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India Strategy: Q4FY19 Interim Nifty earnings review - Tepid earnings season so far

For 27 Nifty50 companies that have reported results so far, their PAT has increased by 24%yoy, ~6% below IDFC estimates. Though financials have been amongst the best performing sector so far (recovery post prolonged lull), they led the miss in expectations (15% miss in IDFC PAT expectations so far, ex-Yes Bank). Ex-financials, Nifty PAT growth stands at 5%yoy so far (~6% above estimates). Within consumption 8 out of 10 companies have reported results so far. For these (consumption oriented companies), slowdown has expanded from discretionary items (observed two quarters back) to staples this quarter, with 2% decline in EBITDA (6% below estimates). While slowdown in consumer staples was led by tighter liquidity, high base and prolonged winter, most of the companies commented on rural demand moderation in their respective earnings concall. Next leg of Nifty earnings season comprises of asset heavy sectors (Oil & Gas, Power) and Pharma, which are cumulatively expected to see 2%yoy decline in PAT, leading to a Nifty50 PAT growth of 15%yoy in Q4FY19, against 20%yoy growth expected earlier.

Pain in consumption expands to staples, worse than earlier expected: Consumption slowdown seen in high ticket size/ discretionary items, two quarters back has expanded to small ticket size items too. This was further worsened by liquidity crunch and prolonged winter in Q4FY19. While limited liquidity impacted the stocks with wholesalers, prolonged winter led to delay in shelving of summer products, which are typical contributors to Q4 volumes. Most of the FMCG and autos companies indicated a slowdown in demand led by rural segment of the economy, much starker than that of urban segment of the economy. 8 out of 10 consumption companies in Nifty have reported results so far, with 2%yoy decline in EBITDA, ~5.7% below IDFC estimates. We are looking at EBITDA here (and not PAT) as FMCG companies benefited from tax credits and ITC from other income, which masked weak operational growth, when PAT is analysed.

Financials miss estimates, indicating a slower recovery: Financials earnings performance saw a prolonged lull in recent years, led by mounting NPAs (in corporate banks as well as PSU banks). As system NPAs peak, financials are expected to finally make a recovery in earnings in FY20, starting Q4FY19E. While in terms of yoy growth, Nifty financials have been the best performing sector so far, but they still missed their PAT growth expectations so far by ~34%, led by Yes Bank, SBI, ICICI bank and Axis bank. Excluding Yes bank, PAT miss stands at 15%. While a large miss in financials earnings indicates a slower than anticipated recovery in financials sector, but ICICI bank posted good quality earnings while Axis Bank posted mixed quality earnings

Margins continue to see compression: With a volatile crude and lower profitability, we saw a compression pressure on margins so far. For 19 ex-financials Nifty stocks that have reported earnings so far, EBITDA margins have seen 123bp contraction yoy, while PAT margins have seen a 68bp contraction. However, given the improving profitability in financials sector, overall Nifty PAT margins (including financials) have improved by 110bp for 27 companies that have reported results so far.

Next leg of earnings to be driven by asset heavy sectors: Next leg of earnings season is expected to be driven by asset heavy sectors like – Oil & Gas, Ports and Power along with Pharmaceuticals. These sectors are expected to have a rather tepid quarter with 2%yoy decline in earnings for 22 companies that are yet to report the results.

Final Q4FY19 Nifty earnings growth estimate: Adjusting for the results of 27 companies that have reported their results so far, we expect Nifty PAT to settle at 15%yoy growth against 20%yoy growth expected at the start of the earnings season. For the companies that have reported results so far, Sales and EBITDA continue to be with +/-2% range of original estimate. Hence, for Nifty 50 companies we expect sales growth to settle at 10% and 7%yoy respectively, similar to original estimates.

IDFC top picks: With in Nifty ICICI Bank and L&T are our top picks. Other than that we have ACC, Aurobindo Pharma, Aarti Industries, KEC International, IEX and NCC in our top picks.