Q2FY14 Anticipation Springs Anew
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The quarterly earnings season has always been one of the important triggers for the Indian equity markets. The September 2013 quarter results were even more so, as this quarter was expected to lay down the foundation for the start of a recovery for India Inc. For the past few quarters, the performance of India Inc. has not been particularly encouraging, with consistent margin pressures on account of spiralling inflation (raw material prices) and higher interest costs hitting the bottomline. From our analysis of the Q2 results of around 1140 companies, it seems that the scenario is yet to improve.
Before we start putting in figures for the September 2013 quarter results, we would like to reiterate what we had stated while analysing the June 2013 quarter results. As regards the expectations, one needs to tone them down again. The depreciating rupee is expected to be a worrisome factor along with other issues like policy paralysis, rising inflation and the increasing Current Account Deficit. We are already halfway through the September quarter, and the rupee has depreciated to a new low of 64 per USD as we go to press. What is adding to the woes is the intensity of the fall, which is making it difficult for the companies even to hedge their positions”.
Along with this, we had also cautioned our readers about the higher debt burden of India Inc. in foreign currency, rising inflation and the expected earnings downgrades. Sure enough, the September quarter results have proved our call right.
The topline of 1140 frequently traded companies has increased by 7.47 per cent on an aggregate basis. However, the contracting margins and rising interest costs saw the bottomline (adjusted for extraordinary items) decline by around 26 per cent, which seems to be rather steep.
However, these numbers are not strictly indicative of the actual performance in the quarter – the tremendous subsidy burden on the companies needs to be accounted for too. As a regular practice, we adjust the PSU oil majors’ data in our results analyses. This time around, adjusted for oil companies, the topline growth stands at 7.79 per cent and the bottomline has declined by 13.41 per cent. On a sequential basis, the topline increased by five per cent but the bottomline remained pretty much stagnant.
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Sensex-Based Companies Put Up A Good Show
The Sensex aggregate sales grew 14 per cent (against street estimates of around 12 per cent), EBIDTA grew 15 per cent (estimates of 12 per cent) and PAT by 10 per cent (estimates of five per cent). Excluding the three PSUs, viz. Coal India, ONGC and SBI, the Sensex PAT grew by 17 per cent, far above the estimates of nine per cent growth. Around 13 companies on the Sensex reported PAT figures above estimates, 12 reported PAT in line with street estimates and five saw their PAT below estimates.
Interest Costs Still On The Rise
In Q4FY13 and Q1FY14, interest costs played a major role in the companies’ performance. Despite the RBI reducing the repo rate, the actual interest cost was higher for these quarters. For the September 2013 quarter too, interest cost has remained a worrisome issue. The interest cost for India Inc. (adjusted for Banking and Finance companies) has increased by more than nine per cent. Though this is on the lower side as compared to the double-digit rise seen in the past few quarters, it is still a cause for concern for India Inc. Further, the two repo rate hikes effected by the new governor would ensure that the interest costs remain higher.
Respite came in on one front, as the depreciation cost increased by 14.16 per cent on a YoY basis. This clearly indicates that some amount of spending is going in towards capex expansion. On the sectoral front, some of the automobile companies have led from the front in terms of depreciation.
Impact Of INR-USD Volatility
The fall of the INR against the USD for the quarter was a key factor denting corporate performance. The steep fall from the levels of 59/USD to an all-time low of 68.61/ USD during the quarter surely took everyone by surprise. Though the rupee eventually settled down at 62.50 towards the end of the period, the volatility had already made its impact felt.
As mentioned earlier, the high amount of foreign debt dented the bottomline appreciably. India being a net importer (of which, crude forms a major part), the overall impact of this is negative. On the macro front, it is a detriment to the CAD levels. As crude is a base for major synthetic raw materials, it also has a micro-level impact in terms of the companies’ margins.
There is no doubt that the positives added up for India Inc., as IT and pharma companies notched up a strong performance for the quarter. The hitherto beleaguered textile companies also managed to put in better numbers. The better performance of exporters also helped saved the day.
Expectations For December 2013 Quarter
A thumb rule to remember for the equity markets is that they move on expectations of future performance. Hence, it is equally crucial to have a sense of the quarter ahead. We expect that a few positives may emerge in the December 2013 quarter. First, with the festive season in the December quarter, the volume growth is expected to be a comparatively better than the September 2013 quarter. Secondly, the INR has stabilised to some extent, providing enough time to adjust accordingly. Stability on the raw material front would help India Inc. sustain its margins. A few key indicators of the services sector have shown an uptick in the H1FY14. Some pick-up in exports and sporadic recovery of investments may help growth as well.
However, there are a few worries too. While the companies’ topline has improved, the FY14 GDP growth is expected to come in below five per cent – the street estimates are being placed at 4.5 per cent for the time being. The RBI has increased the repo rate twice, and this would ensure that the interest cost remains high in the December quarter. With the margins hardly showing any improvement, the higher interest cost would eat up some part of bottomline. Considering the recent repo rate hike, we would not be surprised if the interest cost as a percentage of sales stays above the three per cent level. If the RBI again goes ahead with another rate hike when it meets in December, it would only add to the woes.
On the valuations front, a good amount of downgrade was expect- ed in the Sensex-based companies’ earnings (EPS). As we mentioned in our previous cover story (‘Caution! – Enter At Your Own Risk’, DSIJ Vol. 28, Issue No. 25), the street’s estimates for FY14 were reduced to Rs 1260 (down from Rs1295) and FY15 estimates were reduced to Rs 1400 (from Rs 1510-1540). The good news is that the street is not expecting to see any further downgrades going ahead. On the contrary, the consensus estimates are now at Rs 1295 for FY14 EPS and Rs 1490-1510 for FY15. This means that at its current level of 20425, the Sensex is trading at a P/E of 15.75x, which we feel is a fair valuation.
Ahead in this story, we present our exclusive analysis of how the the macroeconomic factors affected the 10 key sectors and how they fared in the September 2013 quarter.
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The automobiles sector may be viewed as a barometer of consumption demand and consumer confidence. Vehicle purchase is a fairly big ticket item, and retail customers most often choose to go for financing options. The commercial vehicle segment is almost entirely financed. The health of this sector is a stand-in for the overall economic conditions, as it represents multiple industries, from metals to consumer finance.
The second quarter numbers have been positive for the Indian auto industry. It saw some good growth after a long time, in spite of pressures on the companies’ toplines. The industry posted a handsome growth of almost 19 per cent YoY, with the bottomline growth at 44.5 per cent YoY during the quarter.
The robust earnings growth was supported by rupee depreciation and comparatively lower growth in raw material cost. Stable commodity prices helped the automobile companies to see lower outgo compared to the growth in its revenue. This is clearly seen from the 1.6 per cent growth in the industry’s raw material prices on a sequential basis. On a yearly basis, this grew 12 per cent, which was substantially lower than the revenue growth.
Further, supported by rupee depreciation, the operating profits went up remarkably for the automobile companies which are exporting to other countries and have large exposure in other countries. However, like other companies across the country, auto companies are also facing problems with higher interest rates. The overall interest expenses of this industry have gone up by almost 26 per cent on a yearly basis.
Segment-wise, those automobile companies which have sizeable exposure in passenger vehicles showed robust growth on a sequential as well as yearly basis due to rupee depreciation and strong demand from rural India. However, these companies battled higher interest cost (YoY) pressures during the quarter. Another positive is that the companies are paying interest for capacity addition and not for working capital. The additional capacity will start showing results in the next few quarters. During the same quarter last year, Maruti Suzuki’s manufacturing plant remained closed for a fair while. However, companies other than Maruti registered a good performance during the quarter.
Two-wheeler companies showed average growth during the second quarter. Interestingly, these companies (especially TVS Motor) have reduced their debt burden and started improving their margins.
Commercial vehicle companies, on the other hand, have seen subdued growth, reporting a negative topline during the second quarter on a yearly basis. Due to bleak market conditions, there is lower demand in commercial vehicle segments across the country. The commercial vehicle companies have reported some increase in their ‘Other Income’. Ashok Leyland, which posted heavy losses in the first quarter, made considerably lower losses on a sequential basis.
Despite the good performance during the second quarter, automobile companies are expecting muted volumes growth in the near future. Though there is a great demand from rural India, it only partially offsets the downbeat demand scenario in urban India. Hence, the overall demand across all vehicle segments would be weak. With demand recovery being key to sustainable growth in the profitability of this sector, the near future remains under a shadow. The continuing economic slowdown, policy paralysis and higher interest cost are likely to weigh down the consumer sentiment. Hence, it is advisable to keep a close watch on the sector before investing, at least until the point that any significant fundamental positives emerge.
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The quarter ended September 2013 was one of the most eventful and volatile ones for the banking sector in the past few years. Due to sharp depreciation of the rupee, many steps taken by the RBI directly impacted the banking sector’s results and its shares. Therefore, the expectations from the sector in the second quarter result were naturally low. Nonetheless, the banks did manage to post a satisfactory financial performance in Q2FY14.
For the quarter, the average Net Interest Income (NII) of the banks grew by around 15 per cent on a yearly basis and 3.5 per cent on a sequential basis. This growth was led by private sector banks, whose NIIs increased at twice the rate of PSBs on an average. In terms of loan growth, though, PSU banks’ (19 per cent) performed better than their private counterpart (16 per cent). The Net Interest Margins (NIMs) of the sector saw some pressure following the increase in cost of funds and the reversal in interest income.
The weak macroeconomic environment continued to haunt the sector, and this is reflected in deterioration in the banks’ asset quality, though this was slightly than that in the last quarter. The September quarter saw a 10.9 per cent increase in PSU banks’ Gross NPAs on a sequential basis, as against a 4.3 per cent increase for private banks. Overall, private sector banks continued to perform well, while the PSU banks’ have seen some sign of stabilisation on the asset quality front.
| Banks | (Growth Y-o-Y %) | NIM
(%) |
| NII | Gross
NPA | PAT |
| SBI | 12 | 30 | -35 | 3.2 |
| ICICI | 20 | 0 | 20 | 3.3 |
| HDFC | 15 | 38 | 27 | 4.3 |
| Axis | 26 | 25 | 21 | 3.8 |
Going ahead, we believe that highly volatile macroeconomic environment will put pressure on the performance of the sector at least for the next quarter. In the backdrop of higher inflation, we expect the apex bank to increase the key policy rates again, which will hurt the investment book and treasury earnings once again, as we saw in the Sept 2013 quarter. Also, in Q2FY14, only a partial impact on earnings came from transferring losses on securities shifted from the Available for Sale (AFS)/Held for Trading (HFT) portfolio to the Held to Maturity (HTM) portfolio. Credit growth is directly linked to the GDP growth, which is at a decade’s low, and this is bound to impact loan growth. Based on these factors, we expect earnings growth for the entire sector to remain weak in the next quarter. Therefore, we would remain cautious on the sector.
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Rural penetration and expansion in distribution has once again played the trick for companies operating in the India FMCG space. The 15 FMCG companies, the Q2FY14 results of whom we have analysed, have performed better than what the street was expecting. On an aggregate, the topline of these 15 companies has gone up by 13 per cent on a YoY basis, much better than what was witnessed during Q1FY14.
The main parameter on which FMCG companies are evaluated is the volume growth. In the recently concluded quarter, companies have done well on this front. In fact, there are certain companies like Godrej Consumer Products, Dabur India and Glaxosmithkline Consumer Products have seen a good acceleration in their volumes. On the other hand, companies like HUL, Marico and Colgate have been able to keep their volume growth stable.
The gross margins for most of the companies expanded on a YoY basis in Q2FY14 and stood at an aggregate average of 14 per cent. Companies have hiked product price hikes and reduced consumer promotion costs in select products where the impact of the INR depreciation is high. Ad spends continued to see higher YoY growth as companies ploughed back the benefit of gross margins into brand building exercises. Thus, EBITDA margins are not expanded despite the strong gross margin tailwinds.
Going forward, companies in the FMCG sector are likely to keep up with their performance and volume growth is expected to remain at good levels. The third quarter may see Godrej Consumer Products emerge a clear winner followed by Dabur India. As mentioned earlier, companies have increased product prices, the impact of which is likely to be witnessed in Q3FY14. Companies like Marico and Emami are also likely to see improvement in their financials and the worst might be behind them. We continue to remain bullish on the sector and feel that companies like Godrej Consumer Products, Dabur India and Britannia are likely to remain in the limelight.
| Company | Revenue (RsCr) | YoY Growth (%) | EBITDA (RsCr) | YoY Growth (%) | PAT (RsCr) | YoY Growth (%) |
| Colgate-Palmolive India | 895.7 | 15.8 | 141.3 | -10.1 | 109.5 | -24.5 |
| Dabur India | 1748.8 | 14.9 | 323.8 | 26.9 | 249.8 | 23.5 |
| Godrej Consumer | 1957.4 | 22.5 | 295.4 | 21.1 | 201.3 | 20.6 |
| Hindustan Unilever | 6892.6 | 9.2 | 1085.3 | 11.1 | 883 | 9.6 |
| ITC | 7775.8 | 8.8 | 2931.2 | 12.4 | 2097.6 | 14.2 |
| Marico | 1115.4 | -3.5 | 165.5 | 11.4 | 105.9 | 23.3 |
| Nestle India | 2348.3 | 11 | 481.7 | 10.5 | 285 | 6.6 |
| Radico Khaitan | 352.1 | 18.5 | 56.4 | 14.9 | 28 | 35 |
| Titan Industries | 2290 | 1.4 | 188.7 | -18.6 | 162 | -10.1 |
| United Spirits | 2057.6 | -8 | 224.2 | -16.7 | 94.3 | 140.1 |
| Jyothy Laboratories | 305.9 | 33.1 | 42.5 | 102.1 | 22.4 | 1593.3 |
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Infrastructure is one sector that has been at the core of India’s growth story. Development in this sector mirrors the overall health of a nation’s economy. The Government of India has always been quite forthcoming when it comes to upgrading infrastructure, maintaining its focus on related activities even in a difficult economic scenario. In the past few quarters, though infrastructure spending has continued, the companies witnessed a contraction on the margins front on account of higher interest costs and rising commodity prices.
The interest cost for companies climbed on account of increased working capital requirement. In addition, most of the infrastructure companies have been burdened with high debts. In this backdrop, many of them including GMR Infrastructure, GVK and IVRCL even tried selling a few non-core assets.
Though the higher commodity prices receded in the September 2013 quarter, the sector does not seem to be completely back on track. The intense competition in the field combined with a lower number of orders has resulted in high competitive bidding for the projects. Thus, margin pressures continue to haunt the infra players.
As regards the sector’s aggregate performance for the September 2013 quarter, though the topline increased marginally by 5.50 per cent, margin pressures and a higher interest burden resulted in the bottomline sliding by over 30 per cent. The PBIT of infrastructure companies declined by around 10 per cent. Add to that the interest cost increase of more than 24 per cent, and it comes as no surprise that the bottomline was hit.
Going ahead, with the government trying to focus on fast-tracking some of the infrastructure projects, the fortunes of the sector may start reversing. On this front, the management of India’s largest infrastructure company L&T remains slightly circumspect, “The efforts from the government are good, but they will take at least two to three quarters to trickle down into our order book”. Many companies are also focusing on international orders. Though the margins are lower by around 200 basis points, these orders provide a consistent cash flow.
As regards the order book position, the major companies have witnessed some improvement. What remains to be seen, however, is how the companies manage to maintain the order inflows along with sustainable margins. The projects, especially the road projects, have been highly competitive and we expect margins erosion to continue in the coming quarters. We also see the interest costs remaining on the higher side. Hence, in the December 2013 quarter, though the topline is expected to improve, the bottomline is likely to remain stagnant.
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As the rupee depreciation drama unfolded, it was rather interesting to see the corporate results for the second quarter – especially for the IT sector, which has most of its exposure to the dollar. Overall, the quarter has been positive for this industry, and the managements of various companies seem optimistic about the outlook too. A pick-up in discretionary spending is expected and demand is healthy. The order books validate the upward trend in various pockets. With Narayana Murthy back in Infosys, the sector has already caught the attention of analysts during this results season. There were great hopes from the sector in Q2, and it managed to better those.
Overall, the IT industry’s revenue has grown by 12 per cent on a sequential basis during the quarter. The industry beat the street’s expectations in terms of both USD and rupee-term revenue expectations. Analysts were expecting good revenue growth in USD terms because of some improvement on the demand front. The overall personnel expenses have grown by just 9.39 per cent sequentially. This clearly shows that there was none of the usual acceleration in personnel expenses even in the face of improving demand. At 27 per cent, the growth in net profits was strong during this quarter as compared to that in the first quarter this fiscal. Furthermore, the net profit margins of Indian IT companies expanded hand-somely by almost 207 basis points.
Interestingly, the top five IT companies showed 13.45 per cent combined revenue growth during the second quarter compared to first quarter of this financial year, which is at par with the overall industry. However, the net profit for the top five companies grew by just 10 per cent on a sequential basis, much lower than the industry profits. This clearly shows that the mid and small IT companies are operating in a much more efficient manner and utilising optimal resources. Further, the profitability of mid and small companies may be because of a better billing rate. The personnel expenses of the top five companies, if combined, grew by 11.56 per cent, which is higher than the overall industry. This shows that the smaller IT companies have much bargaining power with their employees.
Apart from the favourable results, the sighting of an economic recovery in key Western markets and increased technology spending in the US and Europe is expected to create demand for the Indian IT industry. Though the US market is a major contributor in Indian IT industry, the large Indian IT players have gradually started moving into the European IT services space over the past few years. Outsourcing opportunities in Europe are increasing and Indian IT players are making their presence felt across continental Europe. Thus, a large proportion of contracts are expected to be from Europe, with substantial opportunities in areas such as infrastructure deals.
While rupee appreciation remains the biggest risk to earnings for IT companies, industry experts see the rupee at lower levels over the next few quarters. This will help the players to improve or at least maintain their profit margins. Despite the better performance of smaller IT firms in terms of profitability, we expect the leading and select smaller players to gain a greater revenue share and outperform the overall market.
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The country’s oil & gas sector is experiencing a drastic impact of the declining rupee, and if any further proof were needed, Q2 of this fiscal has furnished that too. On one hand, upstream public sector companies like ONGC, Oil India were hit by the ever-increasing subsidy burden and lower realisations. On the other, the bottomlines of downstream companies like IOC, BPCL and HPCL were also severely hurt by forex losses, interest burden and delayed payment of cash subsidy by the government. In fact, their private peers performed better due to stable realisations, robust crude oil prices and increasing production.
During the quarter, the biggest positive came in the form of RIL’s historic topline move. The company became the first to cross Rs 1 lakh crore in revenues in a quarter. Its total income reached Rs 1.05 lakh crore from that of Rs 92400 crore achieved during the corresponding quarter last year. The net profit was at Rs 5490 crore as against Rs 5376 crore achieved during Q2FY13, marking a growth of 2.12 per cent owing to the rupee decline and better margins from the company’s petrochemical business. A big positive is that its core refining business is now contributing to both the topline and bottomline in a major way. However, the company’s Gross Refinery Margins (GRM) declined considerably from USD 9.5 per barrel to USD 7.70 per barrel, clearly showing stagnation in growth and margins.
PSUs downstream companies, though, continued their bad run due to the higher subsidy burden, forex losses and interest costs. IOC alone was hit by an exchange loss of Rs 2158 crore during the quarter, while it has absorbed Rs 413 crore in diesel subsidies. The company’s net profit declined by a staggering 82.5 per cent owing to insufficient subsidy payment by the government. On the positive side, the company’s GRMs increased from USD 6.07 per barrel to USD 7.43 per barrel during the quarter.
In the case of BPCL and HPCL too, their net profits declined by 81.5 per cent and 86 per cent respectively. However, their GRMs remained low at USD 4.38 and USD 3.81 per barrel respectively, which is a cause for concern. In fact, the cash payment of subsidies from the government came at the right time, failing which all the OMCs would have incurred heavy losses.
The biggest surprise came from ONGC’s numbers. The company’s PAT registered a growth of 2.8 per cent in Q2 owing to a sharp decline in the rupee. In H1FY14, the subsidy burden on ONGC was at an all-time high of Rs 26418 crore as against Rs 24676 crore shelled out during the last fiscal. The company’s net profit in rupee terms spurted to Rs 6064 crore in Q2FY14 as against Rs 5897 crore earned during Q2FY13.
The real dark horse of the sector was Cairn India. The company’s gross production from the Rajasthan field reached 175478 barrel of oil equivalent/day (boepd) and it is expected to reach 2 lakh boepd by the end of this fiscal. Due to this, the company’s PAT reached Rs 2235 crore, while it was in losses during Q2FY13.
All in all, the situation for the oil and gas sector cannot improve until the rupee stabilises to a much stronger level and total decontrol is effected in petroleum products. It is heartening to note that the government is seriously thinking along those lines and the Petroleum ministry has already given a target date for the complete decontrol of diesel.
| Oil & Gas Companies' Performance In Q2FY14 |
| Particulars | IOC | RIL | ONGC | BPCL | HPCL | Cairn | GAIL | Petronet LNG |
| PAT Q2FY14 (Rs/Cr) | 1683.92 | 5490 | 6063.86 | 931.13 | 318.92 | 2235.88 | 915.67 | 181.75 |
| PAT Q2FY13 (Rs/Cr) | 9611.35 | 5376 | 5896.57 | 5034.79 | 2327.09 | -25.01 | 985.38 | 314.79 |
Consolidated Net Profit
Increase(%) In FY13 | -82.48 | 2.12 | 2.84 | -81.51 | -86.3 |
| -7.07 | -42.26 |
| Total Income Q2FY14 (Rs/Cr) | 110848.51 | 105818 | 23897.64 | 62241.32 | 52103.66 | 3231.01 | 14224.37 | 9509.61 |
| Total Income Q2FY13 (Rs/Cr) | 106848.25 | 92447 | 21786.22 | 57344.65 | 49423.91 | 18.58 | 11629.71 | 7573.39 |
| Consolidated Topline(%) In FY13 | 3.74 | 14.46 | 9.69 | 7.87 | 5.14 | 99.42 | 18.24 | 20.36 |
| Gross Refinery Margin (USD/bl) | $7.43 | $7.7 | - | $4.38 | $3.81 | - | - | - |
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The pharmaceuticals sector is one which has witnessed upgrades in the past couple of years, when most of the industries and sectors had taken a downturn. From the September 2013 quarter results, it appears that there is still a lot of steam left in the sector ahead.
Of course, the road has not exactly been a smooth one. Many companies have come under the USFDA scanner, and then there was the Drug Prices Control Order 2013. But the sector has been able to withstand all these jolts and emerged much stronger from them. How well the branded business in India has fared came as a surprise for most investors.
It has to be said here, that the US was the key growth driver during the quarter, aided by a favourable currency. As expected, the growth in the India formulations had slowed down for most companies, impacted by the pricing policy. On an aggregate basis and adjusting for the losses posted by Ranbaxy Laboratories, we found that the bottomline of the sector witnessed a growth of 5.21 per cent on a YoY basis and a stupendous 50 per cent growth on a sequential basis. The top-line has grown by 12 per cent YoY and 10.84 per cent sequentially.
What is more encouraging is that the most of the frontline companies have revised their guidance upwards. For instance, Sun Pharma increased its FY14 revenue growth guidance to 25 per cent in constant currency terms as against 18-20 per cent guided earlier. Glenmark has expressed confidence about exceeding its earlier guidance of 18-20 per cent revenue growth and 21 per cent EBITDA growth for FY14. Divi’s Labs also increased its sales guidance to 15-20 per cent as against 15 per cent earlier for FY14.
With the robust pipeline of ANDAs and FTFs that the companies have in their pipeline, we believe that the good run is not over for the Indian pharma companies yet. In fact, the companies look poised for another quarter of robust earnings in Q3FY14. Our top picks for the sector remain Sun Pharma, Lupin, IPCA Laboratories, Dr Reddy’s Labs and Divi’s Laboratories.
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The power sector, which was supposed to give lifeblood to the country’s growth, has been blighted by a series of obstacles over the past couple of years. The elapsed quarter only took that sorry run further. With the country’s GDP growth witnessing a slowdown and slated to remain around five per cent, the power sector has started experiencing a slowdown in demand. In Q2, the supply increased by more than eight per cent following capacity addition by companies, but the demand for power rose by only five-six per cent. This has put extra pressure on the companies, which were already reeling under supply-side issues of coal and gas, expensive overseas coal and high interest costs.
Due to languishing demand, the most crucial parameter measuring the capacity utilisation of power plants, i.e. plant load factor (PLF), has come down drastically to 64 per cent in the first half as against 70 per cent in the corresponding period last year. Bad enough that capacity utilisation is coming down, worse still, demand is declining from the most lucrative segment, i.e. industry. Industry’s contribution to the total consumption has dropped from 62 per cent to 44 per cent during the first half of FY14 on a YoY basis.
At the same time, the interest cost for almost all power generation companies has gone up drastically by 69 per cent in Q2 owing to a heavy debt burden for setting up of plants. The interest costs for Adani Power, NTPC and Jaiprakash Ventures has moved up by 287 per cent, 104 per cent and 24 per cent respectively compared to last year, eating into their profits. On an overall sector basis, though the total income has jacked up marginally by 0.41 per cent, the other parameters remained sluggish, with the net down by a whopping 34 per cent to Rs 4104.05 crore as against Rs 6239.17 crore last year.
The increase in interest and other cost also brought the PAT margin down from 16.83 per cent to 11.02 per cent. To remain profitable, power generation companies must run at a PLF of 75 per cent. For that to hap- pen, power demand must grow at a pace of nine per cent.
All the negative factors have taken a toll on the power generation companies. NTPC’s PAT tumbled by 21 per cent to Rs 2492 crore owing to declining PLF (particularly gas-based) and rising interest costs (Rs 620.46 crore). Others like JSW Energy, Torrent Power and Jaiprakash Power Ventures posted huge drops in their PAT by 75 per cent, 116 per cent and 31 per cent respectively.
Owing to a staggering interest cost of Rs 930.06 crore, Adani Power’s losses trebled in Q2 to Rs 909.75 crore from Rs 225.39 crore incurred last year. Due to low demand, the topline of the companies was also affected. The total operating income of NTPC remained stagnant at Rs 16415 crore, while this has declined by 19 per cent, 18 per cent and 12 per cent for Reliance Infrastructure, JSW Energy and Tata Power respectively.
Hydropower companies were a little better off as a plentiful monsoon this year helped the companies generate more power. SJVN’s operating income spurted by 4.5 per cent, though this marginally declined by seven per cent for NHPC. The profits also showed some strength.
Until there is some resurgence in the growth outlook and some strength comes in from the demand side, the situation will remain bleak for power sector. The positive development of the US-Iran deal could have some bearing on the sector in the medium to long-term, as gas could be available for idle capacities. For that, however, we have to wait and watch.
| Performance Of Power Companies In Q2 |
| Company | Total Operating
Income
Q2FY14 | Total Operating
Income
Q2FY13 | Diff. % | PAT
Q2FY14 | PAT
Q2FY13 | Diff. % | Interest
Charges
Q2FY14 | Interest
Charges
Q2FY1 | Diff. % |
| NTPC | 16415.44 | 16351.33 | 0.39 | 2492.9 | 3142.35 | -20.67 | 620.46 | 303.46 | 104.46 |
| Reliance Infrastructure | 2831.8 | 3500.22 | -19.1 | 345.82 | 414.13 | -16.49 | 231.62 | 198.02 | 16.96 |
| Tata Power Co. | 2199.52 | 2519.8 | -12.71 | 261.77 | 295.98 | -11.56 | 162 | 164.27 | -1.38 |
| PTC India | 3140.16 | 2792.96 | 12.43 | 61.84 | 44.57 | 38.74 | 0.33 | 0.4 | -17.5 |
| Torrent Power | 2241.77 | 2199.6 | 1.92 | -26.07 | 161.25 | -116.16 | 157.65 | 100.03 | 57.6 |
| JSW Energy | 1229.92 | 1514.01 | -18.76 | 75.38 | 304.81 | -75.26 | 145.79 | 140.71 | 3.61 |
| Adani Power | 2016.78 | 1434.11 | 4.63 | -909.75 | -225.39 | 303.63 | 930.06 | 240.17 | 287.25 |
| NHPC | 1650.02 | 1772.44 | -6.91 | 707.58 | 783.38 | -9.67 | 120.31 | 104.71 | 14.9 |
| Jaiprakash Power Ventures | 969.18 | 905.79 | 7 | 251.89 | 366.03 | -31.18 | 357.36 | 288.5 | 23.86 |
| SJVN | 634.1 | 606.44 | 4.56 | 415.63 | 387.03 | 7.39 | 7.64 | 15.08 | -49.33 |
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Though the sharp depreciation in the rupee witnessed in the second quarter of FY13 has adversely impacted various sectors and the economy as a whole, steel remained one of the beneficiaries. This is especially true of domestic steel companies, whose export competitiveness was augmented by the weakening rupee. JSW Steel saw its export increasing by 23 per cent on yearly basis to 0.84 tonne.
The 57 iron and steel companies that we analysed saw their topline improving by an average 7.3 per cent on a yearly basis. This was largely helped by the increase in volumes, as steel prices remained under pressure on a yearly basis.
The bottomlines were significantly better, and increased by 20 per cent on a yearly basis. This was largely helped by the reduction in the cost of raw material as a percentage of sales. Although, raw material cost increased by merely one per cent in absolute terms, it declined from 45 per cent of sales to 42.3 per cent in the last one year. For example, the coking coal costs for SAIL were at USD135/tonne in Q2FY14 as against USD222/tonne in Q2FY13, which reflects the subdued prices of raw material. What also spiked the sector’s aggregate profits for the quarter was an exceptional item of net Rs 988 crore that SAIL received from a foreign supplier by way of compensation for non-supply of the full quantity of contracted hard coking coal.
The interest cost for the companies increased by 27 per cent on a yearly basis and formed 4.6 per cent of the sales for Q2FY14 as against 3.9 per cent in the same quarter last year. Jindal Steel and Power saw a huge 140 per cent hike in its interest burden on a yearly basis. The depreciation expense also went up by 15 per cent on a yearly basis, as most of the larger players continued with their capex plans.
The second half of the year is usually better for steel companies, with improved volumes and better realisations. A weaker rupee would also support the realisations for steel and other metal companies. Moreover, the delay in US Fed tapering would help the prices, and the recent announcement of new reforms in China has contributed towards improving the sentiment too. We see every reason to remain optimistic on the prospects of steel companies for the next couple of quarters.
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The textiles sector remained quite lacklustre in the past few quarters, especially on account of the overall recessionary trend in major exporting countries like USA and European markets. Apart from these global factors, various domestic factors like inventory at higher cost leading to competitiveness, lower utilisation of capacities and the huge debt burden made it sure that the sector remains under pressure. So disappointing was its performance that it did not merit a mention even in our quarterly results stories.
This time around, the sector has made a comeback both on the bourses and in our story. Feeble as it may be, there does seem to be some hope emerging for the sector. The markets were quick to gauge this, and a few leading textile players are finally seeing a good run-up on the bourses. In fact, our recommendations like Arvind Ltd. and Vardhaman Textiles have outperformed the markets significantly in the past six months. So, what has changed in the sector all of a sudden?
From a cursory look at the results for the September 2013 quarter, it seems that the sector is still in shambles, with YoY sales growth of just 15 per cent and the bottomline taking a sharp decline of around 40 per cent. However, it must be noted here that the poor performance at the bottomline level was mainly on account of higher interest outgo. The interest cost for the quarter increased by over 18 per cent on a YoY basis.
Apart from this, the aggregate results were also affected by some of the larger companies putting up a poor show. The companies like Bombay Dyeing, Bombay Rayon Fashions, Indorama Synthetics, Mudra Lifestyle and S Kumars Nationwide made losses at the PBIT levels only, due to higher inventory at higher cost and lower capacity utilisation.
However, these seem to be things of past, and we expect the textiles sector to witness a good amount of traction going ahead. The first and foremost indication of this is the improvement in garment exports in the past two quarters. Data issued by the ministry shows that exports have increased by more than 15 per cent in H1FY14. The depreciating rupee along with the fall in cotton prices (making India competitive as compared to other markets) are the major growth drivers.
The improvement on the macroeconomic front in the European and US markets has also added to the positivity. A combination of improving textile and apparel demand from large markets, benefits accruing from a depreciating rupee and structural changes in competing markets like China and Bangladesh have resulted in the improved performance and stronger order book visibility for Indian exporters. This momentum has sustained over the short-to-medium term. In continuation with the trend, we expect the textile companies to put in a better performance in H2FY14.
In addition, there have been certain other positives as well. After a long time, the depreciation cost of textile companies has seen an up-move (up more than 13 per cent after adjusting the one-time expense of Rs 510 crore by Welspun India). This shows that companies are investing in facilities after a long time. Secondly, the combination of a fall in raw material prices along with increased capacity expansion would result in higher margins for the companies. We still remain bullish on counters like Arvind Ltd. and Vardhaman Textiles.