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Earnings Preview (Jul - Sep 2018) - A moderate quarter on global and local factors

We expect Nifty50 companies to report moderate PAT growth of 5.6% yoy, in Q2FY19E. We expect to see divergent results across sectors (either strong earnings outperformance or underperformance), led by a variety of factors – weak volumes in Autos, forex impact, rising input costs and base effect. While Nifty50 consumer goods, IT services, media and petrochemicals are expected to show stable performance and Nifty50 metals stocks should post exceptionally strong growth (on a weak base and superior realisation in Coal India), we expect a weak quarter for a) telecom players (down trading within subscriber base, rising fuel costs), b) autos (weak volumes across players), c) construction/infra (forex loss for Adani Ports and higher tax rate/lower other income for L&T). Given the vastly divergent performance expectations, we expect Nifty PAT to settle at ~6% yoy for Q2FY19 even after adjusting for exceptional losses and gains.

 

Ex-financials EBITDA growth for Nifty50 companies is expected to settle at 12.4%yoy (in Q2FY19E), with more than usual divergence across sectors here as well.

 

Staple consumption to do well while discretionary consumption to take a hit: Nifty consumption* companies are expected to post a flat quarter in Q2FY19 with 0.9% yoy PAT growth and 2.5% yoy growth in EBITDA. We observed an interesting dichotomy within the consumption space with staples expected to report strong results while discretionary consumption PAT growth is expected to be weak. Staples and retail are expected to post strong 13% yoy PAT growth, led by a) reasonable volume growth across players and b) more or less flat margins, owing to divergent trends across input commodity prices. However, on the other hand, discretionary consumption (autos) saw weak volume growth, impacted by a) Kerala floods, b) delayed festive season in FY19 (compared to FY18).

 

Commodities to perform well (led by metals), sustainability remains a challenge: The commodities segment is expected to post 20% yoy PAT growth, led by metals (particularly in Coal India on a low base and better realisations). However, Oil & Gas segment is expected to post moderate 5% yoy PAT growth but strong 18% yoy EBITDA growth. Though strengthening crude prices bode well for inventory gains and upstream players, OMC players will continue to see weak marketing margins (the political dynamics make it tough for OMCs to maintain their margins). Also, Nifty50 cement companies too are expected to report 6% yoy PAT decline on weak realisation and rising input costs.

 

Broader IDFC universe to exhibit similar trends: The broader IDFC coverage universe should exhibit a similar trend (in line with Nifty50), with commodities leading overall earnings growth at 15% yoy but muted 3% yoy PAT growth in consumption* (with autos reporting 19% yoy decline in PAT and 14% yoy PAT growth in consumer goods). Overall, we estimate 7% yoy PAT growth  in the IDFC coverage universe in Q2FY19.

 

IDFC top picks: Maruti, Coal India, NTPC, IndusInd Bank, GAIL, Hero MotoCorp are our top picks (refer to our detailed note on “IDFC market meter and top picks” published on 10 September 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