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MOSL: INDIA STRATEGY | 3QFY19 PREVIEW-New Year, New Forces-Macros turn benign, micros deteriorate

INDIA STRATEGY | 3QFY19 PREVIEW: New Year, New Forces; Macros turn benign, micros deteriorate; Financials hold key for earnings hereon

 

CY19 starts with benign macros, an uneventful quarter on the anvil  

• CY18 turned out to be a year of modest returns and elevated volatility across the board for the Indian markets. Macro headwinds blew fiercely for large part of the year, accompanied by first FII outflows in seven years, even as DII flows stayed robust. Nevertheless, when looked in the context of the other major global markets, India did relatively well, even as mid-caps and small-caps logged in a sharp underperformance versus large-caps.
• The situation on the macro front has turned favorable over the last three months, with a sharp correction in crude oil prices, followed by a bounce-back in currency and a moderation in 10-year G-sec yields. However, the micro situation appears a tad weaker, given the slowdown in auto numbers, rising cost of funds and liquidity issues in the NBFC sector, and a correction in global commodity prices. We expect 2019 to be a year of two halves, especially with uncertainty related to the outcome of the crucial general elections scheduled in April-May’19 keeping the markets volatile in the first half of the year.
• In our view, the 3QFY19 earnings-report season will be a lackluster one. Global Cyclicals like Metals and Oil & Gas – the drivers of earnings growth over the last few quarters – are looking jaded, given the correction in commodity prices. Trends for Automobile have worsened at a fast clip, with a sharp moderation in volumes/profit growth and a broad-based cut in forward earnings.
• Financials are likely to drive 3Q earnings, with corporate banks leading from the front. PSU Banks are also likely to deliver a healthy performance, aided by treasury marked-to-market gains and improving asset quality trends. Capital Goods will have another healthy quarter and IT is likely to post the fourth straight quarter of double-digit profit growth. NBFC might face a significant deceleration in profit growth but still post a respectable double-digit number.