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TOP NEWS

 

Alert: Lakshmi Vilas Bank, Indiabulls Housing Finance: RBI rejects merger proposal of Indiabulls Housing and Lakshmi Vilas Bank – Negative for both

The Reserve Bank of India (RBI) has rejected the proposed merger between Lakshmi Vilas Bank and Indiabulls Housing Finance Ltd. Lakshmi Vilas Bank will now have to independently explore options for raising capital to help lift the restrictions placed on it. Indiabulls Housing is now looking for buyback of equity shares and has called for a board meeting on 14th October.  Negative read thru.

 

Reliance Industries (RIL); Telecom Sector: Reliance Jio, subsidiary of RIL, has announced to charge 6 paisa per minute for voice calls made by Jio users to other network but will compensate the customers by giving free data of equal value for new re-charges starting from October 10, 2019. The charges will remain until the telecom regulator makes IUC (Interconnect Usage Charges) zero (which is expected by January 2020).

Our view: The move would improve the consolidated earnings of RIL as IUC cost would become nil (Reliance Jio has paid Rs13,500 crore in the last three year as IUC charges to other telecom operators). Also, we believe this tariff rise by Jio would provide opportunity to Bharti Airtel and Vodafone Idea to hike voice rates, which would be positive for Bharti Airtel and Vodafone Idea.

 

Torrent Pharma: Company received a warning letter (WL) from the USFDA for its Indrad facility, barring fresh approvals from its largest unit - Negative; WL follows August’s “official action indicated” by the USFDA.

The Company does not believe that the warning letter will have an impact of disruption of supplies or the existing revenues from operations of this facility. However, delay in resolution, can lead to cut in FY21 earnings. Torrent Pharma’s US business is ~18% of total sales, which entirely comes from Indrad and Dahej facilities (both under regulator scanner). Torrent has 34 pending ANDAs and 11 tentative approvals, most of them are from Indrad followed by Dahej.

 

 

RESULTS PREVIEW

Company

Net Sales (Rs.cr)

OPM (%)

Adjusted PAT (Rs.cr)

 

Q2FY20E

Q2FY19

YoY (%)

QoQ (%)

Q2FY20E

Q2FY19

YoY (BPS)

QoQ (BPS)

Q2FY20E

Q2FY19

YoY (%)

QoQ (%)

TCS

39,294.0

36,854.0

6.6

2.9

27.7

27.9

(23)

136

8,413.5

7,901.0

6.5

3.5

 

 

 

Net Interest Income (Rs. cr)

PPoP (Rs. cr)

PAT (Rs. cr)

 

Q2FY20E

Q2FY19

YoY %

QoQ %

Q2FY20E

Q2FY19

YoY %

QoQ %

Q2FY20E

Q2FY19

YoY %

QoQ %

IndusInd Bank

2,807.4

2,203.3

27.4

(1.3)

2,496.9

1,992.4

25.3

(3.6)

1,409.1

920.3

53.1

(1.6)

 

 

 

INVESTMENT CALL

 

Q2FY20 Earnings preview – Sobering quarter, yet again

After a positive sentiment boost from the corporate tax rate cut, the market will now look to take cues from the Q2FY20 earnings. On the back of weak high-frequency economic indicators, earnings expectations for Q2 FY20E are muted. We expect a sobering quarterly performance where headline aggregate earnings are likely to decline by 5.7% for Sensex companies. Internals show a fairly skewed picture with a handful of sectors (FMCG, financials – mainly a few private banks and some NBFCs like HDFC and Bajaj Finance) doing the heavy-lifting for aggregate earnings in Q2. On the other hand, negative growth is expected in sectors such as auto, telecom and metals, with energy heavyweight companies like Coal India and ONGC expected to see weakness. Notably, the quarter is likely to see significant one-offs affect the bottomline, like the impairment on deferred tax assets, write-back of Q1FY20 tax, positive effect of a lower tax rate on earnings etc. After the recent correction, the Sensex is trading at ~16.8x consensus earnings of FY2021E, which is near its long-term average. We believe that bold steps like the cut in corporate tax rate, an accommodative monetary policy, helped by relatively benign crude oil prices are factors that favour equity investors.

<!--[if !supportLists]-->·         <!--[endif]-->Getting the focus back on earnings: After the sentiment booster from the corporate tax cut, markets will now eye cues from Q2 FY20 earnings. We expect a sobering quarterly performance where headline aggregate earnings are likely to decline by 5.7% for Sensex companies. Expectations of a weak performance indicate the throes of slowdown that the economy finds itself in and also the effect impact of one-offs such write-downs of deferred tax assets, etc. Expectations of a healthy revival in corporate earnings appear to be further down the road.  However, internals show a fairly skewed picture with a handful of sectors (FMCG, financials – mainly few private banks and some NBFCs like HDFC and Bajaj Finance) doing the heavy-lifting of aggregate earnings in Q2. However, sectors such as automobiles, telecom and metals are likely to clock losses or see profits shrink. Notably, the quarter is likely to see significant as one-offs affect the bottomline - impairment on deferred tax assets (DTA), write-backs of Q1FY20 tax, positive effect of a lower tax rate, etc, all of which are expected to keep earnings performance volatile.

<!--[if !supportLists]-->·         <!--[endif]-->Some positives expected: We expect private banks (both retail and corporate) to see tailwinds and hence aggregate topline of the BFSI, consumer discretionary and pharmaceutical sectors are likely to grow in the mid to high teens, y-o-y. Apart from these, a sharp slowdown is likely in IT and industrial earnings to sub-5% (versus a mid-teens growth in FY19). Once again, broader earnings performance may be sobering, but the management commentary, especially relating to the festive / busy season will be keenly eyed. Weakness in corporate earnings would be more pronounced in the pharmaceutical, telecom and metals sectors. Moreover, –high-frequency indicators related to investment and consumption underline the slowdown in economic growth in last 2-3 quarters. Weak gross fixed capital formation (GFCF), declining IIP, faltering CV sales, tepid capex and new project announcements indicate the malaise. Moreover, tepid credit growth exacerbated by weakness in private final consumption and rising unemployment is indicating a continued consumption slowdown.

<!--[if !supportLists]-->·         <!--[endif]-->Expect reset in earnings estimates until revival happens: Of late there have been several government decisions, supported by monetary policy actions (rate cuts) as well. However, quite understandably, these measures will take time to trickle-down and translate into a demand revival. Hence, we expect that weakness in earnings could persist for most sectors in the near term. This essentially means that the forthcoming results season could witness some residual downgrades in consensus earnings as the street factors in the near-term slowdown in demand across various consumer-driven and export sectors. Over the long term, the government’s efforts to listen and respond are a positive and its fiscal prudence are likely to attract foreign capital to at least partially fund huge infrastructure development projects, which would mean better times for industrials and building material companies, which would have a positive spill-over effect on the entire economy and the corporate sector.

<!--[if !supportLists]-->·         <!--[endif]-->Valuation – Buoyed by government initiatives, recent correction cushions downside risk: Despite continued disappointment on the earnings growth front, downside risk could be limited from current levels. After the recent correction, Sensex is already trading at ~16.8x consensus earnings of FY2021E, near its long-term average. We believe bold steps like the cut in corporate taxes and the accommodative monetary policy stance, helped by relatively benign crude oil prices are favourable factors for equity investors.

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