Deepak Jasani - HDFC Securities
In Q4FY19 Nifty
sales/EBITDA/PAT grew nearly 10 per cent/6 per cent/16 per cent year-on-year (YoY), respectively. Hence, the base as far as earnings before interest, taxes, depreciation, and amortisation (EBITDA) and profit after tax (PAT) is concerned, is high in Q4FY20. However in Q4FY19, profitability was driven largely by banks. Excluding banks, the PAT growth was slow at <2 per cent. The topline growth for Nifty
companies in Q4FY19 was the slowest since Q3FY17.
COVID 19 would impact the performance of Nifty
companies and overall corporate sector in Q4FY20 and Q1FY21. In Q4FY20, we could see a decline in both the topline and bottomline in Nifty companies on a YoY basis. Analysts will rework their FY21 estimates lower after Q4FY20 results and management commentary.
Will margins benefit from lower input costs?
Margins in some sectors could improve due to soft raw material prices. However, this advantage could be partly nullified by lower operating leverage, especially due to lockdown
in the last 10-11 days of March.
Which sectors may be relatively better, which will be worst affected?
Telecom would report better performance due to tariff hike wef December and higher data usage in March, both of which could pull up the average revenue per users (ARPUs) of telecom companies. FMCG (essential categories) could do well, aided by lower input costs. Pharma companies could report better numbers but their Q1FY21 performance could get impacted due to lack of patient visits to doctors and delayed surgeries and also disruption in manufacturing. City Gas distribution companies could do well, especially those who are less dependent on CNG volumes.
On the other hand, Hotels, Auto (poor volumes and lower margins due to lower operating leverage), Cement, Real estate, road construction, FMCG (non essential categories), Oil & Gas (volume decline, low realisation/margins, inventory losses, low refining margins- compensated to some extent by marketing margins), IT Services (despite rupee depreciation, cross currency hit and cutback in spending), could result in pricing pressures and uncovered costs. Malls, Multiplexes are some of the sectors that could result poor numbers.
Financials could report poor numbers due to lower credit growth and higher provisions for slippages / extra provisioning for post Covid era (NBFCs could be hit more due to absence of moratorium and loss of last 10+ days of collection efficiency seen historically). They could partly benefit due to Mark to market (MTM) gains on G-securities portfolio due to 42 basis points (bps) fall in 10-year Gsec yield sequentially.
When is a recovery expected? Will it be in the current fiscal or the next one?
A lot depends on when will we resume activities in a normal fashion (after lockdown
is lifted fully). If we are able to do that by the end of April/early May, then the recovery process could start post October 2020; otherwise the recovery could get postponed further.
Other major headwinds for India Inc
Delay in resurrection of demand (especially discretionary), global slowdown, fiscal pressures at home, local interest rate trajectory, Monsoon intensity and spread, Risk-on sentiments on the part of foreign investors are some of the key headwinds faced by Indian corporates.
Deepak Jasani is the Head Of Research at HDFC Securities. Views are his own.