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MOSL: INDIA STRATEGY | 1QFY19 PREVIEW-‘Recovery’ ball starts rolling-Confidence on earnings recovery improving

INDIA STRATEGY | 1QFY19 PREVIEW: ‘Recovery’ ball starts rolling; Confidence on earnings recovery improving; it’s a story of improving micros and challenging macros

 

Earnings rebound aided by a low base and Global Cyclicals; Technology to stage a strong comeback

• As we commence the earnings journey of FY19, the overall picture is looking brighter, even as macros have deteriorated amid a volatile global trade environment. The confidence on earnings recovery is higher today than any time in the recent past. The story continues to be a case of improving micros and challenging macros (crude oil price inflation, currency, rising bond yields). From an earnings viewpoint, we believe that FY19 will be characterized by [a] bottoming out of asset quality pressures for PSU Banks and Private Corporate lenders, and normalization of provisioning costs toward the latter half of FY19, [b] strengthening consumption trends in an election year, with forecast of a normal monsoon and multi-year-high MSP hikes announced by the government. Consumption, both rural and urban, will be an engine of growth this year, [c] earnings rebound from hitherto laggard sectors like Information Technology and Healthcare, [d] continued lackluster trend in broader private capex as yet, even though some segments of industrial capex have shown a pick-up (Steel, Cement, Refining).
• Overall, we continue expecting FY19 to herald the earnings recovery for India, although the market will remain distracted by several global and local macro events such as the ongoing global trade war, US Fed rate increase cycle, potential moderation in domestic equity flows, and political developments around CY19 general elections.
• As far as the 1QFY19 earnings season is concerned, it will benefit from the favorable base of 1QFY18, when pre-GST destocking by trade had impacted the performance of several sectors like Auto, FMCG, Retail, Healthcare and Cement. Global cyclicals like Metals and Oil & Gas will continue leading from the front and contribute more than half of the incremental profits for MOSL universe.