65.7
6.3
8.3 10.3
27.8
13.4
1.6
2.5
4.8
71.5
129.8
6.0
7.6
9.6
26.6
43.6
34.1 59.8 64.4
37.4
34.0
PE (x)
FY20E
52.4
51.9
58.8
49.0
10.2
86.7
34.3
19.4
FY21E
42.1
22.9
45.5
34.6
8.2
44.1
27.2
18.0
FY19
29.7
2.8
17.0
4.2
1.3
11.5
14.9
3.3
PB (x)
FY20E
31.1
2.9
14.5
4.0
1.2
10.2
11.9
2.9
ROE (%)
FY21E FY19 FY20E FY21E
34.0 50.1 57.9 77.1
2.9 26.0 5.5 12.7
12.0 25.2 24.6 26.4
3.6
6.6
8.3 11.0
1.0
9.8 11.9 13.3
8.3 10.1 12.5 20.7
9.5 39.6 38.5 38.7
2.5 11.3 16.0 15.0
Source: Company, MOFSL
November 2019
2
 Motilal Oswal Financial Services
Strategy
Sep’19 results: In-line; meets modest expectations
EBITDA/PBT in-line; PAT beat led by lower taxes
For the MOFSL Universe, aggregate sales declined 2% YoY (v/s est. decline of
1.1%), EBITDA increased 2.1% YoY (v/s est. decline of 1.1%), PBT declined 0.6%
(v/s est. of 1.7%) and PAT was up 11.7% YoY (v/s est. decline of 6.1%). It is
pertinent to note that PBT is a better metric to analyze like-to-like 2QFY20
performance post the corporate tax rate cuts announced in Sep’19.
Expectedly, the performance was driven by Corporate Banks. Excluding
Corporate Banks, MOFSL Universe sales declined 2.8% YoY (v/s est. of 1.7%
decline) while PBT declined 11.6% YoY (v/s est. of 9.7% decline). PAT posted
5.7% YoY growth (v/s est. decline of 4.2%).
At the PBT level, Autos (21% decline v/s est. of 47% decline) and Utilities (8%
growth v/s est. of 8% decline) have beaten our estimates while Capital Goods,
Cement, Metals and Oil & Gas missed our expectations and posted -6.7%,
22.9%, -66.5% and -20.4% growth (v/s est. of 5.3%, 33.6%, -57% and -11.8%,
respectively. Consumer, Private Banks, NBFC and IT posted an in-line PBT
growth of 5.8%, 45.7%, 10.8% and 0%, respectively.
Sectors that surprised on PAT performance despite a miss or in-line PBT
delivery: PSU Banks (Loss to Profit), NBFCs (38.8% YoY profit growth), Consumer
(27.8% YoY profit growth), Private Banks (14.2% YoY profit growth) and Metals
(6.5% YoY profit growth). Barring PSU Banks, all other sectors benefitted owing
to the sharply lower taxes YoY.
The aggregate performance was expectedly supported by Financials
(contributed 89% to the incremental PAT).
EBITDA margin for the MOFSL Universe (Ex-Financials and OMCs) declined 40bp
YoY to 19.1% (v/s est. of 18.9%), led by Automobiles, Metals, Oil & Gas and
Technology, which saw contraction in margins, while Cement, Utilities and
Telecom saw expansion in margins.
However, EBITDA margin comparison is not strictly relevant given the changes
pertaining to the implementation of Ind-AS 116.
Exhibit 4: Nifty PAT up 8.3% YoY – tax cut drives
performance
Exhibit 3: MOFSL Universe PAT growth of 12%; entirely led
by tax cuts
34
16 16
15 17
13
2 1
-6
3
27
12
5
8
2
5
2
-8
7
-6
-10
-8
.
.
November 2019
3
 Motilal Oswal Financial Services
Strategy
Exhibit 5: Profit growth led by Financials, Consumer, whereas Autos, Oil & Gas and Telecom dragged
Sector
(no of companies)
High growth sectors
Banks - PSU (4)
NBFC (13)
Consumer (18)
Media (7)
Cement (11)
Utilities (8)
Med/Low growth sectors
Banks - Private (10)
Retail (9)
Healthcare (19)
Infrastructure (4)
Metals (9)
Capital Goods (12)
Life Insurance (2)
Technology (13)
PAT de-growth sectors
Oil & Gas (15)
Automobiles (17)
Others (22)
Logistics (3)
Telecom (4)
MOFSL Universe (200)
MOFSL Univ Ex OMCs (197)
MOFSL Ex Corp Banks (194)
Sensex (30)
Nifty (50)
Sales
EBITDA
PAT
EBIDTA Margin
Chg. % Chg. % Var. over
Chg. % Chg. % Var. over Sep- Chg. % Chg. % Var. over Sep-19 Chg.
Sep- 19 QoQ YoY Exp. (%) Sep- 19 QoQ YoY Exp. (%) 19 QoQ YoY Exp. (%)
(%) YoY bp
2,135
-3
6
2
883
2
17
7
401 12
59
50
41.4
360
378
7
21
5
286
28
36
22
46
5
LP
LP
75.7
817
165
4
16
1
135
4
16
2
88
36
39
15
82.1
28
514
1
6
-2
130
-1
8
-1
106 21
28
20
25.3
52
51
-5
7
-3
16
-15
-1
-8
11
7
26
6
30.9
-261
313
-12
3
3
59
-27
17
-4
24
-37
19
-3
19.0
234
715
-7
0
5
257
-9
5
4
126
9
17
19
35.9
176
4,358
2
2
-1
987
-1
-1
-1
545 13
6
21
22.6
-64
370
3
20
0
316
4
29
3
108 -14
14
5
85.3
580
228
1
12
-2
20
-7
23
0
10
-7
13
4
8.8
75
482
6
13
3
101
5
15
3
58
7
10
8
20.9
42
37
-7
11
3
10
-10
11
11
3
-5
7
25
28.6
14
1,364
-4
-13
-2
208
-21
-35
-9
127 82
7
173
15.3
-518
565
12
7
-5
59
22
2
-10
35
47
4
-9
10.4
-59
155
23
8
-8
7
-14
75
40
6
-14
4
-5
4.4
170
1,156
4
8
0
265
8
4
0
197
6
1
3
23.0
-97
6,930
-7
-6
-2
883
-3
-6
5
280
4
-16
-10
12.7
5
4,619
-9
-8
-3
508
-7
-15
-2
250
2
-9
-8
11.0
-102
1,496
-3
-12
2
173
20
-15
27
75 148
-11
40
11.5
-35
377
2
21
-2
52
-34
18
-36
14
-62
-12
-57
13.8
-31
39
3
4
1
6
-5
7
1
3
-5
-17
7
16.0
44
398
0
11
0
145
2
64
45
-63
Loss
Loss
Loss
36.3
1,168
13,422 -3.6
-2.0
-0.9
2,753 -1.0
2.1
3.3 1,226 10.4 11.7
18.9
20.5
83
11,053 -0.7
0.7
0.3
2,654 -0.3
4.6
3.7 1,193 13.0 14.4
21.6
24.0
89
12,903 -3.9
-2.8
-1.1
2,339 -4.0 -2.2
1.2 1,174 13.6 5.7
10.3
18.1
10
6,171 -0.3
0.6
1.0
1,702 5.3
5.3
5.7
767 22.8 11.5
18.3
27.6
125
9,608 -4.0
-2.5
-0.4
2,190 0.5
2.1
4.7
979 14.4 8.3
17.7
22.8
103
Exhibit 6: MOFSL Universe: PBT decline 0.6% versus our estimate of a 1.7% increase
Sector
Automobiles
Capital Goods
Cement
Consumer
Financials
Banks - Private
Banks - PSU
Life Insurance
NBFC
Healthcare
Infrastructure
Logistics
Media
Metals
Oil & Gas
Excl. OMCs
Retail
Technology
Telecom
Utilities
Others
MOFSL Universe
MOFSL Univ Ex OMCs
MOFSL Univ Ex Corp Banks
Nifty
Sensex
Sep 18
(Actual)
125
54
27
120
182
143
-58
6
92
69
5
6
14
184
404
321
12
257
-52
142
22
1,571
1,488
1,605
1,273
974
PBT (INR b)
Sep 19
Sep 19
Chg YoY (%) Var (%)
(Estimate) (Actual)
67
98
-21.4
47.7
57
50
-6.7
-11.4
36
33
22.9
-8.0
129
127
5.8
-1.6
406
390
114.0
-3.9
217
208
45.7
-4.0
79
74
LP
-5.7
7
6
5.6
-4.7
104
102
10.8
-2.5
71
71
2.8
0.1
4
5
1.5
33.9
4
4
-23.4
2.3
14
13
-7.1
-8.8
79
62
-66.5
-22.3
356
322
-20.4
-9.7
291
281
-12.6
-3.5
13
13
6.0
-0.6
255
257
0.0
1.1
-67
-57
Loss
Loss
130
152
7.5
16.9
43
19
-11.4
-55.5
1,598
1,561
(0.6)
(2.3)
1,533
1,521
2.2
(0.8)
1,449
1,419
(11.6)
(2.0)
1,224
1,233
(3.1)
0.7
1,002
1,027
5.5
2.4
Of the 19 sectors that we
track, 4/8/7 sectors posted
PBT that was above/in
line/below our estimates.
November 2019
4
 Motilal Oswal Financial Services
Strategy
Exhibit 7: MOFSL Universe (Ex-Corp Banks) PAT chg. YoY (%)
MOFSL Univ. ex Corp Banks PAT change YOY (%)
16.0
10.2
6.3
2.5
3.3
9.8
7.0
17.4
15.2
7.4
3.3
1.3
9.1
16.3
9.7
8.5
4.2
Exhibit 8: Nifty (Ex-Corp Banks) PAT change YoY (%)
Nifty Ex Corp. Banks PAT change YOY (%)
20.6
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E
.
Sector performance: Sales decline for first time in 13 quarters; EBITDA
growth lowest in 9 quarters
Metals, Auto and Oil & Gas reported a decline of 13.5%, 12.4% and 7.5%
respectively, and dragged aggregate YoY sales; also it was the first decline since
Jun’16. PSU Banks (21.4%), Private Banks (20.3%), NBFCs (15.7%) and Healthcare
(12.8%) posted healthy top-line growth.
EBITDA growth of 2% YoY was the lowest in 9 quarters and was driven by Private
Banks (29.1%), Cement (17%) and Healthcare (15%). However, Metals, Oil & Gas
and Auto reported a decline of 35.4%, 15.4% and 14.9%, respectively.
PAT growth was led by PSU Banks (Loss to profit), NBFC (38.8%), Consumer
(27.8%), Cement (18.8%) and Utilities (17.4%). However, Automobiles and Oil &
Gas reported a decline of 11.2% YoY and 9.2% YoY, respectively. Telecom
reported a loss of INR63b YoY (v/s INR48b loss).
Exhibit 10: MOFSL Universe posted EBIDTA growth of 2.1%;
lowest in 9 quarters
30
11
17
4 6
-2
-2
14
3
15 15
7
17
15
16
Exhibit 9: MOFSL Universe sales declined 2% YoY
23 25 21
14
5
0
-10
4
-4 -5 -4
-1
4
9
15 11
12
15 15
7
11
10 11
13
4
8
3 2
-6
November 2019
5
 Motilal Oswal Financial Services
Strategy
Exhibit 11: Key highlights – Operating margins contracted 40bp YoY for our MOSL Universe (Ex-OMC, Financials)
Sector
Automobiles
Capital Goods
Cement
Consumer
Financials
Banks - Private
Banks - PSU
Life Insurance
NBFC
Healthcare
Infrastructure
Logistics
Media
Metals
Oil & Gas
Excl. OMCs
Retail
Technology
Telecom
Utilities
Others
MOFSL Universe
MOFSL Ex Financials & OMCs
Sep 18
11.9
11.0
16.6
24.8
63.6
79.5
67.6
2.7
81.8
20.5
28.5
15.5
33.5
20.4
12.0
19.4
8.0
23.9
24.6
34.1
14.1
19.7
19.5
EBDITA Margin
Sep 19
11.5
10.4
19.0
25.3
69.7
85.3
75.7
4.4
82.1
20.9
28.6
16.0
30.9
15.3
11.0
18.2
8.8
23.0
36.3
35.9
13.8
20.5
19.1
Chg
-0.3
-0.6
2.3
0.5
6.1
5.8
8.2
1.7
0.3
0.4
0.1
0.4
-2.6
-5.2
-1.0
-1.3
0.8
-1.0
11.7
1.8
-0.3
0.8
-0.4
Sep 18
4.9
6.5
6.5
17.0
14.8
30.7
-9.7
4.1
44.4
12.2
9.6
11.0
18.9
7.6
5.5
9.7
4.5
18.3
-13.4
15.0
5.2
8.0
9.0
PAT Margin
Sep 19
5.0
6.3
7.5
20.6
23.2
29.1
12.2
3.9
53.3
11.9
9.3
8.8
22.3
9.3
5.4
9.6
4.5
17.1
-15.8
17.6
3.8
9.1
9.5
Chg
0.1
-0.2
1.0
3.6
8.5
-1.5
21.9
-0.2
8.8
-0.3
-0.3
-2.2
3.3
1.8
-0.1
0.0
0.0
-1.2
-2.4
2.6
-1.4
1.1
0.4
November 2019
6
 Motilal Oswal Financial Services
Strategy
Nifty: 2QFY20 performance highlights
Operationally in-line; Lower taxes drive PAT beat
Nifty sales declined 2.5% YoY (v/s est. decline of 2.1% YoY). EBITDA/PAT grew
2.1%/8.3% YoY (v/s est. decline of 2.4%/8%). Lower taxes drove the profit beat.
PBT declined 3% (v/s est. 4% decline).
Excluding Corporate Banks, Nifty PBT declined 10.6% (v/s est. of 11.8% decline),
dragged by Metals, Oil & Gas and Autos. PAT, however, was up 7.5% YoY (v/s
est. decline of 7.5%).
Nifty EBITDA margin (Ex-Financials, OMCs) contracted 50bp YoY to 20.2%.
Aided by lower taxes, 42 of the 50 Nifty companies posted in-line/higher-than-
estimated PAT, while 8 missed expectations.
16 of the 50 Nifty companies saw upgrades >3% for FY20 EPS, while 12
companies saw downgrades of >3%.
Exhibit 13: Nifty EBITDA growth lowest in nine quarters
Exhibit 12: Nifty sales declined YoY – A first since Jun’16
Exhibit 14: Nifty PAT growth at 8.3% YoY, led by lower taxes
Exhibit 15: Nifty EBIDTA margin (ex-Financials and OMCs)
shrank by 50bp YoY (%)
November 2019
7
 Motilal Oswal Financial Services
Strategy
Exhibit 16: Divergence between PBT and PAT performance is largely owing to corporate tax rate cut
Nifty Universe
Sep 18
(Act.)
Bajaj Auto
Automobiles
16.5
Eicher Motors
Automobiles
7.5
Hero Motocorp
Automobiles
14.5
M&M
Automobiles
21.6
Maruti Suzuki
Automobiles
30.1
Tata Motors
Automobiles
-2.9
Larsen & Toubro
Capital Goods
30.7
Grasim Industries
Cement
11.1
Ultratech Cement
Cement
5.2
Asian Paints
Consumer
7.4
Britannia
Consumer
4.6
Hind. Unilever
Consumer
21.9
ITC
Consumer
43.7
Nestle
Consumer
6.9
Axis Bank
Banks - Private
11.7
HDFC Bank
Banks - Private
76.6
ICICI Bank
Banks - Private
12.6
IndusInd Bank
Banks - Private
14.0
Kotak Mah. Bank
Banks - Private
17.4
State Bank
Banks - PSU
2.5
Bajaj Finance
NBFC
14.3
HDFC
NBFC
26.4
Cipla
Healthcare
4.3
Dr Reddy’ s Labs
Healthcare
5.8
Sun Pharma
Healthcare
13.3
Zee Entertainment Media
6.5
Hindalco
Metals
21.2
JSW Steel
Metals
31.0
Tata Steel
Metals
52.1
Vedanta
Metals
23.0
BPCL
Oil & Gas
18.7
GAIL
Oil & Gas
29.0
IOC
Oil & Gas
48.1
ONGC
Oil & Gas
127.1
Reliance Inds.
Oil & Gas
132.0
Titan Company
Retail
4.4
HCL Technologies
Technology
32.2
Infosys
Technology
56.3
TCS
Technology
105.0
Tech Mahindra
Technology
14.6
Wipro
Technology
29.3
Bharti Airtel
Telecom
-18.5
Bharti Infratel
Telecom
10.2
Coal India
Utilities
51.2
NTPC
Utilities
33.7
Power Grid Corp.
Utilities
29.6
UPL
Others
4.6
Nifty Universe
1,273
Nifty Ex Corporate Banks
1,246
Nifty Ex. OMCs
1,206
Note: PL: Profit to Loss; LP: Loss to Profit
Company
Sector
Sep 19
(Est.)
15.1
5.6
9.5
15.6
10.6
-14.4
34.4
7.2
11.5
8.3
4.8
22.7
48.3
7.6
27.1
92.3
43.2
20.0
21.1
54.6
19.7
29.3
5.5
5.4
14.0
7.1
15.6
8.9
10.6
22.9
16.6
19.1
23.8
88.3
144.1
4.4
33.2
54.4
107.3
12.7
28.9
-15.3
10.4
30.8
37.8
30.6
8.6
1,224
1,099
1,184
PBT (INR B)
Sep 19
(Act.)
16.1
5.9
11.0
17.6
15.7
5.8
33.0
6.5
9.0
8.4
5.0
23.6
48.1
7.1
24.3
90.0
43.7
18.9
21.0
50.6
20.2
26.5
6.8
2.8
14.2
6.8
16.4
7.0
0.0
15.4
16.6
15.4
8.1
90.4
150.0
4.3
34.9
55.0
105.3
13.4
31.3
-6.2
9.8
42.8
45.7
32.8
4.8
1,233
1,114
1,208
Chg
YoY.%
-2.6
-21
-24.2
-18.6
-47.8
LP
7.4
-41.5
71.2
13.1
8.8
7.7
10
2.8
108.6
17.5
247.9
34.5
20.6
1907.2
41
0.3
59.7
-50.9
7.4
4.3
-22.6
-77.3
-99.9
-32.8
-11.6
-47
-83.1
-28.9
13.7
-3.1
8.6
-2.4
0.3
-8.4
6.9
Loss
-4.3
-16.4
35.9
10.8
5.5
-3.1
-10.6
0.2
Var (%)
6.8
5.9
15.3
12.8
49
LP
-3.9
-9.1
-21.9
0.9
4.6
3.6
-0.5
-6.8
-10.1
-2.5
1
-5.5
-0.4
-7.3
2.7
-9.9
23.8
-47.3
1.9
-4.7
5.4
-20.7
-99.6
-32.7
-0.2
-19.6
-65.8
2.4
4.1
-3.3
5.3
1
-1.8
5
8.4
Loss
-5.6
38.8
21.1
7.3
-43.7
0.7
1.4
2.1
Sep 18
(Act.)
11.5
5.7
9.8
16.7
21.0
-5.6
18.0
8.2
3.6
5.1
3.0
15.2
29.5
4.6
7.9
50.1
9.1
9.2
11.4
9.4
9.2
18.4
3.0
5.0
10.2
4.1
14.3
21.3
34.4
10.2
12.2
19.6
32.5
82.6
95.5
3.0
25.4
41.1
80.4
10.6
22.9
-9.7
6.2
30.9
27.9
23.5
3.4
904
878
860
Sep 19
(Est.)
12.2
4.5
8.6
14.7
8.5
-14.8
21.9
5.2
7.1
5.6
3.2
16.1
31.9
5.1
0.5
59.8
4.5
13.2
15.4
15.2
12.8
25.1
4.0
4.1
10.6
5.3
10.7
6.0
6.7
9.3
12.2
14.8
18.6
68.4
107.8
3.2
25.2
39.7
80.8
9.5
22.4
-13.9
7.7
23.1
31.2
25.3
5.9
832
812
801
PAT (INR B)
Sep 19
(Act.)
14.0
5.7
9.2
13.5
13.6
-1.9
23.1
5.3
5.8
8.5
4.0
18.3
40.2
6.0
-1.1
63.5
6.6
14.0
17.2
30.1
15.1
28.3
4.7
4.0
10.6
5.6
12.5
25.6
41.8
25.2
17.1
10.6
5.6
62.6
113.5
3.1
26.5
40.2
80.4
11.2
25.6
-11.2
9.7
35.2
34.7
25.1
3.6
979
944
957
Chg
YoY.%
21.7
1.1
-5.8
-19
-35.3
Loss
28.4
-35.5
62.2
67.1
33.2
20.4
36.2
30.4
PL
26.8
-27.9
52.2
51.1
218.7
63.1
54
59.8
-19.8
3.5
37.1
-12.8
20.4
21.4
146.7
40.2
-45.8
-82.6
-24.2
18.9
3.8
4.4
-2.2
0
5.6
12
Loss
55.5
14.2
24.5
7
5.8
8.3
7.5
11.3
Var (%)
15
27.5
7.3
-7.6
59.8
Loss
5.2
2.1
-18.7
50.7
27.1
13.5
26.1
18.6
PL
6.1
45.9
6.1
11.8
98.1
17.4
12.6
17.3
-2.4
-0.4
5.4
16.4
326.8
523.7
170.5
39.8
-28
-69.7
-8.5
5.3
-2.5
5.2
1.3
-0.4
18.5
14.4
Loss
25
52.9
11.3
-0.9
-38.7
17.7
16.3
19.4
November 2019
8
 Motilal Oswal Financial Services
Strategy
Domestic Cyclicals’ share of profit pool declines over last quarter
Domestic Cyclicals drove 2QFY20 earnings growth, with 34% YoY increase.
Defensives, too recovered from last quarter, posting a growth of 8% YoY, aided
by growth in Consumer and Utilities.
In 2QFY20, the share of Global Cyclicals in the profit pool increased to 32% from
26% in 1QFY20. Share of Domestic Cyclicals declined to 36% while share of
Defensives remained constant.
Exhibit 17: Share of Domestic Cyclicals, Global Cyclicals and Defensives in profit pool
100%
75%
50%
25%
0%
Defensives
Global cyclicals
Domestic cyclicals
Defensives
include Consumer, Healthcare, Technology, Telecom and Utilities
Global Cyclicals
include Metals, Oil & Gas and JLR
Domestic Cyclicals
include Automobiles, Banks, Capital Goods, Cement, Media, NBFCs, Real Estate and Retail
66% of MOFSL Universe reports YoY profit growth
31% of the companies reported >30% PAT growth.
Overall, 66% of the MOFSL Universe reported PAT growth, while 34% reported
PAT decline.
Exhibit 18: Distribution of PAT growth
Earnings Growth
-15
-11
32 35 31
23
42
26
22
24
9
>30%
13
11
4
18
42 40
11
9
31 38
>15-30%
6
0
-3
8
12
9
>0-15%
17
7
26
-7
-9
35 38
-4
-3
<0%
-11
-13
-4
1
34
18
20
45 47
3
10
Ex OMCs (%)
9
-21
23
7
4
11
23
8
14
27 30 27
25 24 31 34
18
16
18
9 9 10 20
17 15
14 14
27
21 23
13
24 19
20
27 17 16
17
25
18 16 20 22
19 24
22
25 25
21 23
17
20
22
16 13
22
17 22
18 23
16
20 18
18
21
22 10
21 15
19 19 15
17 16 16 13 16
20
22 17 17 19 16
26 13
18 14
18
24 25 18
16 13
22
19
12 16
20
18
51
23
41 43
38 32 39 35
35 41 30 27
32
26 26 31
24 25 25 28 26 24 19 26 24 19 20 26 18 21 22 21 26 26 29 30 29 23 19 25 32
21 21
39 42 40 37 38 45 36
47
36 39 37 35 32
32 30 35
32 33 38 37 34
PAT Growth Ex OMCs (%)
November 2019
9
 Motilal Oswal Financial Services
Strategy
Defensives’ improve, Global Cyclicals decline for fourth
consecutive quarter
Profit growth of Global Cyclicals – the primary engine of earnings growth for the
last few quarters – has moderated sharply.
Metals posted profit growth of 6.5% (v/s our est. decline of 61%); note that
profit decline was 42% for Metals in 1QFY20. Oil & Gas posted profit decline of
9.2% (v/s our est. decline of 1.5%).
Defensives’ profit growth improved on the back of Consumer and Utilities
despite the drag due to Telecom.
Exhibit 20: Global Cyclicals’ profit declined 2%
83
Exhibit 19: Defensives posted impressive profit growth
23
17
10
12 14
7
9
13
7
3
-2 -4
-13
0
-6
-8
11
0
1
-1
8
8
-11
-24 -31 -24
16
-2 -3
20 26 21
40
51
27
46
19
-2
-26
-2
-4
-15
-15
Financials drive Domestic Cyclicals’ growth
Domestic Cyclicals’ profits grew 34% in 2QFY20 off a low base (12% decline in
the Sep’18 quarter).
Private Banks posted 14% PAT growth in the quarter. The NBFC Universe posted
profit growth of 38.8% YoY for the quarter.
Exhibit 22: Private Banks post 14% profit growth – exceed
our expectations
273
78
22
4
-18
-4
-11
25
6 2 6
-17
-35
5
59
14
Exhibit 21: Domestic Cyclicals’ PAT growth at 34%
9 13 12 3 8 15
-15-31 -3 -3
31 38
13 19 2
-15-12
-68
35
54
19 18 18 17
34
11 15 13
November 2019
10
 Motilal Oswal Financial Services
Strategy
Exhibit 23: PSU Banks posted INR46b profit in 2QFY20 v/s
INR30b loss in 2QFY19
Exhibit 24: NBFCs posted strong performance led by Bajaj
Finance and HDFC
46
31 31
15 14
1
6
19
25
18
18
12
2
23
19
36
25
39
11
4
11 9
Exhibit 25: Sector estimates revision from preview
Sector
Automobiles
Capital Goods
Cement
Consumer
Financials
Banks - Private
Banks - PSU
Life Insurance
NBFC
Healthcare
Infrastructure
Logistics
Media
Metals
Oil & Gas
Excl. OMCs
Retail
Technology
Telecom
Utilities
Others
MOFSL Universe
MOFSL Univ Ex OMCs
NIFTY EPS (INR)
PAT (INR B) - PREVIEW PAT (INR B) - REVIEW
FY20E
FY21E
FY20
FY21E
254
368
276
383
187
228
175
215
153
186
152
181
393
452
395
447
1,168
1,768
1,165
1,750
641
925
624
903
213
467
218
475
27
31
27
31
314
376
322
373
224
270
223
273
15
11
15
12
13
15
14
16
46
55
45
51
335
441
342
378
1,257
1,508
1,202
1,532
1,001
1,134
994
1,186
47
62
47
62
769
872
781
880
-186
-130
-25
-197
478
538
470
525
148
180
126
166
5,328
6,854
5,429
6,706
5,071
6,480
5,221
6,360
539
691
538
683
% Upgrade /
Downgrade
FY20E
FY21E
8.4
4.2
-6.6
-5.7
-0.3
-2.9
0.6
-1.0
-0.3
-1.0
-2.5
-2.4
2.4
1.7
0.8
0.4
2.5
-0.8
-0.7
0.9
-1.5
13.7
5.7
4.6
-1.5
-8.1
2.0
-14.2
-4.4
1.6
-0.6
4.5
0.2
0.7
1.6
0.9
LP
Loss
-1.8
-2.3
-14.9
-8.1
1.9
-2.2
3.0
-1.9
-0.2
-1.2
FY19
-21.1
15.7
9.0
15.4
62.7
17.0
Loss
-11.5
33.5
11.9
2.5
18.5
14.4
22.0
6.0
18.4
21.6
14.7
Loss
26.3
-9.0
10.0
12.9
6.4
Growth YoY (%)
FY20E
-12.4
17.2
31.2
18.6
87.9
46.5
LP
11.7
22.5
12.5
-8.8
-9.8
18.0
-28.0
-2.4
9.7
22.2
1.3
Loss
4.6
36.7
15.3
19.1
12.1
FY21E
39.0
22.9
19.0
13.2
50.2
44.6
117.3
15.8
15.6
22.5
-16.1
13.5
12.7
10.8
27.5
19.3
31.7
12.7
Loss
11.8
31.0
23.5
21.8
27.0
Nifty FY20 EPS estimates maintained, FY21 EPS cut by 1.2%
Forecast 12% Nifty EPS growth in FY20E
Reduction in tax rates arrested the earnings downgrades in 2QFY20. Our FY20
Nifty EPS estimate is stable at INR538 while FY21 Nifty EPS estimate has seen a
marginal cut of 1.2% to INR683 (prior: INR691). We expect Nifty EPS to grow
12% in FY20 and 27% in FY21.
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.
Top Downgrades (FY20E): BPCL, GAIL, IOC, UPL and Dr. Reddy's have seen EPS
downgrades of -21.2%, -18.1%, -16.5%, -12.8% and -10.8%, respectively.
November 2019
11
 Motilal Oswal Financial Services
Strategy
Exhibit 26: Nifty EPS revision since preview
Company
JSW Steel
Maruti Suzuki
Eicher Motors
Tata Steel
Hero MotoCorp
Mahindra & Mahindra
Bharti Infratel
Bajaj Auto
Bajaj Finance
Tech Mahindra
Asian Paints
Infosys
Cipla
ITC
Wipro
Vedanta
Sun Pharma
Reliance Inds.
HDFC
UltraTech Cement
State Bank
Nestle
HCL Technologies
ONGC
Larsen & Toubro
Adani Ports
Kotak Mahindra Bank
TCS
Hind. Unilever
Power Grid Corp.
ICICI Bank
Britannia
Hindalco
Grasim Industries
Coal India
NTPC
IndusInd Bank
Axis Bank
Titan Company
Zee Entertainment
Dr Reddy’ s Labs
UPL
IOC
GAIL
BPCL
Tata Motors
Bharti Airtel
Nifty (50)
FY19
31.8
247.7
813.9
88.6
169.5
42.7
13.6
165.4
69.3
48.2
23.1
35.4
18.7
10.2
14.8
18.1
15.1
67.2
43.9
88.7
2.6
178.6
73.6
27.1
63.5
19.3
37.7
83.5
28.9
19.2
5.2
48.1
24.7
66.1
28.3
11.6
54.9
18.2
15.7
16.4
105.2
27.3
18.8
14.0
43.4
-4.4
-8.8
480
Current EPS (INR)
FY20E
24.9
177.8
729.8
57.2
153.6
34.9
18.4
179.5
105.6
48.0
28.9
38.0
22.1
12.6
16.4
14.2
18.4
80.9
52.1
134.6
24.2
214.6
73.3
27.3
78.7
21.9
46.4
86.2
33.2
20.3
17.0
56.9
20.0
73.1
25.7
13.1
89.8
24.0
17.2
19.6
107.2
34.8
10.7
12.3
31.2
-0.3
-5.5
538
FY21E
27.1
256.6
926.8
61.9
174.0
39.5
17.7
189.9
134.0
57.6
31.6
44.0
25.7
13.0
17.2
12.7
22.1
102.0
59.8
170.8
35.5
251.5
81.9
30.1
98.9
25.3
56.1
96.4
40.8
22.8
29.3
65.2
21.5
84.7
28.5
15.2
124.0
46.5
22.3
23.8
126.2
42.6
19.3
14.8
50.0
12.4
-8.1
683
EPS Upgrade / Downgrade
(%)
FY20E
FY21E
29.2
-19.7
17.6
4.3
15.9
8.5
12.3
-19.0
9.6
7.7
9.1
7.9
8.1
6.5
7.5
3.2
6.0
6.0
5.0
8.4
5.0
-4.2
4.9
4.8
4.3
6.5
4.2
-0.1
3.0
1.3
2.7
-21.8
2.7
1.8
2.1
15.6
1.8
-3.5
1.5
-3.4
1.2
2.5
1.0
2.8
0.4
-2.7
0.4
-3.9
0.0
-0.7
-0.8
-0.5
-0.9
-3.1
-1.1
-1.9
-1.5
0.1
-1.7
-0.2
-1.7
2.1
-1.8
-3.3
-2.1
-4.7
-2.2
-4.1
-3.1
-4.2
-3.6
-2.6
-5.7
-7.2
-6.6
-7.4
-8.2
-10.2
-8.3
-5.1
-10.8
-3.3
-12.8
-5.8
-16.5
-8.3
-18.1
-12.3
-21.2
-5.1
Loss
7.8
Loss
Loss
-0.2
-1.2
EPS Growth (%)
FY19
FY20E
32.4
-21.7
-7.1
-28.2
1.8
-10.3
27.3
-35.5
-8.5
-9.4
4.1
-18.3
-0.3
35.5
9.3
8.5
59.6
52.5
12.8
-0.3
9.1
25.5
9.3
7.3
-3.1
18.1
14.8
23.7
10.1
10.9
-11.0
-21.9
12.2
21.6
10.4
20.4
30.9
18.7
-0.9
51.8
LP
840.8
27.5
20.2
17.6
-0.3
34.4
0.7
22.8
24.0
8.6
13.5
16.0
23.0
26.4
3.3
18.2
14.8
16.0
5.9
-52.8
225.6
15.1
18.3
30.9
-19.1
39.7
10.6
47.9
-9.5
30.3
13.2
-8.8
63.6
1538.1
32.1
24.0
9.5
12.7
19.5
62.6
1.9
-5.7
27.3
-23.7
-43.3
38.4
-12.2
-12.9
-28.1
PL
Loss
PL
Loss
6.4
12.1
FY21E
8.8
44.3
27.0
8.3
13.3
13.2
-3.8
5.8
26.8
20.0
9.3
15.8
16.3
3.8
5.0
-10.3
20.6
26.1
14.9
26.9
46.4
17.2
11.7
10.1
25.6
15.7
21.0
11.8
22.9
12.2
72.3
14.6
7.8
15.9
11.2
15.9
38.1
93.5
30.0
21.3
17.8
22.5
80.7
20.5
60.4
LP
Loss
27.0
November 2019
12
 Motilal Oswal Financial Services
Strategy
Exhibit 27: Nifty FY19-21 free float; PAT CAGR at 21%; sales CAGR at 8%
Company
High PAT Growth (20%+)
Tata Motors
State Bank
ICICI Bank
Axis Bank
IndusInd Bank
UltraTech Cement
Bajaj Finserv
Bajaj Finance
Larsen & Toubro
HDFC Bank
UPL
Reliance Inds.
Kotak Mahindra Bank
Sun Pharma
Zee Entertainment
Medium (10-20%)
Titan Company
Hind. Unilever
Nestle
Britannia
Cipla
Asian Paints
HDFC
Adani Ports
NTPC
Bharti Infratel
ITC
Grasim Industries
Dr Reddy’ s Labs
Low PAT Growth (<10%)
Power Grid Corp.
Tech Mahindra
Infosys
BPCL
Bajaj Auto
Eicher Motors
TCS
Wipro
ONGC
HCL Technologies
GAIL
Maruti Suzuki
Hero MotoCorp
IOC
Coal India
Mahindra & Mahindra
Hindalco
JSW Steel
Vedanta
Tata Steel
Bharti Airtel
Nifty (PAT free float)
Sales
EBIDTA Margin (%) EBITDA
CAGR %
CAGR %
FY19 FY20E FY21E 19-21 FY19 FY20 FY21 19-21
24
10
13
12
24
26
28
20
4
-6
9
2
10
12
13
15
18
10
12
11
63
68
68
15
17
20
18
19
87
85
84
17
17
18
18
18
88
93
95
23
18
40
30
35
91
88
89
33
21
20
10
15
18
23
23
30
33
38
28
33
80
81
77
30
39
35
25
30
79
82
83
33
13
17
16
16
11
12
13
23
20
17
18
17
82
84
85
19
26
60
9
32
19
21
23
45
45
12
13
12
15
15
16
17
18
19
17
18
74
76
77
20
10
13
10
12
20
20
22
18
19
9
15
12
32
31
32
11
9
8
11
9
28
31
31
17
23
11
19
15
10
11
12
23
11
7
14
10
23
25
26
18
13
11
12
11
24
24
25
12
12
8
13
10
16
15
16
12
8
5
9
7
19
21
21
12
15
11
14
12
18
20
20
17
18
9
11
10
98
99
99
11
-4
13
13
13
60
64
65
17
3
10
11
10
22
31
33
35
1
-1
4
1
41
42
43
4
11
7
10
8
39
39
38
8
30
-2
3
0
20
15
15
-12
7
10
9
9
19
20
21
15
19
2
12
6
17
16
16
5
9
19
9
14
85
90
90
17
13
7
11
9
18
16
17
7
17
9
11
10
25
25
25
9
26
0
12
5
5
5
5
6
20
0
11
5
17
16
16
2
9
-5
22
8
30
25
27
3
19
6
9
8
27
27
27
8
8
4
7
6
20
20
20
5
25
4
9
6
18
18
18
6
19
15
12
14
23
23
23
13
40
2
12
7
13
12
12
6
9
-14
17
0
13
10
12
-1
4
-11
12
0
15
14
14
-2
25
8
21
14
7
5
5
4
16
-3
8
2
25
22
23
-2
14
-3
-13
-8
15
15
17
-1
13
-4
15
5
12
12
12
3
21
-10
12
0
22
18
21
-3
0
-7
3
-2
21
21
21
0
19
-10
9
-1
19
14
16
-8
-2
5
11
8
32
41
43
25
20
5
12
8
20
20
21
12
Sales YoY (%)
PAT (INR b)
FY19 FY20E FY21E
1,053 1,631 2,243
-15
-1
42
23
216
317
34
110
189
47
65
131
33
58
87
24
39
49
32
54
64
40
61
77
80
104
130
211
267
337
21
27
33
398
479
605
72
89
107
36
44
53
16
20
23
583
686
774
14
15
20
63
72
88
17
21
24
12
14
16
15
18
21
22
28
30
76
90
103
40
45
52
115
130
150
25
34
33
125
154
160
43
48
56
17
18
21
2,173 1,935 2,276
100
106
119
43
42
51
162
163
188
85
61
98
48
52
55
22
20
25
319
324
362
92
97
102
348
351
386
101
100
111
63
56
67
75
54
78
34
31
35
173
98
177
175
158
176
51
42
47
55
44
48
76
60
65
67
53
47
101
65
71
-35
-28
-42
1,923 2,226 2,826
PAT Contbn to
CAGR %
19-21 Delta %
46
80
LP
4
271
20
137
10
67
6
62
4
42
2
40
2
39
3
27
3
26
9
25
1
23
14
22
2
21
1
20
0
15
13
19
0
19
2
19
0
16
0
17
0
17
1
17
2
15
1
15
2
14
1
13
2
13
1
10
0
2
7
9
1
9
1
8
2
7
1
7
0
7
0
7
3
6
1
5
3
5
1
3
0
2
0
1
0
1
0
0
0
-4
0
-7
0
-8
-1
-16
-1
-16
-2
Loss
0
21
100
November 2019
13
 Motilal Oswal Financial Services
Strategy
Sector-wise: Highlights / Surprises / Guidance
AUTO: Margin beat led by internal factors; festive demand raises hope; Earnings upgrade
Demand weakness continues across segments, though festive season cheer visible:
In 2QFY20, headwinds
continued impacting auto demand across segments. This, coupled with the high base of 2QFY19, resulted in
volume decline of 17%/23%/35%/8% in 2Ws/PVs/CVs/Tractors. However, after a weak start to the festive
season, retail demand did pick up during Diwali, resulting in overall mid-to-high single-digit growth for 2Ws and
PVs. While tractors have seen substantial moderation in decline rate, CVs remained weak. This, along with
substantial production cuts, led to inventory coming under control at 30-32 days at the end of Oct’19.
Cost-cutting initiatives drive gross margin surprise across OEMs…:
Gross margins further improved by ~50bp
QoQ (-20bp YoY) for companies in our Auto Universe, driven by cost-cutting initiatives and mix benefits, despite
the QoQ increase in discounts. This was more pertinent for 2Ws and PV OEMs. There was no material benefit of
commodity prices in 2QFY20, but OEMs expect it to reflect in 2HFY20.
…but operating deleverage results in 5
th
consecutive quarter of EBITDA margin decline:
In 2QFY20, our Auto
Universe companies (ex JLR) saw a sharp ~320bp YoY (-130 QoQ) decline in EBITDA margins to 10.2%, impacted
by operating deleverage (margins near 5-year low for our coverage universe). All auto OEMs (excl. TVSL)
witnessed margin contraction YoY, particularly TTMT S/A (-1,000bp YoY), EIM S/A (-560bp YoY), MSIL (- 510bp
YoY), BJAUT (-100bp YoY) and AL (-510bp). TVSL reported ~20bp YoY improvement in EBITDA margins.
Shift to new tax regime dilutes PAT decline:
Aggregate PAT for OEMs (ex JLR) declined ~39% YoY (-7% QoQ),
impacted by TTMT S/A losses and significant decline in PAT for AL (-84% YoY), MSIL (-35%) and MM (-19%).
BJAUT and EIM were the only two OEMs that did not witness PAT decline. Barring AL, TTMT and MM, all OEMs
have shifted to the new lower corporate tax. In Auto Components, only CEAT shifted to the new tax regime.
Earnings upgrade across OEMs, Auto Ancillaries remain a mixed bag:
An improved demand environment and
cost-cutting initiatives has led to earnings upgrade across OEMs and for select ancillaries like MSS and ENDU.
Some of the key earnings upgrades for FY21 are for EIM (+8.5%), TTMT (+8%), MM (+8%), HMCL (+8%) and TVSL
(+7%), whereas notable downgrades have been for MACA (-13%), CEAT (-10%), BHFC (-8%) and BOS (-6%).
Top picks:
We prefer PVs over CVs and 2Ws as (a) it is likely to be the least impacted segment from BS-VI, and
(b) it has a stable competitive environment. Our top picks among large caps are MSIL, EIM, and MSS; among
midcaps, our top picks are AL and ENDU. We have also upgraded TTMT to Buy from Neutral.
Positive surprises:
BJAUT, HMCL, TVSL, MM, MSIL, TTMT, AL, AMRJ, MSS
Negative surprises:
BHFC, BOS, CEAT, ENDU, EXID, MACA
Guidance highlights:
MSIL:
Demand environment in 2QFY20 remained weak (urban markets were weaker than rural markets).
Demand picked up during the festive season (in Oct’19); inventory at dealer level was at around one month.
M&M:
2HFY20 PV industry outlook – UVs should grow 12-13%, cars should decline 8-10%. Overall, PVs should
decline 5-6%. In FY20, tractors should decline 7-8% (v/s earlier guidance of up to 5% decline).
TTMT:
JLR –
China volumes are expected to rise in double-digits; has maintained cost savings of GBP850 target
for FY20.
India –
It expects India business to bottom out; green shoots are visible for CVs.
BJAUT:
Expects industry volumes to have bottomed out. Strong product pipeline for domestic 2Ws over the next
18 months with launches accelerating post BS-VI. Chetak (e-scooter) should be launched in Jan’20, E-3W to be
launched over the next 6-9 months.
HMCL:
Extended monsoons and delayed harvesting should lead to recovery from third week of Nov’19 in rural
markets. Inventory has reduced to 30-35 days in Oct’19.
TVSL:
Retails were impacted due to prolonged monsoons; expect demand revival in 4QFY20/1QFY21. Strong
focus on cost reduction; commodity cost benefit should drive EBITDA margin improvement in 2HFY20 also.
November 2019
14
 Motilal Oswal Financial Services
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EIM:
Festival sales showed strong growth with the North/West markets performing better than other markets.
Inventory is at less than three weeks with waiting period in many models across markets. Have set up 500 RE
Studio stores until Oct’19; plan to set up another 250-300 stores by Mar’20.
AL:
System inventory reduced to 13.2k units in Oct’19 (v/s 18.2k units in Sep’19 and ~27.5k in Jun’19). Maintains
cost savings target of ~INR5b in FY20, of this, INR2-2.3b was already achieved in 1HFY20. FY20 capex of ~INR18b
(v/s earlier guidance of ~INR23b).
Escorts:
Though tractor volumes recovered marginally during the festival period, company believes that a full-
fledged recovery is not possible before Mar’20. Dealer inventory stood at less than four weeks as at Oct’19
(below normal), whereas inventory with the company was at two weeks.
Motherson Sumi:
Strong performance of SMP and PKC should continue, but India business will remain weak.
SMRPBV order book stands at EUR18.4b as it has won new order of EUR3.8b in 1HFY20.
BHFC:
Expects 2HFY20 to be lower than 1HFY20 due to weakness in India, US and EU. US Class 8 trucks should
decline 20-25% in CY20 while EU trucks should decline 8-10%.
Exhibit 28: Key operating indicators
BJAUT
HMCL
TVS Motor
MSIL
MM
TTMT (S/A)
TTMT (JLR) *
TTMT (Cons)
Ashok Leyland
Eicher (RE)
Eicher (VECV)
Eicher (Consol)
Agg. (ex JLR)
Volumes ('000 units)
2QFY20
YoY (%)
QoQ (%)
1,174
-12.4
-5.9
1,691
-20.7
-8.2
886
-18.6
-4.0
338
-30.2
-16.0
191
-16.3
-12.2
105
-44.9
-23.6
134
2.9
13.4
29
167
11
4,426
-44.3
-20.7
-39.2
-20.1
-26.9
-9.3
-14.7
-8.3
EBITDA margins (%)
2QFY20
YoY (bp)
QoQ (bp)
16.6
-100
110
14.5
-60
10
8.8
20
80
9.5
-510
-90
14.1
-40
10
-1.7
-1,010
-810
13.8
470
960
10.9
170
610
5.8
-510
-360
25.0
-560
-90
5.2
-380
-30
25.0
-560
-90
10.2
-320
-130
2QFY20
14,024
9,196
1,968
13,586
13,548
-13,426
107
-1,588
842
5,705
150
5,727
45,466
Adj PAT (INR M)
YoY (%)
QoQ (%)
21.7
24.6
-5.8
37.1
-6.9
38.3
-35.3
-5.4
-19.0
47.6
-815.5
1,385.2
-205.9
-127.2
-84.9
-96
-84.5
-65.5
15.8
14.5
-89.4
-60.5
1.1
26.8
-38.6
-7.2
JLR in GBP million; Source: MOFSL, Company
Exhibit 29: Aggregate EBITDA margin shrinks YoY…
Aggregate (excld JLR)
18
16
13
11
8
Aggregate (incl JLR)
Exhibit 30: …led by YoY contraction in margins across
segments
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
2W
Source: MOFSL, Company
Cars
CVs
Source: MOFSL, Company
November 2019
15
 Motilal Oswal Financial Services
Strategy
Exhibit 31: Revised EPS estimates
Bajaj Auto
Hero MotoCorp
TVS Motor
Maruti *
M&M *
Tata Motors *
Ashok Leyland
Eicher Motors *
Amara Raja
Bharat Forge *
BOSCH
Ceat
Escorts
Endurance Tech*
Exide Industries
Mahindra CIE *
Motherson Sumi *
Rev
179
154
14
178
35
0
2
730
39
18
419
52
53
43
10
11
5
FY20E
Old
167
140
12
151
32
-1
2
629
35
19
437
57
53
39
11
14
4
Chg (%)
7.5
9.6
20.6
17.6
9.1
-68.5
-23.9
16.0
13.1
-9.2
-4.2
-9.4
-0.2
10.4
-4.2
-20.6
3.1
Rev
190
174
18
257
39
12
3
927
38
22
510
63
60
49
11
14
7
FY21E
Old
184
162
17
246
37
11
3
854
38
24
541
70
57
45
12
17
6
Chg (%)
3.2
7.7
6.7
4.3
7.9
7.8
3.4
8.5
1.7
-8.0
-5.8
-9.7
4.8
9.8
-6.2
-12.8
5.5
* Consolidated estimates; Source: MOFSL, Company
CAPITAL GOODS: Margins disappoint, order inflow remains weak
Industry revenue growth below estimate:
Revenue growth was at 7.4% YoY for industry, below our estimate of
12.4% YoY. The miss can be ascribed to BHEL’s weak execution (-8.2% YoY) due to land-related issues, delay from
clients and supply issues from vendor. Bharat Electronics (18.8% miss), Cummins India (16.3% miss) and Havells
(6.3% miss) also disappointed on the revenue front. RAC segment grew robustly due to low channel inventory
post a strong summer season. VOLT’s UCP revenues were up strongly by 19% YoY, while Blue Star also reported
10% growth. However, in Havells’ case, Lloyd saw a decline of 30% YoY, given that the change in its distribution
channel strategy is still in a transition phase and impacting sales, and also due to price erosion in TV LEDs.
Profitability misses estimates too:
Operating profit growth for the quarter was muted at 1.6% YoY, below our
estimate of +13.1% YoY. PBT declined 6.7% YoY versus our estimate of 5.3% growth. Performance was impacted
by execution challenges faced by a few companies like BHEL, Bharat Electronics, Cummins, GE T&D and Havells,
which percolated to the profitability level, resulting in operating de-leverage. Owing to corporate tax rate cuts,
PAT grew by 4% YoY, but was still below our expectation of 14.4% growth. Except BHEL, BlueStar, and Bharat
Electronics, all the other companies in our coverage universe adopted for new corporate tax rates.
Order inflow remains weak:
Order inflows declined 3.6% YoY, given that ordering activity is yet to show traction
post elections. Orders declined by 34% YoY for Bharat Electronics, 49% YoY for KEC International and 97% YoY
for Engineers India. L&T was an exception with order inflow increasing 15.3% YoY to INR483b. Even Thermax
witnessed strong order inflow growth of 28%, but it was inadequate to fuel revenue growth. Overall,
management commentaries suggest that small- and medium-sized orders are flowing in, but large-ticket orders
are on hold and should see a pick-up in 2HFY20.
Liquidity crunch drive pressure on working capital:
Liquidity continues to be low and impacting performance.
Execution was also weak due to prolonged monsoon during the quarter. Working capital toward execution
increased as companies opted to support their vendors in a tight liquidity scenario.
Infrastructure: Performance beat supported by strong execution and margin surprise
Revenue growth in line with expectation despite strong monsoon:
Overall, execution was in line our
expectation as companies demonstrated superior execution of the order book. Revenue grew 10.9% YoY versus
our estimate of +7.3%. While IRB (+22.3% YoY) and KNR (+25.7% YoY) surprised on revenue growth, Sadbhav
disappointed with a decline of 18.2%. Ashoka Buildcon’s revenue was in line with our expectation.
Margin expansion led to beat on PBT:
Operating performance was 10.5% ahead of our estimate, as all
companies witnessed margin expansion in their EPC business. As a result, PBT exceeded our estimate by 34% at
16
November 2019
 Motilal Oswal Financial Services
Strategy
the aggregate level. Except Sadbhav, all the other companies surprised on PBT. Strong operating performance
aided by corporate tax rate cut, led to 7.1% growth in PAT vs. our expectation of 14.1% decline. IRB and Ashoka
Buildcon have adopted new tax rates, while Sadbhav and KNR have continued with earlier rates as they have un-
utilized 80IA benefits.
Key challenges persist in the road sector:
(a) Awarding has been slow as the NHAI is focusing on land acquisition
and assessing the availability of financing toward HAM projects. (b) Lenders are extra cautious toward financing
projects and tightening of liquidity in the sector. (c) Traffic growth at toll projects was muted owing to economic
slowdown and new overloading norms. Resumption of new awarding activity is the key catalyst for the sector
and we expect the same to commence from end-Dec’19 with higher awarding by end-Mar’20.
Top picks:
L&T is our top pick in the capital goods sector,
given (a) better domestic execution, (b) working
capital cycle improvement and (c) leaner balance sheet due to non-core asset divestment. In the consumer
durables space, we like
Voltas
given the strong UCP revenue trajectory and below-normal inventory level for
industry. In
Infrastructure,
our top picks include
KNR
and
Ashoka,
given (a) their ability to timely execute
projects and (b) healthy balance sheet.
Rating changes:
We have upgraded ABB to Neutral from Sell, given its YTD underperformance despite a stellar
performance in the continuous business.
Positive surprises in 2Q:
ABB, Voltas, Ashoka Buildcon, IRB, KNR
Negative surprises in 2Q:
Bharat Electronics, BHEL, Crompton Consumer, Cummins, GE T&D, Havells, Sadbhav
Guidance highlights:
L&T:
Maintained its guidance of sales growth of +12-15% YoY, order increase of 10-12% and EBITDA margin of
10.5% (ex-services) in FY20.
Cummins cuts guidance:
Cummins scaled down its FY20 guidance for domestic revenue growth to 3-5% from 8-
10%. Also, it now expects revenues to decline 20% versus the earlier guidance of a decline of 12-15%.
Exhibit 32: Book-to-bill ratio stands at 2.1x
Order book (INR b)
BTB (x)
CEMENT: Profitability improves led by better realizations
Volumes hurt by heavy rains, tight liquidity:
Volumes for cement companies under our coverage declined by 1%
YoY (our estimate: flat growth) in 2QFY20 due to heavy rains and tight liquidity conditions. While growth was in
line for most players, DALMIA and RAMCO surprised positively as they gained market share.
Profitability driven by realization gains:
EBITDA/t improved 34% YoY to INR983 (our estimate: INR1,012), led by
a 5% YoY increase in realizations and flat YoY growth in cost/t. As a result, EBITDA increased 32% YoY to
INR55.6b. PAT was up 60% YoY at INR18.5b (our estimate: INR20b).
EBITDA/t up 34% YoY:
Cement companies’ aggregate sales were up 4% YoY at INR292b. Cost/t was flat YoY but
up 2% QoQ due to operating de-leverage. Hence, EBITDA/t stood at INR983/t (+34% YoY, -21% QoQ).
Top picks:
We remain structurally positive on the Indian cement sector due to expectations of limited new capacity
addition (~4% CAGR over FY19-22), which should result in improving utilization, assuming a normalized demand
November 2019
17
 Motilal Oswal Financial Services
Strategy
CAGR of 5-6%. In terms of regions, we prefer north and central, where utilization is likely to improve to ~85% over
the next two years, supporting prices. We prefer companies that are moving down the cost curve and provide
valuation comfort.
UltraTech
and
ACC
are our top picks. Over the next 12-18 months, UltraTech will continue
integrating and upgrading acquired capacities, thereby reducing costs and cutting leverage. ACC is also focused on
improving its sales mix (in favor of premium products) and cutting costs (lower energy consumption, discretionary
spends, etc.), which should improve margins. Moreover, the ongoing 15% capacity expansion (commissioning by
end-CY21) provides growth visibility, which was lacking earlier. In mid-caps, we prefer JKCE which is moving down
the cost curve; it is also expected to deliver volume growth from new capacities.
Positive surprises:
BCORP, SRCM, JKLC, TRCL.
Negative surprise:
ACEM, UTCEM, ICEM, DBEL, JKCE
Guidance highlights
Demand weakness is expected to persist in 3QFY20 as well with the liquidity situation still remaining tight. As a
result, a recovery is likely to manifest only by 4QFY20. While there has been an announcement of price hikes in
north and south, sustainability of the same will have to be monitored. Industry, however, is likely to benefit from
lower fuel and logistics costs, as energy prices (oil/pet coke/coal) have been on a downtrend.
Exhibit 33: Volumes down 1%YoY for MOFSL Cement
Universe
Aggregate Vol (m ton)
21.0
8.0 10.4
8.7
2.4 3.6
Volume growth (%)
20.4 18.318.7
12.7 13.3
10.311.2
8.2 7.8
Exhibit 34: Profitability increased 34% YoY
Aggregate EBITDA (Rs/ton)
(1.1)
0.1
42 44 51 49 43 46 55 53 48 55 63 63 57 61 70 63 56
Exhibit 35: Trend in key operating parameters
ACC
Ambuja Cement
UltraTech
Birla Corp
India Cement
Shree Cement
Dalmia Bharat
J K Cements
JK Lakshmi Cem.
Madras Cement
Orient Cement
Prism Cement
Sanghi Industries
Sector Agg.
Volume (m ton)
2QFY20 YoY (%) QoQ (%)
6.4
-1.5
-10.6
5.2
-4.7
-10.1
18.7
-1.0
-12.7
3.2
4.3
-12.1
2.7
-13.3
-12.3
5.7
1.4
-5.6
4.5
8.2
-1.8
2.2
3.6
-3.0
2.1
-3.1
-11.6
2.7
10.3
0.8
1.2
-15.6
-17.9
1.3
-5.5
-18.5
0.5
-27.1
-24.8
56
(1)
(10)
Realization (INR/ton)
2QFY20 YoY (INR) QoQ (INR)
4958
172.0
-297.8
4887
293.4
-116.2
5147
248.4
-177.1
4810
271.6
-144.2
4671
163.1
-157.5
4654
387.2
-48.9
5002
-80.1
-573.6
5604
507.9
-149.4
4541
538.2
69.6
4708
85.2
-281.6
4150
335.0
-402.1
4501
146.0
-168.2
4528
590.5
-34.2
4,932
254
(195)
EBITDA (INR/ton)
2QFY20 YoY (INR) QoQ (INR)
864
187.2
-221.8
841
188.6
-359.0
1026
273.5
-350.9
975
370.4
-81.4
552
48.8
-243.6
1453
454.6
9.8
1063
118.3
-401.1
1135
349.1
-179.8
722
290.8
-7.2
1070
80.9
-207.1
432
189.0
-557.7
614
25.8
-498.2
819
295.9
-274.8
983
252
(261)
November 2019
18
 Motilal Oswal Financial Services
Strategy
CONSUMER: Sales growth weak; EBITDA and PAT in line with low expectations; no near-term recovery in sight
Demand weakness continues:
Cumulative sales growth came in at 5.6% YoY (v/s est. +8.1%). Top line
performance of sector behemoths HUVR and ITC missed forecasts while nine companies (half of our Consumer
Universe) reported sales growth of 230bp below our forecasts. Disruptions in supply chain and demand caused
by floods and continued liquidity crunch (both at channel and consumer level) were factors that affected sales
growth for the quarter. Rural sales, which have been at the vanguard of driving sales and volume growth in the
recent past, slipped below urban sales growth for several companies during 2QFY20. Miss over estimates was
particularly glaring for Emami, GCPL, Marico, PIDI, PGHH and UBBL (all missed by over 500bp v/s estimates).
No signs of immediate recovery:
Management commentary has not indicated any material pick-up in demand
for 3QFY20 either; nevertheless, it is hopeful that a combination of good Rabi crop (resulting from high reservoir
levels following good monsoons) and government measures (to boost consumer sentiment) will lead to growth
from 4QFY20.
Margins above estimates leading to some relief on EBITDA and PBT:
A combination of (a) largely benign
material costs, (b) postponement of ad-spends due to the weak operating environment, (c) premiumization
(caused by lower-end product demand declining and premium product demand being resilient), and (d) some
cost savings benefits meant that unlike sales growth, EBITDA/PBT growth for 11 out of 18 companies under our
coverage was in line or above estimates. Also, in EBITDA terms, HUVR was above expectations while ITC was in
line; and because of their size, EBITDA growth for our coverage universe stood at 7.8% (v/s est. +9.2%), only
130bp below estimates. Only HUVR, GSKCH and UNSP reported over 500bp beat on EBITDA growth while UBBL,
Pidilite, PGHH and Parag reported EBITDA and PAT miss of over 10pp higher than expectations. PBT growth for
our coverage universe stood at 5.8% YoY (v/s est. 7.5%). PAT growth for our coverage universe stood at 27.8%
(v/s est. 6.9%) as companies benefited from the corporate tax cuts 2QFY20 onwards.
Top Picks are HUVR, CLGT and UNSP:
HUVR offers the best visibility of strong momentum in the large cap space
with by far the best ROCEs in the sector. If one factors in the GSKCH merger and synergies, which is not part of
our forecasts yet, valuations still offer scope for reasonable upside. CLGT and UNSP appear undervalued given
both their own healthy medium-term earnings prospects and on a relative basis compared to peers.
We downgraded BRIT & MRCO
during the quarter. While BRIT has been a long-standing top pick, weak near-
term prospects, strong 30% run-up in the share price in the last two months and subsequent expensive
valuations of 49x FY21 EPS led to it being downgraded to Neutral. While long-term opportunity in the India food
space remains attractive and BRIT has done remarkably well to significantly scale up its distribution reach and
product development, the upside over the next one year is limited, in our view. In case of MRCO, two of the
three cornerstones for our preference for the stock viz. better-than-peer visibility on volume growth and
extremely favorable material cost environment have either played out or are not as attractive as before. The
third cornerstone viz. scaling up of new products will benefit only in the medium-to-long term making the risk-
reward less favorable.
Positive surprise:
HUL, PAG, UNSP
Negative surprise:
UBBL, Pidilite, PGHH and Parag
Guidance highlights:
HUVR:
Macroeconomic indicators are pointing toward some pressure on near-term market growth.
Nevertheless, HUVR appears confident of performing well even in a relatively difficult environment.
MRCO:
Company is targeting 8-10% volume growth in India and double-digit CC growth in international
business. EBITDA margins are targeted to be over 20% in the medium term.
APNT:
Near-term growth outlook remains uncertain.
BRIT:
Base is favorable going forward but economy needs to revive for growth to return to earlier levels. Market
share gap v/s the second largest player continues to increase in YTD FY20. Inflation outlook remains modest.
Company expects current 3% inflation to go up to 4-4.5%.
CLGT
will prioritize volume-led sales growth even if it comes at the cost of near-term EBITDA margins.
November 2019
19
 Motilal Oswal Financial Services
Strategy
EMAMI:
There is no clear evidence of demand bounce-back in the industry. RM costs are likely to remain soft.
EBITDA margins are likely to increase as the company does not plan to invest disproportionately in ad-spends;
also company’s cost saving efforts should help.
PIDI
expects slower near-term market growth and is cautiously optimistic of growth hereon. Company is unclear
on recovery in C&B segment over the next two quarters but expects FY21 demand to be better.
DABUR:
Maintained guidance of mid-high single-digit volume growth for the domestic business. Seeing long and
protracted slowdown in rural market.
GCPL:
Management expects gradual improvement in urban and rural demand in India. In Indonesia, GCPL is
hoping to sustain top and bottom line growth. Africa is looking to grow faster. International margins are likely to
expand further, but domestic margins may be sacrificed if required for top-line growth.
UNSP:
Hoping for lower ENA costs as a result of new harvest coming in. Ad-spends will be higher in 2HFY20.
2Q18
9.0
5.0
(0.9)
7.2
10.0
15.0
2.5
4.0
(6.0)
8.0
12.0
3.0
12.0
15.0
3Q18
6.0
11.0
12.0
13.0
6.0
15.0
15.0
11.0
(3.0)
9.4
15.0
8.0
0.0
23.0
4Q18
10.0
11.0
4.0
7.7
8.0
15.0
8.0
11.0
(2.0)
1.0
(5.0)
11.0
(1.0)
13.0
1Q19
10.0
11.0
4.0
21.0
18.0
10.0
12.8
12.0
1.0
12.4
9.0
15.0
10.0
20.2
2Q19
11.0
11.0
7.0
8.1
(4.0)
10.0
10.8
10.0
6.0
6.0
8.0
5.0
5.0
11.0
3Q19
21.0
7.0
7.0
12.4
3.5
0.0
8.0
10.0
7.0
5.0
9.0
7.0
2.0
13.0
4Q19
10.0
7.0
5.0
4.3
0.0
NA
6.5
7.0
8.0
8.0
6.0
1.0
18.0
4.0
1Q20
16.0
3.0
4.0
9.6
0.0
NA
5.4
5.0
3.0
6.0
9.0
7.0
3.0
6.0
2Q20
14.0
3.0
4.0
4.8
1.0
NA
3.6
5.0
2.5
1.0
(1.0)
0.0
1.0
(1.0)
Exhibit 36: Quarterly volume growth
Quarterly volume growth (%)
Asian Paints (Domestic decorative)*
Britannia (Base business)
Colgate (Toothpaste)
Dabur (Domestic FMCG)
Emami (Domestic)
Godrej Consumer (Soaps)*
GSK Consumer (MFD)
Hindustan Unilever (Domestic)
ITC (cigarette)*
Marico
Domestic
Parachute
VAHO
Saffola
Pidilite (Consumer bazaar)
*Our estimate
Source: Company, MOFSL
Exhibit 37: Momentum in sales growth is down with
slowdown in demand
Consumer aggregate sales growth YoY (%)
13.4
12.6
11.2
9.5
9.5
7.6
7.2
Exhibit 38: Consumer aggregate EBITDA margin expanded
50bp YoY due to IND-AS 116 reclassification, benign material
costs and lower ad-spends YoY
Consumer aggregate EBITDA margins (%)
24.5
25.0
25.7
24.7
24.8
24.3
24.3
25.3
6.8
5.6
24.0
Source: Company, MOFSL
Source: Company, MOFSL
Exhibit 39: Aggregate adj. PAT growth stood at 27.8% YoY in 2QFY20, majorly due to
corporate tax cut benefit
Consumer aggregate adj. PAT growth YoY (%)
17.0
17.7
19.4
27.8
15.0
12.7
10.3
12.4
10.2
Source: Company, MOFSL
November 2019
20
 Motilal Oswal Financial Services
Strategy
FINANCIALS-BANKS:
Asset quality sees slight hiccups; loan growth moderation reflects slowdown
Banks witnessed a mixed 2QFY20. While retail banks reported healthy earnings, large corporate banks were
impacted by one-time DTA write-downs. Banks reported slowdown in loan growth led by moderation in corporate
lending, which reflects the weak economic environment; retail loan growth, however, remained steady. Amidst a
challenging macro environment, asset quality trends were mixed with large corporate banks reporting better-than-
estimated slippages (SBIN, ICICIBC) while YES and RBK reported an increase in their watch list’s size/stressed assets.
Deposits growth has been stable with robust growth in retail term deposits while CASA mix continued to moderate.
Life insurance players reported strong traction in VNB growth led by rising share of the protection business and also
improvement in operating leverage. However, total net premium income growth moderated for both IPRU &
HDFCLIFE.
Private Banks – Asset quality trends remain mixed; one-time DTA charge impacted corporate bank earnings:
Corporate private bank earnings have been impacted by the one-time DTA write-downs while retail banks
reported better profitability. However, private banks reported moderation in loan growth, which reflects the
weakness in economic environment. Margin trajectory remains largely stable/positive with increasing focus on
high yielding assets; however, CASA mix continued to moderate (barring KMB) while term deposits grew at a
faster rate. Asset quality trends have been mixed with ICICIBC and HDFCB reporting better-than-estimated
slippages while YES and RBK reported an increase in stressed assets. PCR ratio has improved as banks continued
to make healthy provisions to further strengthen their balance sheet.
Public Sector Banks – Operating performance remains modest; continuing with ~35% corporate tax regime:
All
PSBs under our coverage have continued with ~35% corporate tax regime, and therefore, no adjustments were
required in DTA. Most PSBs reported modest operating performance led by lower interest reversals, higher
treasury profits and controlled opex due to lower gratuity/pension provisions required in the current quarter.
However, PSBs reflected muted loan growth while guiding for better trends in 2HFY20. On the asset quality
front, SBIN and INBK reported better-than-estimated slippages while BOB and PNB continued to report elevated
trends.
Small Finance Banks – AU Bank reported PAT beat while EQUITAS missed on provisions:
AU Bank and EQUITAS
reported strong loan growth, led by healthy disbursements while asset quality trends remained mixed; AUBANK
reported stable trends while EQUITAS reported some deterioration. Overall, AU BANK reported beat on PAT
estimates driven by strong core operating performance while EQUITAS missed on higher provisions.
Life Insurance – Strong traction in VNB continues:
The share of the protection business (total APE basis) stood
at 16% for HDFC Life and at 14.9% for IPRU Life. VNB margins remained stable for IPRU while it slightly
moderated for HDFCLIFE due to lower mix of non-par saving products compared to the previous quarter.
Our view:
2QFY20 earnings reflect the weakness in the underlying lending environment, which has also driven
moderation in loan growth. Further, the addition of new names to the stressed pool has resulted in an increase
to our credit cost estimates for FY20E.
Among banks, we continue to prefer ICICIBC, HDFCB and SBIN while
amongst life insurance players, we prefer IPRU.
Positive surprises:
SBIN, ICICIBC and AUBANK
Negative surprises:
RBL, EQUITAS and YES
Guidance highlights:
AXSB
aims to grow 5-7% faster than the industry, bring down cost to assets ratio under 2% in three years and
grow NIMs in the range of 3.5-3.8%.
SBIN
expects the slippage ratio to go up to 2% over FY20E; some exceptional slippages in a tough environment
can rise further by 40bp. SBIN expects agri slippages to normalize in the coming quarters. The bank’s operating
performance is on track to achieve guided PPoP of INR700b over FY20E.
ICICIBC
expects credit cost to range between 1.2-1.3% for FY20, assuming recoveries from IBC. However, if
recoveries are delayed then credit cost might get elevated. ICICIBC is also planning to add ~450 new branches
during the year and is on track to achieve 15% consolidated ROE by Jun’20.
November 2019
21
 Motilal Oswal Financial Services
Strategy
HDFCB’s
incremental retail growth is healthy; auto loan disbursements during the festive season were
reasonably good and encouraging. It is not witnessing any signs of stress in the business banking portfolio.
RBL’s
credit cost should remain elevated in the near term. The bank plans to recognize all stressed assets in FY20
itself and will continue to invest in the retail business.
Exhibit 41: Net stressed loans declined for AXSB, ICICIBC and
SBIN while it increased for IIB, RBL and DCB
2QFY20
SBIN
PNB
BOB
INBK
NIM (%)
2QFY20 1QFY20
2.9
2.8
2.4
2.4
2.8
2.6
2.9
2.9
Loan Growth (%)
QoQ
YoY
0.5
9.6
1.4
-0.7
0.7
47.0
5.2
11.9
Exhibit 40: Operating performance remains mixed
2QFY20
PSBs
SBIN
PNB
BOB
INBK
PBs
AXSB
FB
HDFCB
ICICIBC
IIB
KMB