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Earnings Preview (October - December 2019) - Outliers - Financials and Metals

We estimate flattish 0.5% yoy PAT growth within IDFC coverage universe^, driven by Financials, where growth is forecast at 17% yoy. Ex-Financials PAT is estimated to register 7.6% yoy decline, primarily led by weakness in metals and mining. Excluding metals and financials, we estimate 16.5% yoy PAT growth and 13% yoy EBITDA growth – the gap between the two arising from corporate tax rate cuts. Ex-Financials, IDFC universe sales growth should come in at 0.9% yoy, driven by weak economic backdrop and deflationary commodities.

We see Financials and Metals as two outliers this earnings season, with robust growth in Financials on lumpy recovery income but decline in metals on weak yoy prices during the quarter.

Lumpy recovery to aid 17% yoy PAT growth in FInancials: While core earnings in the financials sector could decline sequentially, we believe recovery income from NCLT and other means would more than offset the decline. Consequently, we expect financials to post strong PAT growth, in line with the previous quarters. Plus, we expect recovery income to also peak out this quarter. 

While Q3 is expected to be dismal for metals, we expect a recovery from Q4FY20 onwards: Companies within IDFC commodities space are expected to post an 8% yoy decline in topline, primarily  led by metals, which are expected to decline 11% yoy. Metals companies could register a 50% yoy PAT decline, impacted by operating leverage. Q3FY20 could be the trough for commodity prices, in our view, as we expect US-China trade war-related risks to come off. Consequently, metals companies should see a recovery in their performance Q4FY20 onwards, in our view.

Overall IDFC consumption* universe could post reasonable PAT growth on corporate tax cut, but demand conditions to remain challenging: IDFC’s consumption coverage universe is expected to post 17% yoy PAT growth, against EBITDA growth of 10% yoy. We attribute the difference in PAT and EBITDA growth to tax benefits accruing from corporate tax rate cuts announced in September 2019. While tax benefits for the retail sector are rather limited, the same are significant for other sub-segments of consumption-oriented companies. Our pre-quarter interaction with select managements indicates sustenance of difficult demand conditions with rural continuing to see much more deterioration than urban.

13 out of 17 sectors under IDFC coverage universe to post EBITDA growth, with about 10 reflecting double-digit growth: The breadth of growth seems reasonable with all sectors under IDFC coverage universe^, barring alcoholic beverages, pharma, media and metals, expected to post EBITDA growth.

Top picks that look good on Q3FY20E earnings: Aarti Industries, UPL, Asian Paints, Dabur, Ultratech, KEC, Crompton Consumer, Narayana Hrudalaya, Apollo Hospitals, L&T, Cipla, HDFC Bank, SBI and ICICI Bank.