Cost Reductions The Key Highlight For India Inc. In Q1, Says Citi

“Corporates have been able to real bring costs down drastically,” Surendra Goyal, managing director and head of India research told BloombergQuint in an interview. “That to me was the biggest highlight of the quarter.”

While some of the costs spared in the quarter will return to balance sheets, Indian companies are likely to grab the opportunity and have a relatively lean cost structure compared to what it would have been, had it not been for the Covid-19 outbreak, Goyal said.

Recovery, however, will depend on how economic activity picks up between sectors, he added.

Apart from Goyal, BloombergQuint spoke to Citi India’s Director, Deputy Head of India Research, Prashant Nair; Director, Financials Analyst, Manish Shukla; and Analyst Aditya Mathur to get a sense of the emerging earnings trend seen in the first quarter and how they will shape in the second quarter. Here’s what they had to say.

Pharmaceuticals

• Results were better than expected and cost control was clearly visible.
• API (active pharmaceutical ingredients) sales were much, much higher than in the past, likely because of two reasons. First, manufacturers were probably looking to keep higher inventories in case of a second Covid-19 wave. Secondly because companies are looking for suppliers to replace China.
• U.S. revenues were weak across the board. India revenues were weak as expected but this was offset by the cost factor.
• On the API side we need to split companies into pure APIs and sector leaders who also do API more as a back-end function. For the latter, the opportunity depends on whether the company puts more capacity for API. So the opportunity will differ between companies.
• The only possible roadblock is regulations and compliance issues with facilities. If there is no trouble there, we will see the current trend continue.

• Three companies that stood out outside of cost reduction were Dr. Reddy’s Laboratories Ltd., Aurobindo Pharma Ltd. and Cipla Ltd.
• Outside of pharma, labs held up much better than hospitals.

Staples

• Headline numbers have done reasonably on the back of packaged food, health and hygiene products, etc.
• Hindustan Unilever Ltd. and Britannia Industries Ltd. stood out and the numbers were much better than expected.
• Companies are being tactical with their launches and that’s a positive sign.
• There are things like Dabur’s healthcare portfolio and HUL’s hygiene portfolio—there’s room for these to grow into full-fledged segments.
• Don’t see a risk of downtrading. While the jury is still out, a lot of these companies have been smart about the supply constraints and they have actually moved a lot of their supply manufacturing and sales to the higher margin and bigger products.
• Positive on HUL and some mid-sized names like Godrej Consumer Ltd., Marico Ltd. and Dabur India Ltd.

Finance

• Far too many moving parts in the quarter gone by but we were all focusing on moratorium numbers.
• Some banks might be more conservative and choose to show higher NPAs and lower restructuring, other banks might choose to do the opposite. That is what complicated the asset quality outlook for the rest of the year.
• On the operating profit, loan growth, margins were more or less as expected. Asset quality is where there are some unknowns.
• HDFC Bank Ltd.’s management transition should be smooth.
• Challenge for state-run banks is capital constraint, exposure to SMEs.
• Core operating profit at private sector banks is pretty strong which allows them to make provisions whenever required.
• What will work for PSUs more than private banks is treasury gains which will act as counter cyclicals.
• Going into the quarter we were of the view that one should only stick to larger banks and NBFCs. But select mid-sized names are starting to look attractive.
• Would prefer mid-sized banks over mid-sized NBFCs because they have some liability issues to sort out.

IT

• Larger verticals within IT universe—financial services, tech, telecom—have held up pretty well. Travel and hospitality have taken a hit.
• As we go forward things will only look better.

Watch the full conversation here: