Nifty 50 Report Card: Profit Grows 14% Despite Demonetisation Bump

In a quarter that saw consumption fall due to a cash crunch triggered by demonetisation, companies in the NSE Nifty 50 Index managed to absorb the hit in three months ended December 2016, helped by lower input expenses and cost-cutting measures.

Overall, the revenue of the 50 companies on the index rose 5.3 percent while net profit increased a healthy 14 percent. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 9.3 percent on lower input costs.

Excluding financials, the topline growth was again 5.3 percent. Net profit and EBITDA growth (ex-financials) were weaker at 8.3 percent and 6.3 percent, respectively.

Other than auto, telecom and cement, all other sectors supported the topline growth of Nifty 50 Index. Of the 50 companies, net profit of 29 met or beat street expectations, while 21 companies missed analyst estimates.

Two Tata Group companies beat estimates by the highest margins. Tata Steel Ltd. beat analyst forecast for net profit by 77.4 percent, while Tata Power Company Ltd. outperformed by 60 percent.

At the other end of the spectrum, Tata Motors Ltd. and Bank of Baroda missed net profit estimates by 95 percent and 60 percent respectively.

Here’s how each sector fared:

Banks: Demonetisation Slows Down Credit Growth

Demonetisation slowed down credit growth for banks in the October-December quarter. Gross advances of India’s largest lender State Bank of India (SBI) fell 5 percent and declined 4 percent for its private sector peer ICICI Bank Ltd.

The redemption of foreign currency non-resident deposits also dragged credit growth in the quarter.

The share of low-cost current and savings accounts (CASA) deposits, owing to demonetisation-led influx, rose for banks on a sequential basis, bringing down the cost of funds. But inability to deploy the excess funds put pressure on net interest margins (NIMs), which changed in the rage of (-)23 to (+)10 basis points.

Lower provisioning for bad loans, however, helped banks on the Nifty report a 49.3 percent jump in net profit over the previous year.

Combined pre-provisioning or operating profit grew 17 percent, driven by strong treasury gains (led by a 30-basis-point drop in government bond yields during the quarter) and a one-time gain from stake sales (for SBI).

Indian banks did not see any significant changes in the reported bad debt numbers from the September ended quarter as loans up to Rs 1 crore got a temporary repayment relief from the Reserve Bank of India, while some small borrowers prepaid in old currency notes. The year-ago quarter had seen higher provisions driven by the central bank’s asset quality review.

A majority of fresh slippages came from banks’ nonperforming asset watch lists, except for Axis Bank Ltd. where slippages outside the watch list rose and reduced its profit by 73 percent. HDFC Bank Ltd. reported the lowest profit growth since its inception.

In a continuation of the trend seen in the second quarter, private banks with larger corporate books – Axis Bank and ICICI Bank – continued to underperform private peers, posting a sharp decline in net profit growth.

Yes Bank and IndusInd Bank outperformed with 30 percent and 35 percent growth in net interest income, respectively, even in a demonetisation-hit loan demand environment.

2. Pharma: U.S. Business To Continue To Witness Price Erosion

Two out of the five pharmaceutical companies on the Nifty missed analyst estimates.

Pricing pressure in the core business remained a key concern in the U.S., while demonetisation headwinds and price controls led to slower growth in the domestic business.

The net profit of the five drugmakers on the index grew 2.6 percent on account of higher tax expenses at Sun Pharmaceutical Industries Ltd. and Lupin Ltd. Aggregate revenue rose 11.1 percent year-on-year, led by Lupin. EBITDA growth sequentially came down because of key exclusive product launches in the first half of financial year 2016-17. Aggregate EBITDA rose 10.4 percent year-on-year.

While Lupin and Cipla Ltd. reported a strong bottomline growth driven by new product launches in the U.S., Sun Pharma and Dr. Reddy’s Laboratories Ltd. reported a year-on-year de-growth.

Sun Pharma and Lupin maintained their guidance, while Dr Reddy’s guided for a muted FY17 after three warning letters from the U.S. drug regulator and the phasing out of the contract manufacturing deal with Ortho-McNeil Pharmaceutical Inc.

Progress on plant re-inspections by the U.S. Food and Drug Administration for Sun Pharma and Dr Reddy’s will continue to direct near-term movements in their stock prices.

Information Technology: Above Estimates

Seasonally, the October-December quarter is the weakest for the Indian information technology (IT) industry because of holiday season in the U.S. However, all top IT companies in Nifty 50 beat analyst expectations on profitability in the third quarter.

The five IT companies in the Nifty 50 saw muted revenue growth of 1.2 percent compared to the previous quarter. Profit grew 3.9 percent beating expectations, but margins on earnings before interest and taxes (EBIT) remained mostly unchanged sequentially.

Tata Consultancy Services Ltd. (TCS) posted a stable third quarter with 1.5 percent sequential revenue growth and a profit growth of 2.9 percent, beating estimates. Infosys Ltd.’ profit rose 2.9 percent sequentially, beating forecasts. Wipro Ltd. posted subdued earnings with revenues declining 1 percent, and 1.7 percent sequential growth in profit.

The TCS management retained their guidance, while Infosys cut its full-year dollar revenue guidance for the third time this financial year.

Automobiles: Note Ban Hurts Two-Wheeler Makers

Earnings for automobile and original equipment manufacturers in the Nifty 50 were a mixed bag.

The demonetisation pain was more evident in the earnings of two-wheeler manufacturers due to their high exposure to rural areas. Hero MotoCorp Ltd.’s revenue for the third quarter fell 12 percent, and its profit declined 3 percent.

Earnings for passenger vehicle manufacturers ranged from better-than-expected to disappointing when compared to consensus estimates. India’s biggest carmaker Maruti Suzuki Ltd. bucked the trend and posted a 47 percent jump in net profit, largely due to a rise in other income.

Commercial vehicles sales were hurt by a slowdown in economic activity.

The seven automobile and auto-ancillary companies in the Nifty 50 saw revenue decline by 1 percent, mainly attributable to Tata Motors, Hero MotoCorp and Bajaj Auto Ltd. compared to the year-ago quarter. Aggregate profit fell 22 percent mainly on account of Tata Motors, which contributed the largest profit in the base quarter.

Tata Motors was the worst performer of the lot with consolidated profit falling 96 percent and margins contracting substantially due to high marketing costs for Jaguar Land Rover.

Oil And Gas: In Line With Analyst Expectations

Net profit of the four oil and gas companies in the Nifty 50 rose 5 percent on an average, while total revenue and EBITDA rose 9 percent on a sequential basis.

GAIL India Ltd., Reliance Industries Ltd. (RIL) and Bharat Petroleum Corporation Ltd.’s (BPCL) net profit was in line with analyst estimates, while Oil and Natural Gas Corporation Ltd.’s (ONGC) net profit came in 10 percent below estimates.

Higher gross refining margins helped oil marketing companies post strong third-quarter earnings. Government-owned BPCL’s net profit jumped 74 percent while RIL reported its eight consecutive quarter of double-digit gross refining margin.

For India’s biggest explorer ONGC, higher crude oil prices failed to translate into a good quarter due to 149 percent rise in exploration costs to Rs 1,364.4 crore.

Metals: Tata Steel Leads The Pack

Of the three metal and mining companies in the Nifty 50, only Tata Steel Ltd. managed to impress in the third quarter with a four-fold jump in profit, aided by lower costs and higher production.

The three companies’ EBITDA rose 34 percent to Rs 8,579 crore, while revenue rose 10 percent to Rs 59,721 crore.

Tata Steel posted a net profit for the first time in the last five quarters, driven by its Indian operations. The Mumbai-headquartered company registered a Rs 321-crore profit supported by higher realisations and strong growth in deliveries after production was ramped up at its plant in Kalinganagar, Odisha. EBITDA rose four-fold to Rs 3,539 crore while margins expanded 900 basis points to 12 percent.

Coal India Ltd.’s profit plunged 20 percent due to 10.4 percent rise in employee cost and 16 percent fall in e-auction realisations. Hindalco Industries Ltd. reported a profit of Rs 321 crore as against a loss of Rs 33 crore a year ago, largely due to rising aluminium prices.

Telecom: Reliance Jio’s Free Services Hurt Rivals

It was another disappointing quarter for the telecom sector, with incumbents feeling the pinch of free services offered by newest rival, Reliance Jio Infocomm Ltd. Tariff cuts to take on Reliance Jio led to a weaker revenue per user.

Both Bharti Airtel Ltd. and Idea Cellular Ltd. saw their revenue decline for the first time since listing. It was also the first time that the two telecom service providers saw their revenue slip compared to the second quarter, known to be seasonally weak.

Tower company, Bharti Infratel Ltd., bucked the trend with a 25 percent jump in net profit but failed to meet analyst estimates by 17 percent.

Overall, the revenue of telecom companies fell 3 percent on an average, net profit declined 67 percent and the EBITDA fell by 5 percent for the December ended quarter.

Cement: Cost Cuts Help Tide Over Note Ban Bump

The government’s decision to invalidate old high-value currency notes hit the volume growth of most cement companies. The demand was extremely subdued in the key markets of north and west, according to IDBI Capital. However, cost-saving measures helped the companies ride through the tough phase.

The average revenue declined 4 percent in the October-December quarter on a year-on-year basis. EBITDA declined by 2 percent, but profitability grew 6 percent in the same period.

Ambuja Cements Ltd. largely managed to overcome the demonetisation setback. While volumes fell 7.7 percent year-or-year to 5.09 million tonnes, it saw steady realisations which helped net profit jump 59.6 percent.

Brokerage Motilal Oswal Securities expects the impact of demonetisation to subside in January-March with sequential improvement in volume for most regions to pre-demonetisation levels. However, volume growth may appear lower year-on-year, considering the high base of March quarter in the previous year, the brokerage added.

Consumer Sector: Demonetisation Hurts

The impact of demonetisation was evident in the earnings of consumer staples and discretionary companies in the third quarter.

Hindustan Unilever Ltd. (HUL), ITC Ltd. and Asian Paints Ltd. saw their aggregate revenue grow 2.5 percent over the year-ago quarter. Profit grew a muted 5 percent but EBITDA margins contracted for all three owing to high input costs.

In most cases, the weakness in volumes was compensated by price hikes across product categories. Margins, however, were adversely impacted on account of rise in prices of crude-linked raw materials and agri-commodities.

ITC posted net profit growth of 5.7 percent ahead of consensus estimates. HUL’s revenue fell as its volumes contracted, impacting its parent Unilever NV.

Capital Goods: Mixed Quarter

Of the two capital goods makers in the Nifty 50, one – Larsen & Toubro Ltd. (L&T) – missed analyst expectations. Continued headwinds in domestic execution hurt the company even though it reported a 38.85 percent rise in third quarter net profit. Cost cuts and improving project management with a cash-flow-focused approach aided profitability.

BHEL beat estimates on better execution and cost optimisation. The company reported a net profit at Rs 93.5 crore compared to a loss of Rs 1,084.9 crore in the same quarter last year.

Utilities: Tata Power Leads The Pack

The sector’s average revenue dropped 10 percent year-on-year. The three companies’ average EBITDA grew by 10 percent while profit after tax rose 6 percent.

Tata Power led the table beating analyst estimates with a 19 percent rise in net profit on higher share of profit from associates and joint ventures. The profit would have been exceptional had it not been for poor performance of Coastal Gujarat Power Ltd. (Mundra power plant).

Power Grid Corporation Of India Ltd. reported 20 percent jump in net profit, backed by robust capitalisation and strong execution. NTPC Ltd. reported 8 percent growth in profit after tax, in line with expectations.