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Earnings Preview (Oct - Dec 2017) - Strong commodities and demonetisation in base quarter to support growth

We expect Nifty50 PAT to report a strong quarter with a 21% yoy^ growth during Q3FY18. We expect this growth to find support from a) an overall pick up in economic activity, b) strength in commodity prices and c) a weak base quarter due to disruption led by demonetisation. Thus, we expect Nifty50 commodities and consumption* companies to report a PAT growth of 20% and 14% yoy, respectively. 10 out of 14 sectors are expected to post earnings growth, implying that broad-based revival is in sight. Overall, we estimate FY18 Nifty EPS growth at ~10% yoy, followed by accelerating earnings growth of 21% yoy in FY19E, as recently announced fiscal stimulus (roll back in GST rates, recapitalisation of PSU banks, Bharat mala project, etc) begin to impact economic growth.  Our Nifty EPS estimates for FY18E/ FY19E stand at Rs479/ Rs577, respectively (15% CAGR over FY17-19E).

Consumption earnings growth to be marked by strong volume growth: Consumption stocks across IDFC universe are expected to mark relatively (compared to last few quarters) higher volume growth (8-16%), in light of low base and increased demand led by roll back in GST rates. Consequently, within Nifty, we expect HUL and Asian Paints to post PAT growth of 28% and 15% yoy, respectively. Also, we expect auto segment in Nifty 50 to post 96% yoy PAT growth (led by turnaround in Tata Motors and weak demonetisation base). PAT growth in commodities stocks will likely be led by upstream Oil & Gas (ONGC benefitting from stronger crude) and Metals (benefitting from strength in prices).

While Pharma and IT are seeing sequential recovery, the two are expected to be hit by INR headwinds yoy (rupee appreciated by ~5.7% in CY17). Owing to lack of meaningful launches in Pharma, we expect Nifty Pharma companies to post 25% yoy earnings decline. Nifty telecom players too could see a weak quarter, as reduction in interconnect usage charges and price erosion will continue to hit Average Revenue per User (ARPU).

Sales growth holds strong: Similar to Q2FY18, Nifty 50 sales are expected to grow 16% yoy in Q3FY18, led by stronger metals and crude oil. Consequently, commodity stocks are expected to post top line growth of 22% yoy. Also, consumption segment* is expected to see a top line growth of 12% yoy.

Operationally healthy quarter, Nifty margins close to topping out: In terms of operational strength, we expect Q3FY18 to be a healthy quarter with Nifty EBITDA (ex-financials) to report 19% yoy growth. Consumption EBITDA is expected to increase 14% yoy while commodities EBITDA is should post 23% yoy growth (led by stronger prices). We believe Nifty margins are close to topping out after expanding for last 6-8 quarters as higher commodities prices now add to the cost pressure.

Within Nifty, we like SBI, ONGC, HPCL, Hindalco Industries and Aurobindo Pharma, while Bajaj Auto continues to be our Top Sell (refer to our detailed top picks note published on 1st January 2018).

^ - Earnings estimates of Bajaj Finance, Bosch and Ibulls housing on Bloomberg consensus; *(Auto ex-Tata Motors and Consumer goods, ex Telecom)