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India Strategy: Nifty Q3FY18 Interim Review – Better than expectations

24 out of 50 Nifty companies have reported results so far with their PAT* (ex Infosys, ex HDFC Ltd) having increased by 17% yoy, 7% above IDFC estimates. PAT growth for all 24 companies stood at 35% yoy. Of the 24 companies, 15 reported PAT higher than their estimates, pointing to a robust earnings season so far. Earnings growth in the commodities sector was the highest, followed by consumer goods (supported by cost control-led margin expansion and demonetization in base) and financials (strong retail credit growth). Even after adjusting for one-off gains across companies, we observe that growth is wide spread and backed by strong underlying economic activity. Consequently, we expect Nifty PAT (ex-Infosys, ex-HDFC Ltd) growth to settle at 20% yoy for Q3FY18 (31% yoy for all companies against 21% yoy expected earlier).

Commodities lead Nifty earnings growth: PAT of commodity companies (only three companies have reported so far) grew 28% yoy, with a top line growth of 24% yoy during the quarter. So far, it is the highest growth sub-segment within Nifty (adjusted for exceptions). Reliance and IOCL too reported stellar results led by stronger crude leading to inventory gains and higher-than-expected gross refining margins (GRMs).

Margin expansion continues, led by cost control in consumer goods: Nifty PAT margin (ex HDFC Ltd, ex Infosys) expanded 52bp and Nifty ex financials EBITDA margins expanded 133bp during the quarter. The consumer goods sector led the margin improvement, wherein margins of all three companies, ITC, HUL and Asian Paints expanded, on the back of cost control (despite rising raw material costs). Moreover, with demonetization in the base during the quarter, consumer goods ex ITC revenues grew 11% yoy (as GST-based adjustment led to a decline in ITC’s revenues this quarter) and overall Nifty consumer goods PAT (including ITC) grew 18% yoy.

Financials post strong results while IT was a mixed bag: Ex HDFC Ltd, PAT of Nifty50 Financials (7 out of 10 companies) grew 23% yoy (earnings growth was 70% yoy if we include HDFC Ltd). Most of the banks within Nifty 50 are private banks having a strong retail presence and reported strong operational growth on back strong retail credit, followed by housing finance companies finding impetus from RERA and Affordable housing scheme.

Results of all 5 Nifty 50 IT companies have reported mixed results (Wipro and TCS posted a decline, while Tech Mahindra posted a good operational performance). Ex Infosys, PAT of 4 IT companies grew 0.7% yoy (including Infosys, growth was at 18% yoy).

Q3FY18 Nifty PAT growth estimated at 20% yoy (ex-Infosys, ex HDFC Ltd): We expect Nifty 50 (ex HDFC Ltd, ex Infosys) PAT growth to settle at 20% yoy (31% yoy for all companies) versus our earlier expectation of 16% yoy (21% for all companies included).

Nifty top picks: Given the underlying strength across most sectors, we reiterate our March 2018 Nifty target of 11300. IDFC top picks within Nifty 50 are SBI, ONGC, HPCL, Hindalco Industries and Aurobindo Pharma. Bajaj Auto is our top Sell within Nifty 50.