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India Strategy: Nifty Interim Review Q4FY18; Operationally strong quarter so far

Nifty PAT has been flattish yoy (a mild 0.2%yoy uptick) for 27 out of 50 companies that have reported results so far. The weakness in results is led by accelerated NPA recognition and clean up in ICICI and Axis Bank. Excluding financials, Nifty PAT growth so far stands at 8.1%yoy. Also, further on the upside, Q4FY18 so far has been an operationally strong quarter with an ex-financial EBITDA growth of 17.6%yoy (which is ~3% above estimates). Though PAT growth is ~7% below estimates, it’s primarily led by one offs across companies. Also, we expect Nifty margins to have topped out last quarter as one offs and strengthening commodities start putting downward pressure on margins starting Q4FY18. We update our Nifty PAT growth estimate to 3.6%yoy (ex-financials and Oil & Gas), against an earlier expected growth of 6.3%yoy. 

Operationally strong quarter with strong EBITDA growth so far: Ex-financials EBITDA (for 19 companies that have reported so far) has increased by 17.6%yoy. Except, Telecom and Pharma, all sectors (total of 11) have reported EBITDA growth, indicating an operationally strong quarter with a broad based underlying strength.

Commodities and Consumer segments – the star performers: Both consumption and commodities, so far, have exhibited a PAT growth of 25%yoy and 17%yoy respectively. While commodities companies saw support from stronger prices, consumer companies saw support from overall volume growth, market share gains and stronger demand.

PAT so far below estimates (led by one offs mostly), EBITDA beats estimates: EBITDA numbers so far are 3% above estimates, further reinforcing our argument of an operationally strong quarter. PAT numbers however are 7% below estimates, primarily led by one offs in Vedanta, Zee and accelerated NPA recognition by Axis bank. Sales growth so far has been in line with estimates and stands at 19%yoy.

Ex financials and Oil & Gas (O&G), expect Nifty PAT growth to settle down at 3.6%yoy: Taking into account the reported results, we revise our overall Nifty PAT growth estimate to a decline of 2.9%yoy (against an expected growth of 1.5%yoy earlier). The decline is expected to be led by banks and O&G Sector and taking these two out, we expect a PAT growth of 3.6%yoy (against an earlier expectation of 6.3%yoy growth).

Margins seem to have topped out; Expect margins to see pressure led by one offs this quarter and rising commodities (Q1FY19 onwards) – We expect Nifty profit margins to have topped out last quarter as we expect this quarter to see pressure from one off exceptional items (so far PAT margins have come off by 276bp) and rising commodities, which have already started putting pressure on EBITDA margins (48bp decline so far). We expect cost pressure to further worsen in Q1FY19 (led by stronger commodities and hardening of wholesale price inflation, WPI).