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MOSL: INDIA STRATEGY | 1QFY18 Earnings Review-Weak start to FY18-Earnings recovery remains elusive

​INDIA STRATEGY | 1QFY18 Earnings Review: Weak start to FY18; Earnings recovery remains elusive

Ten key takeaways from 1QFY18

• The 1QFY18 earnings season marked another quarter of weak performance and a subdued start to FY18. The performance was also hit by GST-related de-stocking in several consumer-oriented sectors – Auto, FMCG, Healthcare and Consumer Durables. Destocking-driven volume/top-line miss exacerbated the impact at EBITDA level, as it resulted in operating de-leverage. Several companies compensated dealers/distributors for taxation hit due to GST.

• Underlying operating performance remains weak. 44% of our Universe reported a profit decline – a trend similar to 4QFY17.

• 1QFY18 performance in a way makes the FY18 earnings recovery thesis that much more challenging. We expect GST-related volatility to continue even in 2QFY18 before the low base of demonetization in 2HFY17 comes to the rescue.

• The 1QFY18 miss at the Nifty PAT level is accounted for by just five companies – Tata Motors, IOC, BPCL, Sun Pharma and Bharti Airtel.

• Domestic Cyclicals drove the quarterly performance, aided by a low base. Defensives posted another quarter of earnings decline, dragged by Healthcare. Metals stood out with earnings growth significantly above expectations.

• Consumer sector posted marginal but first PAT decline (-0.2% YoY) in 25 quarters.

• The impact of GST-related destocking was witnessed the most in sectors like Auto, Healthcare and Consumers.

• Healthcare reported another washout quarter, with a 48% YoY decline in profits – a significant miss.

• Operating margin for MOSL Universe (Ex- OMCs, Financials) contracted 180bp YoY to 19.6% (Est. 20.5%), exacerbated by GST-related destocking.

• Earnings downgrade/upgrade ratio is still skewed in favor of downgrades, with 81 companies seeing earnings cut of 3%+ and 38 companies seeing earnings upgrades of 3%+. We marginally cut Nifty EPS by 2.6% for FY18E, but keep FY19E EPS unchanged. We now expect Nifty EPS to grow 14% to INR484 in FY18 and 24% to INR602 in FY19.