Q2FY15 Result Review - Disappointing Quarter :: Edelweiss

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Q2FY15 earnings surpassed our estimates marginally, but were lower than past couple of quarters. Our coverage universe’s (excluding OMCs) PAT grew 9.6% YoY (Edelweiss estimate: 8.6%). The main disappointment was on the topline front, which grew by just 6.1% YoY (Edelweiss estimate: 6.6%) compared to ~12-13% growth rate of last couple of quarters. Domestic consumption, which was showing signs of revival, seems to have lost pace. Further export related sectors (which have been the main driver of corporate earnings) also witnessed slowdown. Going ahead, while lower commodity prices should aid profitability, demand remains a concern and needs to be carefully tracked.

On the earnings front, Sensex EPS was downgraded by ~1-2% (a trend not observed in last couple of quarters). Consensus now forecasts FY15 and FY16 EPS of INR1,560 (~13.5% YoY growth) and INR1,845 (~18% YoY growth). If the economic recovery does not pan out, then FY15 numbers are at a risk.

Economic recovery momentum wanes

Our coverage universe’s top line growth lost pace dramatically to ~6.1% YoY from 12-13% in the past 3 quarters. This was partially due to fading impact of INR depreciation, and also due to slowdown in economic activity. As far as the economy is concerned, the main concern area is the slowdown in domestic consumption and also in exports. Going ahead, we expect mild increase in topline mainly due to rise in household real incomes.

EBITDA margin increases marginally

EBITDA margin of our coverage universe (excluding OMCs and BFSI) dipped 42bps QoQ and improved 34bps YoY, beating our estimate ~19bps. The marginal QoQ decline was predominantly due to higher average raw material costs. This should however reverse course, given the sharp correction in commodity prices.

Investment sectors improve; consumption, exports lose pace

While the economic activity did slow in Q2FY15, there are some greenshots, especially in investment related sectors (cement, capital goods, construction). These sectors saw an improvement in order books as well as profitability. However, consumption and export-oriented sectors slowed. Stress in the banking sector remains high.

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