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Earnings Preview (Oct - Dec 2018) - Muted quarter on a high base and inventory losses in OMCs

We expect Nifty earnings see muted 2.6% yoy growth, largely on the back of a high base (23%yoy growth in Q3FY18) and expected inventory losses in Oil Marketing Companies (OMCs).  For Nifty50, PAT CAGR over Dec 2016-18 stands at ~13% yoy, indicating a relatively healthy growth. Also, ex-Oil & Gas and Petrochemicals, Q3FY19 PAT growth is expected at 7% yoy (15% CAGR over Dec 2016-18). Within Nifty50, we expect FMCG, Infrastructure and IT Nifty 50 stocks to exhibit stable growth (in mid-teens), while autos are expected to see negative impact from weak volumes during the quarter and a high base in Dec 2017 (owing to demonetisation in Nov 2016). Sales growth of Nifty 50 companies however, is expected  to be robust, led primarily by commodities on account of higher realisation in metals space and volume growth along with mild yoy increase in realisation for cement companies. Nifty 50 consumption* companies are expected to post 10% revenue growth, led by consumer goods/retail companies registering reasonable volume as well as realisation growth, while auto sales are expected to be weak on lower volumes .

 

Consumption dichotomy to continue, as staple consumption is expected to do well while discretionary consumption is expected to be weak: Nifty consumption* companies are expected to post mere 1.1% yoy PAT growth during Q3FY19, with divergent trend exhibited by consumer discretionary and staples (similar to last quarter). High-ticket consumption items (discretionary products) have seen  weakness in last 4-5 months on account of weak demand, led by phasing out 7^th central pay commission (CPC) benefits along with higher interest rate and oil price environment experienced until Nov 2018. On the other hand, staples/ lower ticket-size consumption items continue to find support from rural markets, as rural growth continues to outpace urban on a relative basis (more details on consumption dichotomy ).

 

PAT of commodities companies is expected to decline 8% yoy, led primarily by inventory losses in OMCs: Though OMCs are expected to post inventory losses, led by weaker crude prices (down ~34% from peak), we expect retail marketing margins to surprise on the upside. However, overall, we expect Nifty 50 Oil & Gas universe to post 27% yoy decline in PAT, led by 3 OMCs (BPCL, HPCL, IOCL). Metals are expected to remain weak led by Vedanta (overall weakness in zinc, aluminium and shut down of copper segment) and JSW Steel (one-off tax benefit in the base).

 

Broader IDFC universe to exhibit similar trends : The broader IDFC coverage universe should exhibit a similar trend (in line with Nifty50), with commodities seeing 11% yoy PAT decline (led by 27% PAT decline in Oil & gas companies) and muted 1.5% yoy PAT growth in consumption* (with autos reporting 8% yoy decline in PAT but 13% yoy PAT growth in consumer goods). Overall, we estimate 5% yoy PAT growth in the IDFC coverage universe in Q3FY19.

 

IDFC Nifty picks : We like ICICI Bank, Maruti, L&T, GAIL, Hero Motocorp with in Nifty.