3QFY15 results were disappointing and underlying trends in volumes and NPLs showed no signs of recovery. We see downside risks to our FY2016 estimates with both volume and profitability likely to disappoint. The market looks expensive, as India’s improved macro position is yet to translate into earnings. The upcoming budget and budget session will be critical given that oil prices have moved up sharply in the past few weeks. (Read Full Report)
5.8% decline in net profits of BSE-30 Index; 5.1% decline in Nifty-50 Index’s net profits
3QFY15 adjusted net profits of the BSE-30 Index and Nifty-50 Index declined 5.8% and 5.1% yoy. Reported results were boosted by extraordinary gains in NTPC and Tata Steel and would have been even worse otherwise. PSU banks and cement disappointed the most while IT was the only sector with consistent outperformance. 3QFY15 EBITDA of BSE-30 Index and Nifty-50 Index declined 6% and 3.2% (6.4% and 5.5% below our estimates).
Risks to FY2016 earnings estimates have increased post 3QFY15 results
We see downside risks to our current FY2016E net profits for the BSE-30 Index and Nifty-50 Index (+18.3% and +17.1%). Macro factors and especially the level of interest rates and oil prices will play a role undoubtedly for sectors such as banks and energy. However, our volume and profitability assumptions for certain domestic cyclical sectors such as automobiles, cement and industrials may be at risk without a meaningful pick-up in economic activity. Underlying trends in volume growth and NPLs were quite weak in 3QFY15 too.
Macro factors supporting market currently in the absence of earnings improvement
In our view, (1) India’s improved macro position (low CAD, declining GFD/GDP and reasonable inflation), (2) supportive global liquidity and (3) ongoing reforms and expectations of further reforms are supporting the market’s current high valuations in the absence of earnings recovery. Any negative surprise in one or more of the above mentioned factors may lead to a correction in the market given the absence of earnings support.
Budget and budget session will be important in the short term; macro will play a role too
Given the market’s heightened expectations from the budget and five important economic bills before the parliament, the budget session of the parliament is likely to set the tone for the market for the next few months. Also, the level of global oil prices will influence India’s macroeconomic variables and in turn, the fiscal and monetary policy actions of the government and the RBI, respectively. Both have potential to disappoint negatively versus expectations.
By Strategy Report from Kotak Institutional Equities