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India Strategy: Nifty Q4FY18 Review; Earnings performance (ex-Financials) better than expectations

Nifty 50 PAT declined 1.3% yoy against our expectation of 1.5% yoy growth in Q4FY18. The weakness in earnings was led by accelerated NPA recognition in banks, weakness in Oil & Gas segment, one-offs in few companies and a high base. Ex-financials and Oil & Gas, Nifty PAT increased 9.8% yoy versus our expectation of 6.3% yoy growth. Overall, Q4FY18 was an operationally strong quarter with an EBITDA (ex-Financials) growth of 17.8% yoy and an EBITDA margin expansion of 39bp. However, given the strength in commodity prices and WPI series, we expect EBITDA margins to top out this quarter. Consumption was the best performer, propelled by volume growth and market share gains while commodities saw a moderate PAT growth of 7.6% yoy (set back from weak company results in Oil & Gas and cement). As a result, FY18 Nifty 50 EPS grew at 5% yoy; we estimate 20% yoy growth in FY19E EPS.

Ex financials, ex-Oil & Gas PAT is above estimates despite a weak start: Though the earnings season started on a weak note (refer to our interim review note here), the second half of the earnings season picked up well with ex-financials and ex-oil & gas Nifty PAT/EBITDA surpassing overall estimates by 2% each. However, overall Nifty 50 PAT came in 6% below estimates, deterred by accelerated NPA recognition and one offs in Cipla, Vedanta, Zee, etc.

Accelerated NPA recognition led to a 31% yoy decline in Nifty 50 financials earnings: We saw accelerated NPA recognition across banks (Axis, ICICI, SBI) this quarter, which we believe is good for the long run, but is associated with short-term pain (loss/profit decline). Consequently, overall earnings in Nifty 50 financials declined 31% yoy this quarter (~34% below estimates).

Consumer segment shines but commodities posted moderate PAT growth: Consumer segment (Autos, Consumer goods: ex-Telecom and ex-Tata Motors) was the best performer in Q4FY18 with 23% yoy growth in PAT and 25% yoy growth in EBITDA. The growth in consumption segment was led by volume growth, market share gains and stronger demand – which we view as a direct result of strong consumption demand being fulfilled through domestic manufacturing (refer to our note: Economy gathers steam) along with an accelerated move from unorganized to organized. Commodities, however, posted moderate 8% yoy PAT growth led by a high base and inventory effects in the Oil & Gas sector and one-off JPA acquisition capital charge in Ultratech. Commodities, however, posted 28% yoy EBITDA growth, indicating underlying strength in the business. 

Margins to top out this quarter as cost pressure builds up with stronger commodities: As stronger commodities have started putting pressure on costs across companies and Q1FY19 WPI inflation has been surprising on the upside, we expect EBITDA margins to top out in Q4FY18. EBITDA margin expanded 39bp yoy to 17.2% in Q4FY18. PAT margins, however, shrank 156bp yoy (to 9.7%) this quarter, led primarily by one offs across companies.

Operationally strong quarter: Overall Q4FY18 was an operationally strong quarter with ex financials EBITDA growth for Nifty settling at 18% yoy. All sectors posted EBITDA growth except Telecom (as a result of RJio led disruption in the sector). Overall, Nifty (ex-financials) EBITDA was 1% above estimates led by commodities segment which reported a 4% beat on EBITDA estimates.

Downgrades continue to outpace upgrades, but downgrades/upgrades ratio sees a mild improvement qoq: 25 Nifty companies downgraded their FY19E EPS against 12 companies, which upgraded the same. This brings downgrade/ upgrade ratio to 2.1, which is mildly better than 2.4 which we saw last quarter (Q3FY18). 

Nifty 50 FY18 EPS growth settles at 5.2% yoy with 20%/24% yoy growth expected in FY19E/FY20E: We maintain our Nifty target range as 11550-11980 for Mar 2019 (more details here). Within Nifty we like Coal India, HPCL, Hindalco, NTPC, Hero Motocorp, Eicher Motors, HDFC Bank and Maruti.