Nifty Q3 FY16 revenue declined 2% y-o-y, driven by global commodity-linked sectors. Excluding global commodities, revenue was up 9% y-o-y, with muted growth in many sectors (power, consumer, telecom, pharma, infra & cap goods and autos). Ebitda margins (overall) were largely in line with expectations, though ex-global commodities they were slightly weaker, with Ebitda growth disappointing. Earnings were down 3% y-o-y (overall) and up 1% y-o-y (ex-global commodities), below the 8%/9% growth we expected. Even adjusted for the large loss reported by BOB, earnings growth of 1%/7% (overall/ex-global commodities) was below our expectations. Consensus FY16/FY17 Nifty earnings estimates were revised downward 3.1%/4.5% during the earnings season, but we expect further cuts; the current FY17 earnings growth expectation of 18% appears optimistic. In Q3, 42% of the companies under our coverage missed earnings expectations.

Autos, consumers: commodity benefits re-invested; IT: slow revenue trend

Autos: volume performance mixed; declining commodity prices drove margin surprise for 2-wheelers, while for trucks and cars, this was offset by higher discounting.

Consumer: volumes drove revenue growth of 8%; low raw material prices drove gross margin expansion but a significant part of the benefits re-invested into promotions.

IT services: dollar revenue growth was soft at -0.3%-1.4% for India’s top-four listed IT services vendors. Y-o-Y revenue momentum continued to decelerate for most vendors, with no vendor managing to retain double-digit growth rates. With Cognizant sounding caution in its outlook for financial services in 2016, we think revenue momentum could slow further.

Pharma: India business was impacted by weak anti-infective seasons and the withdrawal of promotions/bonuses; US business starting to look better, though currency depreciation in emerging markets continued to have an impact.

Banks: balance sheet clean-up; oil & gas: strong refining margins

Banks with large corporate exposure disappointed with sharp increase in GNPLs; most SOE banks reported large losses. Banks with a strong retail presence and low exposure to potentially stressed assets reported strong loan and earnings growth. Housing finance companies saw healthy growth in retail loans and margin expansion (though HDFC Ltd. disappointed on non-retail growth). Weak rural demand resulted in high credit costs for MMFS.

Cap Goods/Infra: domestic order flows weak and execution climate sluggish. Margins declining even in a low commodity price environment reflecting aggressive bidding in the past and negative operating leverage.

Cement: demand remains subdued.

Metals & Mining: tough quarter due to continued pressure on commodities markets. Despite some government action in September (safeguard duty on HRC), domestic prices remained under pressure. Coal India reported a solid quarter with no material decline in pricing and some apparent operating leverage on the improved volumes.

Oil & Gas: good quarter for refiners (RIL) and marketing oil SOEs, who benefited from strong refining margins and lower fuel subsidy; upstream SOEs and Cairn were weak amid sharp fall in oil prices.

Power: subdued industrial power demand kept utilisations under pressure; merchant prices therefore remained soft. Benign international coal prices were a support in an otherwise subdued environment.

Telecom: pricing pressures in both voice and data segments were evident. However, this was compensated by robust data volume growth, with data revenue contributing about 20-29% of mobile revenue in the quarter.

Nifty Q3 FY16

Revenue (overall) for Nifty companies declined 2% y-o-y in Q3 FY16, largely in line with expectations. Excluding global commodities, revenue growth was 9% y-o-y, in line with our expectations.

UBS Research