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MOSL: INDIA STRATEGY | 3QFY20 PREVIEW-Earnings still tepid; Financials to drive aggregates

INDIA STRATEGY | 3QFY20 PREVIEW: Earnings still tepid; Financials to drive aggregates

 

Another modest quarter of earnings ahead; tax cuts to provide some cheer

• With the Nifty near all-time highs and FII flows at a five-year high, one wouldn’t be too amiss to conclude that India is in the midst of a major bull market. However, the reality is different. Economic growth momentum has decelerated, while corporate earnings have remained tepid for the last two years. CY19 turned out to be a year where the markets got further polarized in terms of both earnings and performance. While the Nifty delivered 12% returns, the Nifty Midcap-100 and Nifty Smallcap-100 were down 4% and 9%, respectively. Even within the Nifty, the divergence between the top 15 stocks by market cap and the rest has widened to 50%. Cumulatively over two years, the Nifty has now outperformed the Nifty Midcap-100 and Nifty Smallcap-100 by 35% and 51%, respectively. This to an extent is also a reflection of growth polarization and the heightened preference for quality in a slowing economy.
• In our view, this polarization will reverse only if growth recovers and gets broad-based. From that perspective, CY20 holds some promise. The government and the RBI have taken some steps to revive growth, the effect of which will be visible with a lag. Some sectors are showing signs of stability/bottoming out with support from festive season demand and few macro indicators like Services PMI have also bounced. The forthcoming budget will be a crucial policy event with the market focus on: [a] potential near-term demand-booster from the government and [b] the contours of fiscal deficit arithmetic. Meanwhile, the recent geopolitical flare-up between the US and Iran has led to a spike in crude prices and intensified macro worries.
• Corporate tax cuts have prevented a further slide in earnings estimates. Nonetheless, the FY20 corporate earnings story is all about Financials, with Nifty ex-BFSI earnings expected to decline 2% for the year. The upcoming earnings-report season will likely mark one more quarter of muted earnings.
• We estimate MOFSL Universe’s 3QFY20 PBT/PAT to increase by 1%/9% YoY, led by BFSI (estimated to contribute 81% of incremental profit YoY), Automobile (low base effect) and Consumer (beneficiary of tax cuts). However, Metals/O&G are likely to drag the performance, given the underlying weak commodity prices. Telecom is expected to sharply reduce losses YoY, which will support earnings. Ex-BFSI, MOFSL Universe’s PBT is estimated to decline by 5% and PAT to increase by 2% YoY. We estimate Nifty PBT/PAT to increase 2%/8% YoY. Ex-BFSI, we expect Nifty PBT/PAT to decline 6%/2% YoY. Our FY20 Nifty EPS estimate has been stable at INR532. We now build in EPS growth of 10% for FY20.