FREE

MOSL: INDIA STRATEGY | 2QFY19 PREVIEW-Correction everywhere; Recent macro events raise risk to earnings recovery in 2HFY19

INDIA STRATEGY | 2QFY19 PREVIEW: Correction everywhere; Recent macro events raise risk to earnings recovery in 2HFY19

 

INR weakness driving earnings of IT, Global Cyclicals; Domestic businesses face growth headwinds

• 2018 is turning out to be a year of sharp volatility and across-the-board correction in Indian equities – Nifty-50 is down by 12%, Nifty mid-cap index by 26% and Nifty small-cap index by 40% from their yearly highs. While FIIs have been net sellers of USD3.6b in CY18YTD, DIIs have remained on buying spree with net flows of USD13.4b in CY18YTD after an inflow of USD14b in CY17. We, however, note that DII flows have moderated in recent months.
• Rising crude prices and sharp INR depreciation (-16% in CY18YTD – the worst since 2011) have impacted investor sentiment of late. Recently, the fear of tight liquidity and higher interest rates is adversely impacting several domestic-oriented sectors, which were the key to FY19 earnings recovery. NBFCs, in particular, will see downgrades after many years of strong growth, in our view.
• The 2QFY19 earnings-report season is likely to mirror the trend of the previous quarter, albeit with a reduced impact of a favorable base. Global Cyclicals like Metals and Oil & Gas will continue leading from the front and contribute three fourths of incremental profits for the MOSL Universe.
• Rural Consumption recovery is expected to continue, with Consumer Staples (FMCG) likely to post fifth straight quarter of double-digit profit growth. NBFCs should report strong growth in 2QFY19, as most headwinds emerged only toward the quarter-end – the impact will be evident in 2HFY19 estimates (NBFCs now form 6% of MOSL Universe profit pool v/s 1.6% in FY08). IT appears set for multi-quarter-high profit growth, driven by a strong operational performance and currency tailwinds. We estimate PAT CAGR (FY18-20) of 13% for our IT Universe (v/s 5% over FY15-18). Although Corporate Lenders are likely to report another quarter of subdued earnings, the operational trends are improving.