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Earnings Preview (Apr - Jun 2018) - Strong growth on a low base; Consumption to be a consistent performer

We expect Nifty50 companies to post 20%yoy PAT^ growth in Q1FY19E on a low base (destocking before GST implementation led to 8.5% yoy decline in Q1FY18 PAT). We expect 11 out of 14 sectors to post PAT as well as EBITDA growth yoy. Our analysis of high-frequency indicators shows an uptick in the domestic economy along with a pick-up in demand at the micro level (please refer to our note “What’s moving on the ground”), which we believe will help sustain earnings growth in the medium term. However, the exceptional growth level (20%+) that we will see in Q1FY19 may not sustain in near term as Q1FY19 growth is coming on a low base while the ongoing recovery is slow but stable. We expect 31% yoy PAT growth in Nifty ex-financials in Q1FY19. Though earnings growth for Nifty financials is expected to decline 3% yoy on ageing provisioning, we expect qoq fall in NPLs this quarter.

Stable consumption growth expected to continue: Consumption* companies should report 22% yoy growth in PAT with 24% yoy growth in revenues (ex-ITC). Although the growth comes on a low base, growth in rural consumption continues to fuel underlying demand ,supported by a bumper crop in FY18 (with on track Kharif sowing for FY19).  Moreover, there is increased government focus (expenditure of rurally/socially-focussed ministries is up 32% yoy FYTD19), as this is a pre-election year. These factors underpin our view of sustained consumption growth trajectory in FY19. We estimate 220bp/119bp EBITDA/PAT margin expansion, respectively, within our Nifty consumer universe, buoyed by GST-led savings and cost efficiencies.

Commodities PAT to exhibit strength yoy, but sustainability a challenge: The commodities segment is expected to post 42% yoy growth, but would be weak qoq led by margin pressure on OMCs (the political dynamics are making it tough for OMC’s from taking relevant price hikes despite a stronger crude, thus compressing their margins). While cement volumes are expected to be strong, PAT is expected to decline 23% yoy on weak realisations. Moreover, we see challenges for the commodities in the near to medium term from macro headwinds (trade wars impacting metals prices, strong crude may not bode so well for OMC’s as it’s a pre-election year). 

Strong sales and EBITDA growth to accompany PAT growth (on a low base too):  Nifty 50 companies are expected to post strong 25% yoy sales growth in Q1FY19. Strengthening prices of commodities coupled with consumption growth would primarily contribute to the toplines of Nifty 50 companies. While the toplines of commodity companies are estimated to post 38% yoy growth, those in the consumption segment (ex-ITC)* would register 24% yoy growth, in our view.  We estimate 30% yoy growth in EBITDA (ex-financials) of both commodity and consumption companies.

IDFC top picks: Maruti, Coal India, NTPC, IndusInd Bank, GAIL, Hero MotoCorp are our top picks within Nifty 50 (for details please refer to our note on “IDFC market meter and top picks” published on 5^th July 2018).

^ - Earnings estimates of Bajaj Finance, Bajaj Finserv, Grasim and Ibulls Housing on Bloomberg consensus; * Consumption companies include Auto ex-Tata Motors, and Consumer goods ex Telecom