Q3 results review: Analysts raise red flag on falling margins

Although the comeback staged by the banking sector in terms of the bad loans cleanup impressed the street, analysts seem to be concerned that the margins in Q3 remain under pressure due to rising costs.

Revenue (results of 648 companies taken into account) during the quarter grew 17.3% over the corresponding period in 2017, according to a report by rating agency ICRA released on Monday. However, the EBITDA (earnings before interest, tax, depreciation and amortisation) margins fell 75 basis points (bps) year-on-year (y-o-y) and 20 bps on a sequential basis due to rising global crude oil prices and raw material costs, apart from the adverse impact of the rupee’s depreciation.

Shamsher Dewan, vice president, corporate sector ratings, ICRA, said, “While sectors such as airlines, cement, and building materials (tiles and glass) reported a decline in EBITDA margins because of the sharp increase in fuel prices, sectors like automobile OEMs, consumer durables, paints, and media saw margin contraction due to rising input costs.”

However, the fall in crude oil prices towards the latter half of the quarter and price hikes in some sectors, Dewan said, boded well for companies, going forward.

According to a report by ICICI Direct, EBITDA margins during the quarter moderated 165 bps to 20.1,% primarily due to rising raw material costs. The report also said that gross margins declined 270 bps over last year, but this was partially offset by lower employee expenses.

Meanwhile, a note by Emkay Global said margins for Nifty companies during the quarter declined a whopping 570 bps. “The performance of the Nifty companies (excluding oil & gas, and financials) continues to remain moderate in the third quarter of FY19, with sales growth decelerating to 12.6% (12.3% and 22.8% in Q2 and Q1, respectively), signifying a fade out of last year's favourable base. The sustenance of cost pressures continued to weigh in on margins, which declined by a massive 570 bps,” the note said.

Going forward, Emkay sees the rural growth momentum remaining strong, supported by expectations of a hike in minimum support prices (MSPs) and the overall thrust towards the agriculture space in the run-up to the general elections this year.

The note also said that higher ticketing yields resulted in a sequential improvement in performances for airlines in the third quarter. “The trend of  higher yields has continued into Q4 FY19, and the sector will stand to benefit from the decline in ATF [aviation turbine fuel] prices in this quarter,” it said.

ICICI Direct’s report, too, was bullish on rural growth. “In the FMCG pack, double-digit volume growth trend continued, depicting strong underlying rural demand, which is bound to further scale up, given rural income enhancing measures being undertaken by the government."

"Going forward, with robust consumer demand, especially on the rural front, asset quality concerns fading away in the banking space, pick-up in execution in the infrastructure as well as capital goods domain, we witness healthy 15%+ CAGR earnings growth in FY18-20E,” the report said.

Edelweiss Research, meanwhile, highlighted three macro themes that warrant investors’ attention—global growth slowdown, tightening domestic liquidity picture, and government spending shifting from capex to rural.

The brokerage house is also cautious on the market due to high valuations. “We see Nifty hovering in the 9,800-10,500 range till June and maintain a defensive bias in our model portfolio,” it said in a report.