2QFY20 Earnings: EBIDTA Ahead of Tepid Expectations; Expect Limited Upside

21 NOVEMBER 2019

The 2QFY20 EBIDTA for BSE-100 companies came slightly ahead of tepid expectations, along with flattish year-on-year growth in revenue and PBT. Reported PAT (profit after tax) however, declined 13% YoY for the quarter that saw one-off effects from AGR provisioning losses in telecom, DTA revaluations in Financials, sharply lower provisioning for PSU banks and the adoption of new corporate tax rate.

Among sectors – Autos, Staples and Cement benefited the most from lower input costs. Operating profits were better than expected across all sectors, except energy, where refining margins disappointed. Banks reported better than expected PPoP (pre-provision operating profit) largely led by treasury gains. Ex-energy, EBITDA and PBT came 5% and 3% better than expectations respectively.

Citi analysts now expect the recent corporate tax rate cut to provide a 4% boost to their NIFTY 50 FY20 EPS (Earnings Per Share) estimates owing to lower effective tax rate of 27.5% now vs 30% earlier. About 50% of Citi covered companies announced adoption of the new tax structure, while 25% plan to stick to the older regime.

Source: Bloomberg, Company Data, Citi Research Note: Revenue is ex-energy; PBT – Profit before taxes. 99/100 BSE-100 Companies.

Citi analysts estimate FY20E NIFTY earnings to grow +3% YoY, sharply below consensus estimate of +14% YoY, owing to higher expected weakness in materials, energy and telecom.

Driven by positive global sentiment and emerging market flows, Nifty has returned 7% over the course of the 2QFY20 earnings season (MSCI EM up 5%). Citi analysts, however, believe that the current valuation of 18.5x 1yr-forward P/E (i.e. 1.5sd above long term mean) leaves little upside. Policy announcements aimed at alleviating financial stress and boosting consumption, along with developments in US-China trade talks may drive sentiments and FII flows going forward.

Source: Bloomberg, Citi Research

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