FREE

India Strategy: Nifty interim results update - Strong performance ex-OMCs

For 40 Nifty companies that have reported results so far, PAT has grown 2% yoy in Q3FY19 (in line with IDFC estimates). The weakness in Nifty results is primarily driven by dull results from OMCs owing to weaker GRMs and higher inventory losses (despite strong retail marketing margins). Ex-Oil & Gas, Nifty PAT grew (so far) at a reasonable 8.2% yoy (~2.5% above estimates). Ex-Oil & Gas, 23 and 30 out of 37 companies outdid their PAT and sales expectations, respectively, indicating a breadth in beat. FMCG, IT and Infrastructure sectors have emerged the strongest so far. While FMCG found support from stronger rural consumption, L&T and Adani Ports exhibited operational strength. Results of overall Nifty50 financials were in line with improvement in earnings quality across banks having a sizeable corporate loan book (SBI, Axis, ICICI Bank). We expect growth in overall Nifty earnings to settle at ~3% yoy for Q3FY19. 

Oil & Gas disappoints the most on inventory losses and weak GRMs: For 3 out 5 Oil & Gas companies that have reported results so far, absolute PAT was close to half of our estimated number (~48% miss) owing to higher inventory losses and weak GRMs in IOCL and HPCL. Although retail margins remain strong, fears of government intervention on pricing along with weak operating performance and volatile crude will outdo positives in the near term, in our view, playing heavy on OMCs overall performance. Consequently, our Oil & Gas team expects OMCs to remain under pressure over the coming 6-9 months.

FMCG, IT and Infra strongest sectors: While two infra companies reported 32% yoy ’ PAT growth, on strong operational performance (L&T on strong order inflows and execution and Adani Ports on strong cargo volumes and profile); FMCG and IT companies registered 15-17% yoy growth in PAT, with stable earnings profile. In particular, FMCG found good support from rural markets (compared to urban), which reaped benefits of overall stronger crop output in last 2 years; urban markets, on the other hand, have to deal with the high base of 7^th CPC payouts that has been implemented across all states.

Rural commentary relatively more positive than urban: We have been consistently highlighting strong consumption dichotomy (divergent performance in rural and urban markets), as exhibited by our high frequency scorecards ( and ). We expect rural consumption growth to outpace urban in near term, led by: a) a reasonable kharif harvest, b) uptick in agri and allied loans outstanding, c) broader reach of government schemes - where the dole out to poorer states has risen (money is reaching more number of people, prompting consumption of small-ticket items) and there is an added impetus from the recently announced PM KISAN scheme (). On the other hand, urban consumption will see a near-term impact of the benefits of the 7^th CPC coming into the base (adverse effect on sale of discretionary/high-ticket items); the same should normalise from mid-CY19 onwards. This dichotomy has sort of played out in consumer goods results so far, as seen from: a) HUL’s comment that rural has grown 1.3x that of urban, b) Maruti pointing to 13% yoy growth in rural markets (39% share in overall Maruti portfolio) versus urban, which was flat, c) Asian Paints mention that rural markets were “good” with only Hero Motocorp suggesting rural distress.

Peak NPLs behind us, qualitatively better earnings across banks: With a) overall system Gross NPAs coming down by 70bp sequentially in Sep-18 (as per as per RBIs Financial stability report, ) and b) an uptick in corporate credit uptick (details ) – we see corporate banks benefitting. Consequently, in current earning season, we have observed NPL recovery, stronger earnings outlook, expectations of improvement of ROE, ROCE across three biggest banks (with a reasonable corporate loan book) within Nifty universe – Axis, ICICI and SBI.

In line results so far; ex-Oil & Gas, there is broad-based beat: Overall Nifty PAT and EBITDA are in line with estimates, while sales growth outdid expectations by 5% yoy. OMCs were the biggest drag on results; excluding Oil & Gas, Nifty PAT exceeded estimate by 2.4% . In fact, the nature of beat here was relatively more broad based with 23 and 30 out of 37 companies outdoing their PAT and sales expectations, respectively.

Adjusting for all the reported results, we expect Nifty50 to record ~3% yoy PAT growth in Q3FY19, in line with our earlier estimates.

IDFC Top picks: Within Nifty50, we like ICICI Bank, Maruti, L&T, Asian Paints, GAIL and Hero Motocorp.