Based on a bottom-up analysis of 112 companies in our coverage, the earnings season (ex-financials) has been largely in line with our estimates. Ex-financials Ebitda grew 24.8% y-o-y, largely in line with our estimate of 24% y-o-y. Net income (ex-financials) grew 16.8% y-o-y. Including financials, net income declined 17.4% y-o-y. NIFTY universe reported earnings growth of 8% y-o-y in Q4FY18. Ex-financials, net income growth stood at 13% y-o-y.
Key takeaways from the current earnings season
Net profit dragged by financials: The drag in net income was led by both lower-than-estimated PPOP growth and high provisioning. PPOP for public sector banks (ex-SBI) in our coverage declined 64% y-o-y, the worst performance in the recent past. PPOP for private corporate banks rose 19% y-o-y, 9pp below our estimates, while that for retail banks rose 20% y-o-y, in line with our estimates. Overall provisioning at Rs 772 bn rose significantly due to accelerated recognition of NPAs.
Strong operational performance ex financials: Ebitda growth at 24.8% y-o-y is the highest growth since Q1FY15. 72 companies (out of 98 in our coverage, ex-financials) have business geared towards the domestic economy. Overall, these companies posted Ebitda growth of 30% y-o-y, the highest since Q2FY15.
Pick-up in investment cycle: L&T Q4FY18 results indicate a pick-up in domestic execution and strong outlook on revenue/order inflows for FY19F. Domestic infrastructure execution rose 24% y-o-y to Rs 171 bn vs. our estimate of 10% growth. FY18 order inflow at Rs 1.5 trillion (+7% y-o-y) is ahead of guidance of flat to slightly positive growth.
We remain sanguine on the earnings growth of our covered companies over the next 3-5 years. Current forecasts by our analysts suggest that consolidated earnings for NIFTY companies should rise 51% over FY18-20F, largely driven by the low base of financials. We forecast ex-financials earnings growth for NIFTY at 37% over FY18-20F. We remain cautious on valuations.
NIFTY’s 12-month forward P/E multiple, at 17.5x, is close to more than 1 SD above its 8-year average on expected earnings. The gap between 10-year government bond yields and earnings yield has expanded and is close to the lowest level since Sep-14, indicating relative overvaluation.
Our NIFTY target of 11,380 is based on a forward multiple of 16x on December 2018F earnings. We are overweight on financials (particularly retail private banks and insurance), autos, oil and gas, infrastructure/construction and healthcare. We are underweight on IT, consumer staples and cement.
We remove PNC Infratech from our top 10 over concerns on tightening liquidity and risk of an adverse environment. We add Torrent Pharma as a play on domestic pharma growth. Our Buy-rated top-10 picks are: HDFCB, IPRU, SHTF, MSIL, AL, MM, TRP, LT, RIL, GAIL.