India strategy: Q3 earnings in keeping with expectations

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Updated: Feb 25, 2019 2:52 AM

Earnings revision is still trending down; Nifty EPS cut 2.8/3.0%, with 9/27% growth likely in FY19/20e

Corporate Banks showed a material sequential improvement in the slippage/ asset quality trends.

The December corporate earnings-report season for both Nifty and MOSL Universe was in line with our expectations, with domestic cyclicals led by financials picking up the baton from global cyclicals as the driver of earnings growth. Corporate Banks, IT and Consumer delivered a strong performance, while Autos and Cement disappointed. Top-line growth for MOSL Universe and Nifty was at a multi-quarter high. However, this failed to translate into concomitant Ebitda growth. Notably, Ebitda margin shrank 300-320bp for MOSL and Nifty Universe, dragged by OMCs. Capital Goods, IT and Retail exhibited y-o-y expansion in the operating margin.

Corporate Banks showed a material sequential improvement in the slippage/ asset quality trends. This provides good visibility on the earnings outlook. Consequently, the share of domestic cyclicals in the profit pool increased to 39% – the highest since Jun’09. NBFC Universe delivered an in-line performance, but saw some moderation in the growth estimates owing to the prevailing stress in liquidity and cost of funds environment. Telecom posted its sixth consecutive quarter of loss, while Automobiles and Oil & Gas posted a decline of 23% and 21% y-o-y, respectively, in profits.

Overall, the direction of earnings revision is still trending down, dominated by a big miss in some of the large-caps in global cyclicals like Tata Motors. The Sensex posted sales /Ebitda/PAT growth of 22/14/23%, while Nifty posted 23/5 /6% growth. This divergence between the two can be attributed to OMCs, which have dragged the profits of Nifty Universe.

Earnings estimates revised down: 43 companies saw an earnings cut of 5%+, while 26 companies saw upgrades of 5%+. Our FY19/20 Nifty EPS estimates have been cut 2.8/3.0% to Rs 496/629 (prior: Rs 510/648). We expect Nifty EPS to grow 9% in FY19 and 27% in FY20. Nearly 81% of the earnings cut is driven by Tata Motors, SBI, HPCL and ONGC. In Nifty, 60% of incremental earnings for FY20 is expected to be contributed by financials. In MOSL universe, Consumer, IT and Retail have seen marginal upward earnings revision, while Autos, Oil & Gas and Cement have seen considerable cuts.

Top Upgrades (FY20e): Bharti Infratel, IndusInd Bank, Tata Steel and Wipro have seen EPS upgrades of 25.4%, 9.5%, 8.9% and 6.2%, respectively.

Top downgrades (FY20e): JSW Steel, Tata Motors, ONGC, Reliance and HPCL have seen EPS downgrades of 26.0%, 21%, 12%, 11% and 10%, respectively.

Model portfolio changes: During the quarter, we raised weights on Maruti, Axis Bank, LICHF and also introduced Brigade in the model portfolio. We also further raised our weight on Axis Bank. We continue liking Corporate Banks, Consumer, IT and Auto (4W). Correction in mid-caps offers a good opportunity for bottom-up idea selection across sectors.


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