Amnish Aggarwal, Head-Research, Prabhudas Lilladher, says “companies which were having a good amount of cash with them, their treasury incomes have gone up because of the higher interest rates. So, whatever has been the aggregate beat, these are one of the two major reasons why this has not been a disappointing quarter as far as the numbers are concerned.”
The narrative approaching the results was that people became watchful that this result season we would start seeing some early kind of cracks in some of the numbers either flat to weakish. But by the time we are winding up our Q2 earnings season, the narrative seemed to have changed. It turned out pretty okay. What were some of the hits and misses in your view?
If you look at the aggregate numbers which we have studied so far, there are two big factors why you can say first of all as far as your aggregate volumes are concerned and when I am saying this we are referring to the volume growth in any sector or the segment. So, there has not been any big surprise element on that part. The demand conditions have not predominantly changed than what we were talking say a month or two back. But what has been surprising is that the benefit of benign raw material prices has been better than what it was anticipated say a couple of months back.
The second thing is that the companies which were having a good amount of cash with them, their treasury incomes have gone up because of the higher interest rates. So, whatever has been the aggregate beat, these are one of the two major reasons why this has not been a disappointing quarter as far as the numbers are concerned.
If you can talk about some of the names from the midcaps, smallcaps and largecaps, you choose wherever you want to talk about, some of the big upgrades in earnings, where the cycle may get stretched on the higher side going forward.
If you look at the best number, they have come from the capital goods and engineering companies. So, whether it was L&T or ABB numbers or some of the other smallcap to midcap engineering and capital goods companies, there has been a broad-based topline growth and operating leverage has given them good margin expansion. This is one sector I would say that has done really well across the board barring most of the bearing companies or some solitary segments here or there where the numbers have not been that great. But broadly, it is one of the best performing sectors.
Now the second sector where the numbers have been pretty good has been the automobile sector because the volumes which were expected to be good and the benefits of low raw material prices and operating leverage have come. The numbers of most of the auto companies have been quite good if you ask me.
The third, we think, is the largest segment – banks. A major outperformance has come in numbers on account of lower provision of NPAs because the NPA provisioning has been lower, otherwise I would say at the EBITDA level, there is not much of a change from what was being expected. A big difference has been the lower provisioning because the asset quality remains quite good as far as banks are concerned.
A quick followup from the capital goods, engineering, some of the midcap and smallcap names which are top in your overall house call or house report if you could share some names where earnings are good.
Among the larger ones, Siemens, ABB are the two stocks. In the case of Siemens, there was news regarding the acquisition of 18% stake by Siemens AG from Siemens Energy and then a possible de-merger. Both these companies are technologically very sound. They are one of the global leaders and they continue to look good.
If you look at the smaller names which are there, for example, we had initiated on Hindustan Aeronautics, it continues to look good. Bharat Electronics continues to look good. Apar Industries is one stock which we have been very positive about. Apar has done well over the past at least two to three quarters, if not more. Some of the other midcap and smallcap names, even GE T&D, has done well.
Some of the names we might not be covering like Schneider Electric, Elantas Beck. That is why I said that the growth rate is very broad-based and the entire gamut of companies in capital goods and engineering have done well.
What is the outlook when it comes to the entire new-age tech space? Do you believe that now that a lot of these companies have upped their game in a way, pulled up their socks, put the focus on profitability that investors and the stock markets really wanted to hear, this space can be revisited? Would you be bullish on any names?
We do not have formal coverage on many new-age companies but what I can say is that many companies have seen their business models maturing in the last couple of years. Many of them have even revisited the business model and made changes and wherever in the tech space, the companies today are having much more nimble competition and where there is some sort of a barrier to entry which has been created, those segments are likely to do well. For example, today, in a company like Zomato, the industry was already consolidated. Zomato and Swiggy are the two large players and the market and the scope of growth is huge.
In such models, you will see them developing and one of their subsidiaries, Blinkit, is also catching up because the entire commerce space is also doing well and is fairly consolidated. Even in the tech space, creating some sort of a business moat and then having some sort of a pricing power or threat to entry that seems to be more important and is clearly playing out in case of, say, Zomato.
When it comes to a player like Nykaa, they are doing well. Their numbers have also improved but definitely the barriers to entry for a model like Nykaa, they do not seem to be that to me at this point of time as they are for a company like Zomato. Similarly, when it comes to Paytms of the world or Policybazaar, some of the models are definitely maturing but then one has to look at the longevity of the model because when it comes to the financial services, we have seen that many big houses, many big companies will come in and the possibility of disruption in financial services seems to be significantly higher than many of the other segments of the technology of new-age companies.
The space looks quite interesting in the longer term because as the consumers switch more and more to online, as we start using more of these payment gateways online whether it is delivery, financial services or education, the fields are going to grow and the kind of ecosystem we have developed in India should do well over the long term. But yes, many of them have matured and for the rest, it is more like a wait and watch.
Some of the calls that stood out in your mind on the road ahead, companies which have been negotiating the environment and doing very well, guiding at better margins, higher growth?
It would be difficult to take a cue from the calls in general because each and every company is operating in a different environment and different set of circumstances. But definitely, I can give you a very broad sense of all the companies in the financial services or the banks. So the banks, seem to be in a pretty decent shape with some compression in NIMs might have happened for them but the growth outlook for them looks to be quite good.
The NPAs are under control. But yes, there has been, you can say, some sort of doubt whether there could be some problems in personal loans, which can come, maybe not now, but in the future. Similarly, if you look at the entire FMCG/retail space, then definitely the commentary which I can look at is that there is still a lot of confusion as far as rural demand is concerned. Some companies are indicating some green shoots which are visible in rural India, but the others are feeling more like a stay put kind of a situation. Clearly, on the entire broader consumption space, the clear disparity which I have been talking about is very clearly visible. The recent media articles on what happened during these last three, four weeks of the Diwali buying clearly shows that the demand for the premium goods, luxury goods, and the upper section of the society is intact, whereas the absolute mass or the economy products, they are not doing that well.
These are some of the trends which we could clearly spot. Again, if you look at the capital goods sector, the commentary there, barring bearing companies or abrasives, any commentary across the board has been very strong on the basis of whether it has been in energy management, whether it has been smart cities, smart infra, energy transition.
Their commentary has been quite good. If you look at the entire building materials/durable space, I think durable companies, except if you think you can say power cable, whether it is residential or industrial, the cable segment has done really well. You look across companies ranging from a Polycab to an RR Cable and their commentary has been very good. But when it comes to consumer durables, I do not think many companies have given any strong commentary over there. Similar is the case with certain segment on the building material side.
It has been a very specific segment. For example, many of the hospital companies have also done really well, and many of them have indicated strong occupancy level and strong margin outlook for the coming few months. Even some pharma companies are showing that finally the pressure on generics might be a thing of the past and things should start improving. I would not single out any name, but there are clearly certain sectors which are now showing that their momentum could be setting in some of them.
Given the fact that within the auto space, it was a pretty strong performance in October, a lot of smart year-on-year growth. For instance, Maruti put out 20% growth or so. The domestic wholesale numbers were fairly encouraging. What would you like within auto space?
We have been positive. Maruti is one of our top bets in the auto space because, the volumes have been good, the company is making a comeback into the SUV space where they were under indexed. The way their entire margin profile is, the facility of the parent company, which is now with them, will also provide the momentum.
Maruti remains to be quite a good play as far as the PVs. If you want to play PVs, I think Maruti is one of the best plays over there. Now, in addition to it, you see, if you look at a two-wheeler space, Hero Motor has done really well in the past, particularly a couple of months, because the stock was very under indexed and the valuations are very favourable for Hero Motor. But having said that, it all depends on how the rural demand goes, because Hero has the maximum contribution among all the listed companies for the 125cc segment, which is the entry-level segment.
If the rural demand continues to look up and does well, then Hero as a stock has more legs to it because the PE multiples of Hero are relatively still on a lower level when compared to Bajaj, TVS, and some of the other players. On the PV or on the CV side, Ashok Leyland and Tata Motors, both the companies have been doing well as far as their numbers are concerned.
But currently, we are already in the third year of the cycle and it remains to be seen how far this year’s CV cycle can go. But Tata Motors, to me, seems to be a more holistic play, given that JLR is also improving and they are doing well on the EV side. Now the Tata Technology IPO is also coming. There could be some more momentum which could be there in Tata Motors as well.