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MOSL: INDIA STRATEGY | 3QFY18 Earnings Review-Earnings picture getting brighter

INDIA STRATEGY | 3QFY18 Earnings Review: Earnings picture getting brighter

 

Ten key takeaways from 3QFY18

• After beginning on a strong note, the 3QFY18 earnings season lost sheen toward the end, led by disappointment from heavy-weights like SBI, Tata Motors, Lupin and ONGC. However, what’s more encouraging is that the earnings picture is getting brighter, with the recovery expected to gather pace in FY19. Key trends of 3QFY18: 1] Recovery in consumption-oriented sectors, with a broad-based volumes pick-up in Staples, Discretionary, Cement and Auto, albeit on a low base of demonetization and upbeat commentary on rural consumption. 2] Sequential asset quality improvement and a decline in slippages in Private banks, even as PSU banks posted a mixed performance on the asset quality front. 3] Semblance of a recovery in order inflow for Infrastructure/Construction/Capital companies after the GST-related pangs of 2QFY18. 4] Optimistic commentary in IT sector after a while, even as 3QFY18 saw a good beat from tier-II IT names.
• While aggregate sales and EBITDA were in line, profits missed our estimates. The miss at the PAT level for both MOSL and Nifty Universe can be entirely ascribed to PSU Banks – elevated provisions and MTM losses in the bonds portfolio dragged the bottom line.
• Proportion of companies reporting a PAT decline (at 29% of our MOSL Universe) is at a 12-quarter low. Within our MOSL Universe, out of the 19 sectors we track, 4/7/8 posted profits that were above/in-line/below our expectations. The surprise/miss ratio at 0.9x deteriorated sequentially.
• Technology was the surprise package of this earnings season. While the aggregate performance was in-line and flattish, it belies the healthy internals. 11 out of 15 companies, mostly tier-II IT, in our universe have exceeded our PAT expectations.
• Global Cyclicals single-handedly drove the quarterly performance, led by Metals and OMCs. Defensives posted the fifth consecutive quarter of earnings decline, dragged by Healthcare and IT, while Domestic Cyclicals posted an 18% YoY PAT decline.
• Within Domestic Cyclicals, Auto, Cement, Private Banks and PSU Banks posted weaker-than-expected PAT growth.