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India Strategy: Nifty Interim Review Q1FY19; Consumption leads - rural consumption outpaces urban

For 30 out of 50 companies that have reported results so far, Nifty PAT exhibited 7% yoy growth with ex-financials growth at 14.4% yoy. Consumption remained the strongest at 21%/14% yoy EBITDA and PAT growth, respectively. Our in-depth analysis of numbers combined with management commentaries point to strong rural consumption momentum (in line with our view so far, “”). Also, overall, the quarter continues to be strong operationally with 25% yoy EBITDA growth for companies that have reported results so far. We expect Nifty PAT growth to settle at 17% yoy (versus 20% yoy earlier) as ICICI Bank and Tata Motors (TAMO) have surprised on the downside.

Rural consumption growth outpaces urban: Nifty Consumption stocks posted 21%/14% yoy EBITDA/PAT growth, driven by strong performance in automobiles and FMCG sectors. Volume growth has been strong across both Nifty as well as our coverage universe, and is so far above expectations. Management commentaries reinforce our thesis of rural consumption outpacing urban in FY19.

FMCG companies see expansion in PAT margin:  While most sectors faced pressures on PAT margins, led by rising costs, lower other incomes, etc, the FMCG universe within Nifty saw PAT margin expand by 457bp on better product mix, GST-led benefits, cost efficiencies and superior volume growth. We expect earnings of consumer goods companies to outperform in FY19, driven by margin expansion and rural growth prospects. 

The drag in financials was led by ICICI Bank: Companies within Nifty financials (11 out of 14 that have reported results so far) witnessed 6% yoy decline in PAT. While Axis and ICICI Bank led the decline, ICICI Bank’s earnings were the major negative surprise (driven by high-ageing provisions for NPLs and MTM loss).

Results (ex-financials, ex-TAMO) above estimates so far: Ex-financials, ex-TAMO PAT came in 3% above estimates. Also, overall Nifty EBITDA (ex-financials) was 2% above estimates, indicating a reasonable broad-based earnings performance. However, losses posted by ICICI Bank and Tata Motors versus  expectation of profits led to overall Nifty PAT 6% below estimates (for 30 companies that have reported so far).

Growth expectations for Nifty downgraded, as ICICI Bank and Tata Motors disappoint: We expect overall 17% yoy growth in Q1FY19 Nifty PAT versus 20% yoy growth expected earlier. Also, ex-financials, we estimate Nifty PAT and EBITDA growth of 29% and 31% yoy, respectively (against 31% expected earlier).

IDFC top picks within Nifty: Maruti, HeroMotocorp, IndusInd Bank, Coal India, NTPC and GAIL feature in IDFC top picks.