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India Strategy: Q4FY19 Nifty results review - Overall a weak quarter, particularly for consumption; Financials mark recovery

Nifty PAT growth in Q4FY19 stood at 12%yoy. Excluding Yes Bank and Tata Motors (TAMO), Nifty PAT growth looked encouraging at 22%yoy, but was still ~3% below estimates. This quarter saw asymmetrical performance across themes, which was driven by key factors affecting respective segments: a) financials made a reasonable recovery despite a big miss on estimates, b) autos saw weak performance owing to tepid volumes and demand, c) consumer goods held up better than autos but performance at EBITDA level was weak as rural demand growth weakened, d) metals saw subdued performance (4%yoy decline in EBITDA, ~2% above estimates). Overall Nifty results missed PAT by ~6%, driven primarily by financials. Excluding financials and TAMO there is a beat of about ~2% on PAT. On EBITDA level, performance was marginally below estimates with 31 Nifty companies missing their EBITDA estimates, indicating persistent operational weakness. Overall commodities related sectors held up better than consumption related ones, with commodities companies posting 8%yoy growth in EBITDA against 4%yoy EBITDA decline in consumption related sectors. Overall FY19 saw ~6% rise in Nifty50 EPS, against expectations of 23%yoy growth observed in May, 2018, which was led by deterioration of demand environment seen in late 2018.

• Muted performance ex-financials: Q4FY19 Nifty PAT growth ex-Yes Bank and Tata motors stood at an encouraging 22%yoy. This number was led by financials primarily because of better NIMs and lower slippages (as system NPAs peaked out). Ex-financials & TAMO, Nifty PAT growth stood at a tepid 4%yoy
• 31 companies missed their EBITDA estimates compared to 25 companies that missed their PAT estimates, indicating broader operational miss: Overall Nifty PAT is 6% below IDFC estimates. The miss was primarily driven by Financials. Ex-financials and TAMO, Nifty PAT was ~2% above estimates. Nifty EBITDA ex financials & TAMO, saw a marginal miss of 0.4%. Also, 31 Nifty companies missed their EBITDA estimates against 25 companies that missed their PAT estimates, indicating persistent weakness at operational level. The highest miss in EBITDA estimates was led by consumption driven sectors – autos and consumer goods namely, thus resulting a 3% miss in consumption related EBITDA estimate.
• Commodities held up relatively better: Nifty commodity companies had 1% beat in EBITDA and 2% in PAT. Overall EBITDA growth for commodities companies stood at 8%yoy with ~1% decline in PAT. The good performance was led by cement as well as oil & gas & petrochemicals. While metals companies’ absolute performance was weak, it outdid IDFC estimates on both EBITDA and PAT level.
• Consumption sectors’ performance dismal: 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 consumption demand. Most of them indicated that slowdown in rural demand was much starker than urban segment of the economy, on their respective earnings calls. Overall consumption companies’ (ex-TAMO) EBITDA was down 4% while PAT was up 6%yoy (supported by other income and tax credits).
• Financials marks recovery, despite miss on estimates: Financials earnings performance saw a prolonged lull in recent years, which was led by mounting NPAs (in corporate as well as PSU banks). As system NPAs seem to have peaked and NIMs exhibit improvement, financials are expected to finally make a recovery in earnings in FY20, starting Q4FY19. While in terms of yoy growth, Nifty financials were the best performing sector in Q4FY19, but they still missed their PAT growth expectations by ~26%, led by Yes Bank, SBI, ICICI bank, IndusInd Bank and Axis bank. Excluding Yes bank, PAT miss stands at 16%. While a large miss in financials earnings indicates a slower than anticipated recovery in financials sector, but we have observed a sustained recovery in the corporate banks space, especially led by uptick in Industry credit o/s post a prolonged period of subdued growth
• Margins continue to see compression: With a volatile crude and lower profitability, we saw a compression pressure on margins persisting in Q4FY19. Ex-financials, Nifty EBITDA margins saw 93bp contraction yoy, while PAT margins saw 78bpyoy contraction. Including financials but ex-TAMO and Yes Bank, Nifty PAT margins improved by 86bp yoy, led primarily by financials.
• Expect investment revival to play out before consumption revival: In line with overall macro environment and expected policy direction by NDA-2, we expect investment related themes and corporate banks to do well. We expect consumption also to see a recovery, albeit with a lag though (our top picks note )