Nifty 50 Earnings Review: ACC, HDFC, Axis Bank, Bharti Airtel, BHEL, Hero Honda, ICICI Bank, ITC, Kotak, L&T, M&M, Maruti...
Munira Dongre 02 August 2010

To start off, here a few general observations:

* MNCs: The Reserve Bank of India circular removing the cap on royalty payment has paved the way for increased royalty or trademark fees to MNC parents.

* The next quarter will definitely not be favourable for cement. Too much capacity coming in, and the September quarter is sluggish for construction due to rains.

* Banks' results were above expectations. It seems given that most will see loan growth of 20% and above this year. However, with some banks, asset quality remains a bit of a concern.

* Execution issues exist among engineering companies despite brimming order books.

* Cash flow issues could catch up with real estate companies.

* Raw material prices are going up almost for all companies. If not, they are close to exhausting their low-cost inventory.

ACC (Q2) - A lot of capacity coming up

Performance veered towards disappointing. Raw material (fly ash and slag prices were higher), fuel, and freight costs were rising, volumes were down, and realisations were flat. ABB's 3mtpa expansion at Chanda (Maharashtra) is almost complete and expansion projects in Orissa (Bargarh) and Karnataka (Wadi) have begun commercial operations - these will boost ACC's capacity to 30mtpa from 26mtpa very soon. This does not bode well for cement prices in the October quarter.

ACC's RMC business continued to be a drag. Allotment of coal blocks will not be an immediate positive, and would reflect in valuations only when these blocks are almost near operation (this is a 4-5 year project).

AMBUJA CEMENT (Q2) - Lower clinker costs

Results came in at the lower end of expectations. Exports fell 27%, volumes were up, and realisations were flat. Clinker costs were low due to the stabilisation of its new clinker units (leading to stripped-down clinker purchases). Power and fuel costs were high.

'Other expenses' were also high - these included consultancy charges, advertising and marketing expenses, and plant maintenance cost. ACEM commissioned a 30-MW thermal plant at Ambujanagar. Depreciation was slightly up since it commissioned new capacities at the end of Q1CY10; management has guided a depreciation of Rs4 billion for the full year.
Ambuja Cement commands a valuation premium among cement stocks and in the seasonally weak September quarter, it might see a sharp fall.

AXIS BANK (Q1) - All about loan growth this quarter

Results were in line with estimates. The 39% growth in advances was way above expectations - large- and mid-corporate segment growth was 55% (boosted by loans to the telecom sector and the 3G auctions). Loan growth could continue to be strong over Q2 and Q3 due to a lower base.

Following good loan growth, fee income growth was also strong at 19%. CASA growth continued to be strong, again on a lower base. Margins declined due to higher deposit costs and full impact of CRR hike, however, the dip was a little on the higher side. Asset quality was stable but slippages were more than expected. The theme of Axis' valuation discount to HDFC Bank narrowing is likely to continue playing out and by the end of this year, if performance continues to be strong, this discount may not exist.

BHARTI AIRTEL (Q1) - All eyes on SA

Results not yet out, but we are including this in any case, because the company held an analyst call recently. Clearly, in Bharti's case, the whole focus has shifted away from results to the Zain acquisition. Bharti is betting on the fact that penetration and usage is low in the South African countries where Zain operates and that it will be able to make a big headway in both these areas using its low-cost high-usage model.

Debt expectations have now been scaled down to $800 million from $1 billion and $200 million annual interest costs will have to be serviced by its SA operation.

BHEL (Q1) - Execution needs to pick up fast

Poor sales growth (16%, slowest in the past 2 years) was offset by a drop in raw material costs (the management believes this is sustainable through the year, despite the fact that its low-cost inventory will be exhausted by Q2). The industrial segment remains sluggish. Employee costs are rising due to new hiring. Order-flow in Q1FY11 was slightly lower than in Q1FY10. The company's management says it will book orders worth Rs550 billion in FY11 (current outstanding orders are at Rs1,480 billion) - which is flattish over FY10.

What BHEL expects now is more orders on the supercritical front and costs in this segment will come down with more indigenisation. Both these factors, along with a pick up in execution and revenue, will be critical to stock performance. BHEL is expecting good orders from National Thermal Power Corporation's bulk tendering Phase-I that is likely to invite financial bids in Q3FY2011.

CAIRN INDIA (Q1) - Eyes on future cash

Profits came in way, way below expectations due to higher depreciation costs and lower Rajasthan sales volumes. After commissioning its pipeline (to Gujarat) in June, Cairn has started charging depreciation on the pipeline at 10% straight-line method, resulting in excess
depreciation charge of Rs1.2 billion. Realisations were higher than expected. Cairn is currently producing 100,000bpd of crude at Rajasthan, which is expected to touch 125,000bpd in the second half of this year. With the pipeline to Salaya in Gujarat, it has linkages with refineries of RIL, Essar and IOC. But it still delivers to MRPL and HPCL through trucks (which is expensive). Cairn is expected to generate annual free cash flowof $2.5 billion-$3.0 billion from FY12E onwards and remains a favoured play on crude
prices - two reasons why the stock has not fallen despite disappointing numbers. The market could also be looking at positive news on reserve accretion in Rajasthan. Besides, Cairn is also doing some 'wildcat' drilling in the KG basin.

DLF (Q1) - Cash flow needed badly

Profit was generally disappointing due to higher interest expenses and depreciation charges. Residential sales were the weakest in the last 5 quarters but leasing picked up quite a bit. Overall, DLF sold 1.9 million sq ft for Rs11.5 billion, down 30% y-o-y and 47% q-o-q. Debt is just not going down, indicating that the operational cash flows that it is generating are not enough. This means that it has to have more launches at prices that can bring in high levels of volumes and this is clearly not happening as yet. DLF has said that it will withdraw from affordable housing (not sure if it was in this segment in the first place) and raise Rs 25 billion from sale of non-core assets.

HCL TECH (Q4) - Great sales numbers

Sales were stronger than expected, but margins declined, hit by BPO losses, subcontracting costs, and initial costs for large outsourcing deals. Margins may decline further with salary increments in the September quarter. Hiring was stronger than expected, indicating confidence in future growth.

HDFC (Q1) - Just about okay

The key positive was 62% growth in new residential loans that led to a 17% loan book growth. Volume growth was 23% despite sell-down of loans to HDFC Bank. Disbursements were up more than 25% (on a low base) and sanctions were up 31%. HDFC did not book some expected profits on sale of investments, but dividend income was higher. Fee growth also lagged.

HDFC BANK (Q1) - Simply great

Net profits came in on the higher side of expectations. Loan growth at 40% y-o-y was also higher than expected. NPAs declined, asset quality remained one of the best in the industry and low-cost deposits increased. The bank will probably continue to sustain its rich valuations. The initial view after RBI tightened rates on 28th July was that banks will not follow suit. However, HDFC Bank surprised the market by hiking FD rates by 0.75% the very next day.

HERO HONDA (Q1) - Facing an uncertain future

The deviation in PAT numbers was due to higher-than-anticipated costs of technology changes that were needed to meet new emission norms. Realisations were up only 2% (price hike was taken only late June).

Raw material costs were also rising. Recent reports suggested that Honda Motors is likely to offload 6% of its 26% stake in Hero Honda.

Until now, most believed the reverse - that Honda Motors will buy out Hero Group's 26% stake. If the news is true, it means that Honda will eventually exit the JV and that the technological agreement between the two may not be renewed beyond 2014. This will certainly mean a completely different future for HH and it is reflected in the share price that has tanked from almost Rs2,050 to Rs1,800.

HINDUSTAN UNILEVER (Q1) - Margins at the altar of volumes

Net sales and profits were in the middle of the expectations band. Volume growth continued in double digits led by personal products, beverages and processed foods. There was some mild recovery in soaps & detergents - detergent volumes grew in double digits (due to price
cuts) and a re-launch of 'Rin'. Premium soaps got a shot in the arm with the launch of 'Dove' in a Rs20 price-point pack. Other notable growth stories - 'Pepsodent', 'Close Up', 'Fair & Lovely' re-launched, 'Pond's White Beauty' and 'Vaseline Healthy White', 'Vaseline Menz' and 'Max Fairness', 'Kissan' and 'Annapurna', 'Knorr Soupy Noodles', 'Brooke Bond
Sehatmand tea', and ice creams.

Ad spends continued to eat into margins. This is in line with HUL's strategy to stay focused on volumes rather than margins at the moment. The stock will be sensitive to prices of the key inputs (including palm oil, LAB, HDPE and raw tea) in the coming quarters and to competitive action. The buyback price of Rs280 was supporting the stock but it has slipped of late.

ICICI BANK (Q1) - Loan growth has to pick up

There was hardly any growth in advances at 7% but within advances the corporate loan book grew 30%. CEO Chanda Kochhar gave a guidance of 20% for the domestic book for the year, lower for the international book, 15-16% overall (lower than peers). NPA ratio came down to 1.62% from 2.19% and Ms Kochhar seemed confident it will end lower than that. The focus seems to be on housing and car loans now. The deliberate shrinking of its credit card book is almost over.

IDEA CELLULAR (Q1) - Heavy capex ahead

Numbers were good. 2G voice traffic was up ~13% q-o-q but ARPM (Average Revenue per Minute) fell sharply by 5.6% in the quarter to reach Rs0.44. EBITDA margins came off due to higher spectrum charges and the Spice amalgamation. ARPUs (Average Revenue per User) continued to decline but not as sharply. Minutes of usage actually went up for the
third quarter in a row. Value-added services share continues to inch up and is now at 12.6% of revenue. Debt and capex remain concerns. Q1 capex (excluding 3G and Indus) was only Rs3.2 billion versus recent quarterly run rate of Rs7 billion-Rs9 billion. But full year capex guidance is Rs40 billion-Rs44 billion, much higher than the Rs30 billion guided earlier. 3G spectrum cost amortisation could happen in Q3 or Q4 depending on the initiation date of the 3G offering.

ITC (Q1) - Volumes finally drop

Most worrisome was the drop in cigarette volumes. Maybe the tipping point has finally arrived where the price hikes are not being absorbed and could lead to shrinking volumes. FMCG, agri-business and hotels are doing well in terms of revenues. Losses were lower than expected in paper and FMCG. New brands and variants such as 'Lucky Strike', 'Classic
Menthol Rush' and 'Gold Flake SLK' were launched during the quarter. Some non-cigarette growth: 'Sunfeast' biscuits grew by 43% y-o-y, 'Aashirvaad' flour grew 21% y-o-y, the confectionery segment was up 25% and the personal care segment was up 86%.

JINDAL STEEL (Q1) - Disappointing

Performance was lower than expected, hit by lower steel deliveries despite strong steel production. Subsidiary Jindal Power's realisations dropped sharply. (More details in the conference call).

JP ASSOCIATES (Q1) - PAT disappoints

Net profit was below estimates despite strong revenue growth. This was because of lower margins in engineering and construction and cement, higher interest, depreciation and taxes. E&C margins were lower because of a higher contribution from low margin in-house construction work and a force majeure at its Srisailam irrigation project due to flooding.

KOTAK BANK- Loan growth up but subsidiaries need to catch up

Results were in line. Loan growth was strong at 40%. NPA provisions declined. Broking and IB posted a 30% decline. Decline in market share (80bps y-o-y) and falling yields is putting pressure on K-Sec profitability.

LARSEN & TOUBRO (Q1) - Execution woes

Execution was lower than expected in engineering and construction, but good in electrical and machinery divisions. EBITDA margins were up due to lower raw material prices. Current order-book is Rs1,078 billion, implying book-to-bill ratio of 2.9x. The management is still confident of achieving 25% y-o-y growth in FY11 based on large orders from the Hyderabad Metro project and from the road sector.

MAHINDRA & MAHINDRA (Q1) - Another good quarter

The company exhibited healthy revenue growth. Automotive realisations slightly down due to shift towards light commercial vehicles. The tractor segment was up 15%. Cost-control led to margin rises in the automotive segment. Raw material costs were higher but were offset to some extent with lower employee expenses.

MARUTI SUZUKI (Q1) - Royalty hit

Results were very disappointing despite 25% growth in sales volume as other expenses rose 42% due to higher royalty payments. Income from exports to Europe also fell due to the weakening of the euro. The higher royalty payments have already resulted in huge downgrades (20% +) by brokerages and it is possible that the stock will languish here for some time.

NTPC (Q1) - Uninspiring

Results characterised by lower PLFs and flat volumes despite the additional 990-MW Dadri
and Kahalgoan units in operation. Higher fuel and employee expenses hit margins. Margins were also affected by lower PLFs resulting in lower incentives.

ONGC (Q1) - Lower production from fields again

Earnings were below expectations. No clarity about the under-recovery contribution to oil marketing companies yet (ONGC has paid 80% of up-stream's share of under-recovery). The company is still struggling to sustain production from its oilfields. There was some marginal improvement in gas production from its fields.

PUNJAB NATIONAL BANK (Q1) - Restructured assets strain

The bank exhibited good credit growth at 25%. CASA continued to improve marginally with
branch expansion. Fee-income growth was moderate maybe because a large part of the credit growth came from SMEs. NPA provisions were the highest in six quarters. Slippages surprised negatively as they stood at Rs12 billion for the quarter with one large account of Rs2 billion and Rs2.6 billion slipping from the restructured asset portfolio. Of its total
restructured assets of Rs130 billion, approximately 8% have already turned into NPAs.

Restructured assets now stand at almost 7% of gross advances and this will weigh on stock performance.


On the face of it, RELI's results look lower than expected whereas RPWR's look better than expected. More details needed to comment.

SAIL (Q1) - Not smooth sailing

Weak sales volumes resulted in an inventory build-up. Higher raw material and staff costs eroded profitability. We expect more details after the conference call.

SIEMENS (3Q) - Not the usual sluggish 3Q

Sales were driven by strong performance of the power-transmission segment but profitability was impacted by significant margin erosion in the power generation and oil & gas segments. However, the pace of execution has picked up in the quarter. The order backlog of Rs135.5 billion (up 34% y-o-y) could give more confidence in future execution.

STERLITE INDUSTRIES (Q1) - Cost overruns

Results were below estimates mainly because of higher costs at BALCO and VAL. Hindustan Zinc's Dariba smelter produced only 33,000 tons, while production of old smelters suffered due to shortage of water. Besides, the company was also hit by higher alumina prices, wage inflation due to higher provisioning required on gratuity calculations, and higher power
costs. There is still no improvement in the visibility of bauxite mines, which will drag down production growth and margins of aluminium.

SUN PHARMA (Q1) - US sales surprise

A positive surprise came from higher US sales (non-recurring). Domestic market growth looks great at 91% but this is due to a low base. Base business is up just 9%. While margins are recovering, they are not near their normal levels yet.

1 decade ago
The analysis is brief but to the point and excellent.
Banking sector is going great. Axis Bank can equal HDFC Bank by this time next year.
ADAG Group as a whole has disappointed.
Cement Industry capacity expansions are not matched by demand. So pricing pressures will increase.
m kumar
1 decade ago
Please give us more INSIGHT on the future of Hero Honda shares - to buy / wait / future scene & also on the laggarad of all laggards (for over a decade) HUL - the most shameless OF ALL THE SHARES LISTED!
T chandra kanth
1 decade ago
your review on the performance of the companies is pointed, critical and it is simply superb
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