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MOSL: INDIA STRATEGY | 1QFY20 PREVIEW-Last man standing! Banks continue dominating earnings revival

INDIA STRATEGY | 1QFY20 PREVIEW: Last man standing! Banks continue dominating earnings revival

 

Politics behind; Focus shifts to fundamentals; Banking-led earnings recovery in FY20

• The much-awaited event of 1HCY19 – the General Elections – turned out to be favorable for the market with Mr Modi winning a strong mandate. However, ‘politics’ has now taken a backseat and the focus has shifted to fundamentals amidst a weaker backdrop for earnings in general and Consumption in particular. There has been no respite on the slowdown narrative, with several high frequency indicators and corporate commentaries pointing toward a weak backdrop as we enter into the first earnings season of FY20. That said, there are some small silver linings. First, the cost of capital has fallen, led by the 75bp repo rate cut by the RBI since Feb’19 and the general dovish commentaries by global central banks. Second, in its maiden budget delivered last week, the government has announced an initiative to tap the overseas markets to meet part of its borrowing needs. This should augur well for the interest rate and liquidity environment in India and also strengthen currency, in our view.
• The 1QFY20 earnings-report season will likely be a repeat of 4QFY19, with Financials driving the performance singlehandedly. Corporate banks will account for entire growth in the Nifty and the broader MOFSL Universe’s earnings. Autos will have another lackluster quarter. IT sector profit growth will come off in this quarter. Consumer sector is also expected to report a muted quarter.
• We expect MOFSL Universe PAT to grow 7% YoY, led by Financials and dragged by Metals. Global Cyclicals are likely to post a decline of 16% in profits, while Defensives are expected to post flat profits YoY. Domestic Cyclicals will post 49% YoY jump in PAT. MOFSL ex-OMC and PSU Banks PAT growth is estimated to be absolutely flat. Our FY20/21 Nifty EPS estimates have been cut by 3.4%/2.1% to INR583/INR691 (prior: INR604/INR706). We are now building in EPS growth of 21.1%/18.5% for the Nifty for FY20/21. Excluding corporate banks, we are expecting 7.5% profit growth for the Nifty in FY20.
• Markets meanwhile remain volatile, with mid-caps continuing to underperform large-caps. The picture has turned polarized even in the Nifty, with a few stocks accounting for the gains in the benchmark (highlighted in detail in ). On balance, the risks to earnings remain tilted toward the downside, given the still weak underlying demand scenario and lack of private capex recovery. The earnings growth recovery in FY20 is likely to be narrow and predominantly led by Financials, even as Global Cyclicals drag and Consumption-oriented sectors post deceleration in earnings. At 19.8x FY20 EPS, we believe Nifty valuations are rich and offer limited room for re-rating.