Our analysts have built in a lot of negatives into their Q1FY18 estimates, and thus there is a higher chance of a positive surprise during the coming earnings season, in our view. They expect revenue and earnings growth of 12% y-o-y and 1% y-o-y, respectively, for the Morgan Stanley coverage universe. For the Morgan Stanley India coverage universe (122 companies), our analysts expect revenue and net profit growth of 12% and -1% y-o-y, respectively, in June 2017. They expect y-o-y margin compression of 214 bps. For Sensex companies, they expect revenue and profit growth of 8% y-o-y and 4% y-o-y in QE June 2017.
What has driven our expectations for the quarter?
(i) De-stocking (and price discounts) ahead of GST roll-out for domestic industries, especially consumer staples and discretionary
(ii) lagged impact of higher commodity prices leading to higher costs (iii) earnings to remain weak for corporate and PSU banks, while retail banks and NBFCs are likely to fare better (iv) inventory losses due to lower oil prices for oil PSUs (v) persistent competitive intensity for telecom companies (vii) firm prices but high costs for cement companies (vii) weaker realisations for steel companies (viii) lower volume off-take and higher costs for aluminium companies. (ix) YoY revenue and earnings weakness for technology even as currency tailwinds from ` appreciation could lead to FX gains.
According to our analysts, Tata Steel, Dr Reddy and Tata Motors will likely see the fastest net profit growth, while Bharti Airtel, Sun Pharma and Lupin should be the laggards. Tata Motors and Tata Steel should be the biggest contributors to Sensex earnings.
Growth is in a U-shaped recovery, driven by domestic and global factors. We expect earnings revision breadth to improve in the next few months. We expect Sensex earnings growth of 18% in FY2018 and 24% y-o-y in FY2019.