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Earnings Preview (Jan - Mar 2018) - Consumption to do well

In Q4FY18E, we expect Nifty50 PAT(^)to grow by a muted 1.5% yoy (on a higher baseᶴ). Excluding the Oil & Gas and infrastructure sectors, we expect 7.3% yoy growth in Nifty earnings in Q4FY18. However, in our view, Q4 will be an operationally strong quarter with EBITDA growth (ex-financials) estimated at 16% yoy. We expect 11 out of 14 sectors to post EBITDA growth. The strength in EBITDA numbers reinforces our view of an ongoing economic recovery, also supported by recent high-frequency indicators like credit growth, IIP, airline passenger growth, vehicle sales, etc.. We estimate FY18E Nifty EPS growth of 7.5% yoy at Rs473. We have introduced FY20E Nifty EPS of Rs664 (18% yoy growth over Rs563, our FY19E target) in this report.

• Consumption - the strongest theme this quarter: We expect consumption companies (autos ex-Tata Motors, consumer goods within Nifty50) to post strong 19% yoy earnings growth in Q4FY18E. GST-led rate cuts and a gradual recovery in demand would enable growth in FMCG companies. However, in the case of Asian Paints, both volumes and price hike would propel growth in the company. Robust volume growth across the autos pack would help the sector to enjoy overall strong growth.
• Commodities to post an overall moderate performance: We expect the commodities pack (within Nifty 50) to post reasonable operational performance (EBITDA growth at 23%yoy), fuelled primarily by Oil & Gas and petrochemicals. Metals, however, are expected to post an EBITDA decline of 1% yoy on: a) higher aluminium costs, b) poor performance by Tata Steel (Europe) and c) weak volumes. Overall, commodities could witness a decline in net earnings, led by Oil & Gas (on account of a high base in IOCL and ONGC and decline in refining margins in HPCL)
• Strong sales growth to continue: In line with last few quarters, Nifty 50 sales should continue to post 14% yoy growth in Q4FY18, led by strength in commodities prices and consumption. We estimate 19% yoy top line growth in commodity stocks. We also expect a strong 20% yoy topline growth in the consumption segment (ex-ITC)*.
• Operationally strong quarter on pick-up in demand and economic activity: We believe Q4FY18 will be an operationally strong quarter, as can be seen from the topline growth (which is not just commodity-price driven) and strong EBITDA growth across sectors. While EBITDA margin across sectors is expected to expand 31bp yoy (Nifty ex-financials), PAT margins would see 125bp slide on account of weak PAT.
• Within Nifty (new components), we like Maruti, ICICI Bank, HPCL and Hindalco Industries, while Bajaj Auto continues to be our Top Sell (refer to our detailed top picks note published on 07 February 2018).

^ - Earnings estimates of Bajaj Finance, Bosch and Ibulls housing on Bloomberg consensus and earnings number based on Nifty components as of 31^st March 2018; (ᶴ) Q4FY17 saw a higher base led by one-off gains in Oil & Gas (IOCL and ONGC) and lower taxes in Infrastructure (on back of 80IA tax holiday which ended in Mar 2017); *(Auto ex-Tata Motors and Consumer goods ex-ITC, ex Telecom)