Q2 FY15 Result Review and Picks ::HDFC Sec, link

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The quarter gone by:
India Inc had a muted quarter in Q2FY15. Following the positive trend seen in Q4FY14 and Q1FY15, Indian corporate sector saw revenue deceleration in Q2FY15. The complete evaporation
of the Rupee depreciation, which aided an upsurge in performance in earlier quarters, caused a sharp decline in sales growth in Q2FY15.
Demand is visibly weak on the domestic front as observed from companies’ results for July-September. Reported analyses have noted that lowered input costs solely drove firms’ profits
while revenues from sales remained weak. That means conditions for fresh investments are still not observable. Rural demand, the mainstay of aggregate consumer spending (60% of India’s
demand base) for past two years, is flagging as incomes are affected by lower government spending, uneven rainfall, minimal increases in farm support prices and so on.
A full-blown recovery remained elusive for India Inc in the July-September quarter, even as it overcame the challenge of achieving profitable growth. The challenge facing Indian companies
now appeared to be on the sales growth.
As per a study by Business Standard, during the quarter ended September 30, the net profit (adjusted for exceptional items) of 2,432 companies (excluding banking & financial and oil & gas
ones) rose 41.8 per cent on a year-on-year basis — the fastest pace in at least three years — but their net annual sales growth slumped to 5.9 per cent, slowest in five quarters. The same
set of companies had in the previous quarter reported 29.8 per cent annual net profit growth and 10.1 per cent increase in net sales, raising hope of a swift recovery in India’s growth cycle
and corporate earnings. The dichotomy between top-line and bottom-line growth rates in the September quarter has tempered the growth expectation among experts and analysts.
The profitability was boosted by last year’s low base and lower operational cost, especially with a drop in sales & marketing expenses, finance cost and depreciation allowances. This set of
companies had reported an annual decline of 21.9 per cent in net profit during the corresponding quarter of last year. Cost moderation in the July-September period led to an improvement of
90 basis points in core operating margins (excluding other income) on a year-on-year basis to 15.1 per cent of net sales, against 14.2 per cent a year ago. The bad news was that the
operating margin was down 50 basis points on a sequential basis.
The companies in the sample reported a sharp rise in profits, despite a relatively poor show by information technology exporters and pharma companies, which had been driving corporate
earnings in the past few quarters. Combined earnings growth for IT companies like TCS, Infosys, HCL Tech and Wipro (on a year-on-year basis) fell to 15.9 per cent in the September
quarter, the slowest pace in 10 quarters. The combined annual net profit growth of pharma companies was 30.3 per cent, down from 35.2 per cent in the previous quarter. In what hints at a
continued slowdown in capex cycle, annual net sales growth for capital goods makers fell to 1.4 per cent from 2.9 per cent in the previous quarter. The results also indicated a moderation in
consumption demand, with net profit of FMCG companies growing at the slowest pace in 12 quarters (7.8 per cent) and their net sales growth slumping to the lowest in four quarters.
The rise in net profits could be attributed to lower costs and to base effects, not a demand recovery. In Q2FY14 interest costs rose by a moderate 7.9 per cent year-on-year. The rupee has
stabilised, reducing the cost of imported raw materials. Interest rates have stabilised at slightly lower levels. But the lack of demand is worrying, given consumption demand contributes to
over 60 per cent of gross domestic product or GDP. Though companies reported a 29 per cent increase in net profits for the September 2014 quarter, it was thanks largely to a leg-up from
‘other income’ from an asset sale or an investment income.
The fall in sales growth was steeper for large companies in the September quarter compared to mid-and-small companies, given the slowdown reported by players such as Bharti Airtel, Tata
Motors, SAIL, Tata Steel, NTPC, and Power Grid. But large companies have trumped the smaller ones on profitability, suggesting that they were benefiting from economies of scale in
procurement. Their input costs shrank in the September 2014 quarter.
The combination of poor earnings, expectation of real GDP growth decelerating to 4.8% in Q2FY14 and earning downgrade contrasts the market performance, which is scaling new highs,
evidently in anticipation of a V-shaped recovery in real GDP growth to 8-9%. Conversely, Q2FY15 results, characterized by significant moderation in sales growth funneling down to
single digit growth in profit growth poses risk to consensus 18-20% growth projection for Nifty companies. The results also highlights continued vulnerability for banking and investment
related sectors.
Nifty Q2FY15 earnings growth (ex global commodities) was 12.1% much lower than 22.1% for Q1FY15. Top line growth at 8.9% was below Q1FY15 growth. EBITDA margins were largely
inline with expectations, and similar to last quarter. Nifty earnings growth (overall) is 9.2% vs. 6.1% expected and excluding global commodities it is 12.1%. Nifty sales growth (overall) is
subdued at 4.9%,. Excluding global commodities, sales growth is 8.9%. EBITDA margins (overall and excluding global commodities respectively) are at 17.9% and 21.2%.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009990