FREE

India Strategy: Q3FY19 Nifty results review - Staples consumption and Infrastructure lead while OMCs disappoint

Q3FY19 PAT of Nifty50 companies grew 3% yoy (in line with IDFC estimates). Weak GRMs and high inventory losses at OMCs along with a high base (Q3FY18 Nifty PAT grew at 23% yoy) resulted in the weak PAT growth at 3%. Ex-Oil & Gas & TAMO, Nifty PAT grew at a reasonable 9% yoy (~2% above IDFC estimates), with 28 and 33 out of 44 companies outdoing their PAT and sales expectations, respectively, indicating a breadth in beat. However, despite overall inline results, the spree of downgrades continued. Nifty PAT downgrades continued to outdo upgrades with Nifty PAT downgrades to upgrades ratio at 1.8x in Q3FY19 driven by maximum downgrades in Autos, OMCs, Metals and Financials. Consequently, Nifty FY19E/20E EPS saw 5%/3% downgrade to Rs498 and Rs636, respectively. FMCG, IT and Infrastructure emerged as the strongest and operationally most stable sectors. While FMCG found support from relatively stronger rural consumption (when compared with urban), L&T and Adani Ports exhibited operational strength. Though overall Nifty50 financials results were in line, we observed improvement in earnings quality across banks with sizeable corporate loan book (SBI, Axis, ICICI Bank). Within Nifty 50 we like, ICICI Bank, Maruti, L&T, Asian Paints, GAIL and Hero MotoCorp.

Overall Nifty results in line, with a PAT beat ex-Oil & Gas and TAMO: Nifty50 PAT grew 3% yoy in Q3FY19, in line with IDFC estimates. The overall weakness in Q3FY19 Nifty PAT growth can be attributed to OMCs (on account of higher inventory losses and weaker GRMs, despite higher gross refining margins) and a high base in Q3FY18 (23% yoy growth in Nifty PAT). Ex-Oil & Gas & TAMO, Nifty PAT grew at a reasonable 9% yoy (~2% above IDFC estimates), with 28 and 33 companies (out of 44) beating PAT and sales expectations, respectively, indicating a breadth in beat.

Despite overall in line results, we saw spree of earnings downgrades continue: Despite in line results, we saw spree of earnings downgrade continue in this quarter, with earnings downgrades at 1.8x that of upgrades. Autos, OMCs, Metals and Financials saw maximum downgrades. For FY19E and FY20E, Nifty 50 PAT was downgraded by 5% and 3% to Rs498 and 636, respectively.

Margins across sectors squeeze as prices of commodities peak in Q3FY19; we expect sequential improvement in Q4FY19E: We saw Nifty PAT and EBITDA margins shrink this quarter (both sequentially and yoy), as commodity costs peaked. While Nifty PAT margin squeezed 184bp, EBITDA margin shrank 410bp yoy. Cement, Media, Pharma and Infra were the only sectors that saw yoy PAT margins expand. We expect PAT margins to improve in Q4, as key commodity prices have eased on global growth concerns.

FMCG, IT and Infra strongest sectors: While two infra companies’ PAT grew 32% yoy, on account of strong operational performance (L&T on strong order inflows and execution and Adani Ports on strong cargo volume and profile), PAT of FMCG and IT companies grew 15-17% yoy, with a stable earnings profile. FMCG particularly has seen higher support from rural markets (compared to urban) as they reap benefit of overall stronger crop output in last 2 years while urban markets deal with a high base owing to 7^th CPC pay-outs that is finally fully implemented.

Rural commentary relatively more positive compared to urban: Over the last few months we have been highlighting a strong consumption dichotomy (divergent performance by rural and urban markets), as exhibited by our high frequency scorecards (). We have been expecting rural consumption growth to outpace urban in the near term, led by: a) a reasonable kharif harvest, b) uptick in agri and allied loans outstanding, c) broader reach of government schemes - wherein dole out to poorer states has gone up (money is reaching more number of people, prompting consumption of smaller ticket items) and there is an added impetus from recently announced PM KISAN scheme (our detailed report on it impact here: ). On the other hand, urban consumption is expected to see an adverse impact of 7^th CPC benefits coming into the base (adversely impacting sales of discretionary/high ticket items), which we expect to normalise mid-CY19 onwards. This dichotomy  has sort of played out in consumer goods results where: a)  HUL mentioned that rural growth was 1.3x urban, b) Maruti said that rural markets (39% share in overall Maruti portfolio) grew 13% yoy while urban was flat, c) APNT mentioned that rural markets were “good” with only Hero Motocorp pointing rural distress.

Oil & Gas disappoints the most on inventory losses and weak GRMs: For Oil & Gas companies, PAT missed IDFC estimates by about 21% on the back of higher inventory losses and weak GRMs in IOCL and HPCL. Though 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 – thus expected to play heavy on OMCs share price performance. Consequently, our Oil & Gas team expects OMCs to remain under pressure over the next 6-9 months.

Peak NPLs behind us, qualitatively better earnings across banks: With a) overall system Gross NPAs coming down by 70bp sequentially in Sep 2018 (as per ) 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 Nifty banks with strong corporate loan book (ICICI, SBI and Axis Bank).