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Q2 results hold the key for possible recovery in Q4

Author: Dasari Sreenivasa Rao/Wednesday, September 9, 2020/Categories: Exclusive

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Q2 results hold the key for possible recovery in Q4

Is India Inc on recovery path? Analysts forecast better numbers in Q2; Over 550 listed cos line up dividend payout; Profitability indicators relatively stable for cement, FMCG & power sectors

With the first quarter (April-June) of the current fiscal 2020-21 coming to end, now, all the eyes on performance of the India Inc during the ongoing second quarter whether it would give any positive cues about much-anticipated gross domestic product (GDP) recovery in the fourth quarter (January-March). After suffering the steep decline in Q1earnings and GDP, India Inc, however, sees more than a silver lining for FY21 as majority of the chief executives expect recovery in the fourth quarter. Challenging situation from Q1 seems to be pouring in, much like the incessant rains in Mumbai, for India Inc.

The GDP contraction (-) by 23.9 percent, as against the forecast of 18.3 percent drop, is considered to be worst contraction and the steepest decline among the world’s top economies.

Listed companies under BSE-100 witnessed their sales plummeting by an average 30 percent year-on-year (YoY), according to a latest report from Credit Suisse, which say the operating profit fell 35 percent. Services sector witnessed decline for the fifth consecutive month. FMCG, pharma and few financial stocks look promising for the next quarters.

Unfazed India Inc takes up dividend payout

Though the Covid-19 pandemic took a toll on the revenues of the domestic industry and businesses, several listed companies have decided to extend dividend payout to their valuable shareholders. The coronavirus outbreak sent revenues up in the smoke and propelled several leading companies to announce profit warnings. According to a latest data published in the media, 554 listed firms on both BSE and NSE have decided to offer dividend payouts for shareholders during the first quarter of the financial year 2020-21. It indicates the surge in retail participation in the domestic stock market during the lockdown and unlock phases, observes an analyst.

It’s reported that 15 companies announced their plans to consider dividends in April, another 116 companies were on record in May saying that they would reward their investors with a dividend payout. The board of directors of another 423 listed entities approved dividend payout to their shareholders in June. However, the total amount of dividend paid by these companies to shareholders was not immediately available.

However, majority of companies that lined up dividend payout to investors during the first quarter of the 2020-21 fiscal are from mid-cap and small-cap firms. Interestingly, on YoY basis, there’s an increase in the number of companies that announced dividend payout to the shareholders. During 2020 so far, as many as 882 companies announced dividend payout as against 878 firms in 2019 and 1,687 firms in the 2018 financial year.

The market analysts see an opportunity in every crisis. And the pandemic Covid-19 is no exception. The new wave of Covid crisis undoubtedly created new business prospects for telecom, pharmaceuticals, IT, fintech and so on. The companies that announced dividend payouts are from the just mentioned sectors. This trend is giving a sigh of relief to the investor community as they’re suffering from low returns from fixed income instruments like bank FDs.

Mostly retail stocks drove the Nifty from 7,600 points during end March to around 11,300 now. The rally has been helped mid-small-cap stocks move upwards giving good returns to retail investors who jumped on to the bull bandwagon around April. During the lockdown period, a good number of young employees ventured into stock market trading. As a result, significant surge in retail demat accounts was seen during the last four months.

This seemingly contrarian move to share a part of their profits during the first quarter of this fiscal with shareholders coincides with the decision of many frontline companies to skip their usual sequential or annual guidance to investors citing growing business uncertainty with the Covid-19 pandemic and the subsequent economic lockdown deepening the haze over their business outlook. Also, many cash rich companies skipped dividend payouts and even went into a cost cutting mode including mass lay-offs, furloughs and deep salary cuts citing the need to conserve cash.

In the Budget 2020, the Finance Minister had proposed to abolish dividend distribution tax on dividends paid by the corporates and the tax burden would be borne by the receiver (i.e. shareholders). So, it could be one of the reasons for corporates paying higher dividends." Generally, investors prefer companies with history of high dividend in times of crisis as they feel it to be a safe investment option.

Perhaps that’s the reason why key indices moved up owing to retail investor participation in the equity market. These stocks, they say are appealing to retail investors, who generally like shares of lower denomination. It also goes against the grain of research notes by leading rating agencies which said that first quarter FY'2021 earning numbers of corporate sector would be a washout citing significant pressure on revenues and profits, considering that the major part of the quarter was under lockdown or on graded and guarded unlocking phase.

What KV Kamath Committee points out?

Further, the latest report submitted by KV Kamath committee, set up by RBI on loan restructuring, suggested recast of loans in sectors such as power, construction, iron and steel, roads, real estate, wholesale trading, textiles, consumer durables, aviation, logistics, hotels, restaurants, tourism and mining. The committee considered five parameters for suggesting restructuring. The parameters include- net worth, debt to EBIDTA, current ratio, debt service coverage ratio (DSCR)and average debt service coverage ratio (ADSCR).

The lenders can also consider other financial parameters in addition to five mandatory parameters and may, at their discretion, adopt a graded approach depending on the severity of the impact on the borrowers, as per the report. For sectors where ratios are not specified, bankers may make their own assessment towards the resolution plan. The Kamath panel has advised that the resolution framework should be invoked by December 31, 2020. As per the recommendations, the resolution process should be treated as invoked once lenders representing 75 per cent by value and 60 per cent of lenders agree to do so. The residual tenor of the loan may be extended by maximum two years, with or without payment moratorium. The moratorium period, if granted, shall come into force immediately upon implementation of the resolution plan. The asset classification may be maintained as standard or upgraded to standard subject to the resolution panel being implemented as per the framework, said the report of the panel.

RIL-silver lining

The worst drop was most for the energy sector (down by 57 percent) and auto (20 percent). Reliance Industries Ltd (RIL), India’s largest listed company by market capitalization (mcap) and accounts for 10 per cent of the total mcap and almost 20 per cent of Sensex pack, also suffered from 44 per cent drop in revenues during the first quarter.

RIL recorded revenue of Rs 91,238 crore in Q1FY21 a decrease of 44 per cent as compared to Rs 1,62,353 crore in the corresponding period of the previous year. Decrease in revenue is primarily due to fall in O2C (oil-to-chemicals) revenues, led by sharp decline of 57.6 per cent in average Brent crude price. Retail business also witnessed 17 per cent decline in revenues due to lockdown and restrictions in store operations. Overall decline in revenue was partially offset by increase in revenue of Digital services business with strong subscriber addition and significant improvement in ARPU. Exports from RIL's India operations declined by 34.8% to Rs 32,681 crore as against Rs 50,158 crore in the corresponding period of the previous year due to lower price realizations. This was partially offset by increase in export volumes of Petrochemicals and Refining products, according to SMC Global Securities.

However, Mukesh D Ambani, CMD, Reliance Industries Ltd, is a least bothered businessman as he relies on consumer-centric business models.

India's most valued company RIL shares touched new high of Rs2,198.70 showing 43 per cent rise for year to date as against eight percent surge in Sensex.

Asia’s richest businessman Ambani said: “I am humbled and inspired by the exemplary commitment and empathy of the Reliance family during the Covid-19 pandemic. The severe demand destruction due to global lockdowns impacted our hydrocarbons business, but the flexibility in our operations enabled us to operate at near normal levels and deliver industry-leading results. Our consumer facing businesses became the life-line for individuals and businesses with our Retail and Jio teams working hard to ensure millions got essential goods and services through the lockdown. We completed the largest fund raise in Indian Corporate history in this quarter. I thank the millions of individual investors who supported our Rights Issue and welcome all our new partners to an exciting new phase of growth at Reliance.”

EBITDA declined by 11.8% to Rs 21,585 crore from Rs 24,486 crore in corresponding period of the previous year. The decrease in EBITDA was primarily due to lower contribution from O2C business, which was impacted by significant demand destruction and margin pressure across transportation fuels and polyester chain. Lower realizations in export market also impacted the profitability despite higher regional benchmark margins.

RJio Dials Disruption Tone

The lone silver lining among listed companies in India was RJio, which successfully completed India's largest ever rights issue of Rs 53,124 crore (oversubscribed by 1.59 times), world’s largest by a non-financing institution in last 10 years. Jio Platforms Ltd, a wholly-owned subsidiary of Reliance Industries Limited, raise Rs152,056 crore from leading global investors including Facebook, Google, Silver Lake, Vista Equity Partners, General Atlantic, KKR, Mubadala, ADIA, TPG, L Catterton, PIF, Intel Capital and Qualcomm Ventures in just three months. Reliance Industries, post completion of these investments, would hold 66.48% equity stake in Jio Platform on a fully diluted basis. Of the total investment, Jio Platform Limited has already received Rs 115,694 crore as subscription amount from ten investors. Rs 22,981 crore will be retained at Jio Platform to drive future growth.

BP invested Rs 7,629 crore for a 49 per cent stake in the Company's fuel retailing business. Promoter shareholding increased to 48.94 per cent at the end of June 2020 quarter from 48.87 per cent at the end of Mar'20 quarter. No promoters shares were pledged.

Covid-19 rescues pharma cos

The ongoing crisis helped the pharma companies perform better during the first and second quarters of the current fiscal. Particularly, pharmaceutical companies with hydroxychloroquine and azithromycine in the line of products improved their margins significantly. For instance, Ipca, India's largest producer of azithromycin, recorded a four-fold jump. its net profit rose over 40 per cent to Rs1,546 crore for the first quarter. Ipca MD AK Jain in a webinar said that the company made Rs260 crore additional revenue from domestic and export markets. Another pharma company Alembic also recorded over 200 per cent jump in its revenues. Dr Reddy's is no exception to this.

Dr Reddy’s Lab spurts above estimates increased by 430bps over previous year and by 450 bps sequentially, primarily on account of a favorable product mix and forex benefit. Dr Reddy’s Lab’s CEO and Co-chairman, GV Prasad, said: “The current quarter’s financial performance has been strong across all parameters. I am glad that we have been able to serve our patients well and ensured continuity of business operations despite the challenging times. We have started integration of the acquired business from Wockhardt and executed two important licensing arrangements for treatment options for Covid-19. Currently, we are working towards bringing both these drugs to multiple markets.”


Amid the pandemic, IT industry has fared well as it was able to adopt to the new normal faster than expected. The IT firms were able to enable work from home for over 90 percent of their 50 lakh workforce in just a couple of weeks. This enabled them to support their clients during the pandemic, with an increased level of productivity.

CP Gurnani, MD & CEO, Tech Mahindra, said: Our customer centric approach and continued focus on keeping our associates safe and connected has helped us to navigate through these challenging times successfully. We are witnessing a wave of new age technologies being adopted by the customers as businesses across the globe are actively pursuing digital transformation. We are well positioned to capture such spends and our endeavor is to be back on the growth path amid increased signs of demand normalization.”

Manoj Bhat, CFO at Tech Mahindra, said: Despite demand uncertainty and volume reduction, we have been able to demonstrate operational resilience through cost optimization. Cash conversion has been strong, while we aim to improve profitability margins as demand normalizes.” For the quarter ended June 2020, which was expected to bear the brunt of the pandemic, IT firms performed better than expected, in terms of growth and deal closures. This was in part aided by vendor consolidation and tech spending in the areas of cloud, work from home solutions and automation. Clients had no option but to invest in technology to ensure business continuity amid the pandemic.

Forecast on Q2

Despite an expectedly weak Q1FY21, key indicators of consumer sentiment hold a view that most sectors are witnessing sequential improvement since June and gradually returning to pre-pandemic levels in Q2FY21, according to ratings agency ICRA. Icra study reveals that despite visible stress across other major sectors, there’s exception to select sectors such as IT, telecom, sugar and pharmaceuticals. The rating agency in its latest report further stated that financial results of 489 companies in India, excluding financial sector entities showed a YoY and sequential contraction in revenues with aggregate revenues contracting by 31.1 per cent on a YoY basis in Q1 FY2021. As per the study, industrial and infrastructure-oriented sectors contributed 29 per cent and 38 per cent respectively to the slowdown YoY de-growth during the quarter.

As per the analysis, negligible revenues for the major part of the quarter, which impacted the absorption of fixed overheads, and lower realisation in commodity sectors especially metals and oil and gas, weighed on the profitability of India Inc, with PBT margins contracting to multi-year lows. “This was despite benefit of subdued raw material prices and favourable rupee movement in select sectors like IT,” says Icra in the report. Commodity-linked sectors declined by 34 per cent on a YoY basis with almost all the major commodity sectors, including oil and gas, metals and mining, iron & steel, cement, etc. The revenue contraction on the back of tepid realisations due to benign commodity prices and subdued volumes, adds Icra.

On the other hand, the profit before tax (PBT) margin also declined by 498 bps on a YoY basis, and by 70 bps sequentially to multi-quarter lows of 3.6 per cent. The Covid-19 followed by extended lockdowns in the country, both nationally and then the Indian corporate sector, already grappling with a weakening macroeconomic scenario, faced major disruption because of the Covid-19 pandemic and two-month-long nationwide lockdown imposed to combat the same, said Icra.

The major impact of the outbreak, lockdown and unlock was clearly visible in the financial performance of corporate entities in Q1 FY2021. Few key sectors with sharp margin contraction included airlines, hotels, retail, health care, gems and jewellery, etc. Sharp contraction in revenues given restrictions on operations, impacted the absorption of fixed overheads in these sectors and many of them struggled to cover even operating costs. Icra further added that profitability indicators were relatively stable in sectors like cement, FMCG and power, supported by commodity tailwinds in a challenging demand environment.

Despite the expectedly weak Q1 FY2021, key indicators of consumer sentiment indicate that most sectors are witnessing sequential improvement since June 2020 and gradually returning to pre-pandemic levels in Q2 FY2021 as lockdown restrictions gradually eased," the report said. Analysts are of positive view to a large extent by healthy rural sentiment, supported by two healthy crop cycles, timely onset of monsoon, healthy reservoir levels and expectations of a healthy Kharif output, besides the government’s support measures. Accordingly, select sectors like tractors, two-wheelers etc have witnessed faster recovery vis-a-vis earlier expectations." In addition, it said indicators like freight activity, electricity and fuel consumption also indicate a healthy recovery close to pre-pandemic levels as we progressed into Q2 FY2021.

The writer is a business journalist with 27 years of experience


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