Q3 results show companies are turning the tide but investors must stay cautious

Corporate results for Q3 (Oct-Dec 2020) clearly show that India’s economy is reviving after the devastating impact of the coronavirus pandemic. The agro-economy, a rare bright spot during lockdowns to contain the pandemic, continues to do well. Automobile manufacturing, which supports a range of other sectors, is recovering. Power generation is up and construction is again hiring workers. Banks saw a turnaround in profit but their bad assets is a worry. Devangshu Datta writes on what investors should do in this economy.

Devangshu Datta | Business Standard
17th February

Corporate results for Q3 (Oct-Dec 2020) show clear indications of increased economic activity. Year-on-year comparisons with Q3, 2019-20 (Oct-Dec 2019) show some revenue expansion alongside far better margins being recorded across a wide range of sectors.

The agro-economy, which was one of the few bright spots during the lockdowns to contain the coronavirus pandemic, continues to do well. That has probably helped consumption. Sectors like edible oils, pesticides, sugar, plantation crops like tea and coffee, and tractors have delivered good results.

Industry and services also showed improvement in terms of both activity and margins. The auto sector, with its long value-chain, is seeing a recovery, along with FMCG and consumer durables. Real estate, however, remains in the doldrums, perhaps indicating that consumers are still wary about making big commitments.

In the core sector, steel, non-ferrous metals and cement offtake has increased. Power generation is up. Construction data suggests re-employment is taking place due to a pick up. Logistics activity has increased. The mining segment is also doing better. These are all signs of a rebound.

Mercifully, although the global commodity cycle seems to be on the upswing, fuel prices remain low. This has helped refiners and industries like paints, petrochemicals, chemicals and plastics (all of which use crude and natural gas as key raw material inputs) to generate better margins.

Sectors improving

Bank credit growth wasn’t high, indicating that the investment cycle is still down in the financial sector. Banks saw a turnaround in terms of profitability, but this may be deceptive given that non-performing assets (NPAs) were treated with kid gloves. Non-bank financial companies (NBFCs)—shadow banks—had a less impressive performance, with profit after tax (PAT) falling but revenue growing. The insurance segment has done well, with strong volume expansion. On the export front, pharmaceuticals and information technology (IT) continue to deliver steady performance.

Investors must still be cautious for a few reasons. One is that valuations are running very high. While good double-digit margin expansion has been achieved in many sectors, revenue growth isn’t as strong, though it’s positive in most cases. Further margin expansions are unlikely, given that inflation may be picking up. The current earnings per share (EPS) growth rates cannot be sustained through 2021-22 without an acceleration in revenue growth rates. Also, EPS growth has been largely discounted into current valuations, with the major indices running at 40-plus PE.

The Reserve Bank of India has warned that NPAs will rise substantially, but the impact has not been felt yet. The poor performance of shadow banks and a rising commodity cycle will at some stage surely hit margins. It’s also not yet clear how much of the consumption increase is due to deferred demand after a poor first half 2020-21 when lockdowns led to contraction.

Caveats aside, it was a good quarter and there’s actually an excellent chance that revenue growth rates will pick up in 2021-22. The Union Budget’s focus on infrastructure should encourage re-employment, and strong core sector performance. Higher employment, in turn, should continue to push consumption demand. There’s plenty of under-utilised capacity so servicing higher demand will not in itself be a problem.

We examined a sample of 2,058 listed companies with minimum revenue of Rs 10 lakh. On YoY basis, sales revenues grew by 2.54 per cent for this sample, from Rs 21.58 trillion (Q3 2019-20) to Rs 22.14 trillion (Q3, 2020-21). Operating Profits (PBDIT) grew by 17.95 per cent to Rs 6.53 trillion while the OP margin rose to 26.9 per cent from 23.88 per cent. Net profits of Rs 2.05 trillion rose by 60.6 per cent. Excluding the extremely volatile banking, NBFC and refining sectors from the sample, sales revenues grew 6.9 per cent for the remaining 1751 companies while PBDIT rose 24.5 per cent and PAT rose 39.64 per cent.

Turnaround time

The agro-related sectors that have driven the rural economy include agrochemicals, edible oils, sugar. Core sectors that have done well include steel, mining, cement, power generation, non-ferrous metals. Related service sectors that have improved performance include construction and logistics. There’s been some turnarounds especially in steel and construction.

Among other infra-related sectors, telecom equipment has delivered a strong performance while Bharti Airtel has seen a turnaround among telecom service providers.

Among consumption-related sectors, FMCG and consumer durables have both delivered growth. Automobiles and segments of the value chain such as auto-ancillaries, castings and forgings and tyres have all seen strong improvements in performance. Paint companies, which have various levels of exposure to construction, to realty and to the auto sector, have also done well.

Pharma and IT are major export engines. Both sectors show growth. Textile is another big employment generator as well as being a consumption-driven sector, with exports as well. It, too, has done well.

When we look at banking, insurance and NBFCs, banks have done well albeit credit growth is low. NBFCs have seen falling profits. Insurance has seen notable expansions in revenues as well as profits.

The performance of refineries, chemicals, petrochemicals is inversely related to crude and natural gas prices. So long as crude prices stay down, these sectors will register strong performances since raw material expenses remain down.

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A few links for further reading

Are Indian banks out of the woods?

Earnings season is over at most Indian banks. Looking at the September-quarter results, one might be tempted to say the worst is behind for the India banking industry. Many banks have surpassed analysts’ profit estimates; even if a few have announced losses or smaller profits, that’s primarily on account of one-off deferred tax asset adjustments. Three government-owned banks and one owned by Life Insurance Corp continue to be in a bad shape. At least 10 public-sector banks are busy with their consolidation plans. Is Indian banking out of the woods? The answer will have to wait, writes Tamal Bandyopadhyay.

Don’t waste this crisis

The gross domestic product (GDP) growth numbers for the July-September quarter, the lowest in 26 quarters, are no surprise. Most analysts had — belatedly — forecast the bad news. It is now clear that if the government does not get its act together by Budget day, two months from now, a quick recovery from the current depths should not be expected. The economy is on a cusp from where it can swing either way. Nirmala Sitharaman is on test.

Fix the holes in your investments and insurance plans ahead of the new year

Make changes where required so that your investment and insurance portfolio are equipped to meet the rigours that 2020 may have to offer. With the year drawing to a close, your thoughts may have turned to taking a holiday and visiting a new destination. Or you may want to just curl up in a blanket and laze around by a bonfire. While you do deserve some rest after toiling for the entire year, one essential task you must not overlook is to check your financial portfolio and ensure it is in good shape.

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