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MOSL: INDIA STRATEGY | 4QFY18 PREVIEW-Earnings recovery imminent; More ladders than snakes

INDIA STRATEGY | 4QFY18 PREVIEW: Earnings recovery imminent; More ladders than snakes

 

Global Cyclicals drive earnings; Autos and Technology show good recovery

As we step into FY19, the clamor for an earnings recovery has become louder. This is particularly because the last three years were characterized by a muted earnings performance due to macro disruptions and several policy changes pertaining to asset quality in the banking sector. Although we expect Nifty earnings to grow by a decent 11% in FY18, it is much below our FY18-beginning estimate of +17% – this can be mainly attributed to the drag from corporate banks (ICICI Bank, Axis Bank and SBI, which together accounted for 62% of the cut in Nifty PAT estimate in a span of a year).

However, we believe the worst of the NPA cycle is behind, and with resolution in several key NCLT assets, the earnings picture for BFSI could turn much brighter in FY19. Our consumption recovery theme is also gaining strength – also because the government is expected to be supportive of consumption demand in an election-busy year. Projection of a normal monsoon in CY18 adds to the cheer. Also, on the investment side, industrial capex is showing signs of recovery.

Overall, we expect FY19 to kick-start earnings recovery for India, although the market is likely to be distracted by several macro factors along the way, such as the ongoing global trade conflict, the US Fed rate increase cycle, domestic equity flows and, last but not the least, the domestic political developments in an election-heavy year. Although the path to earning revival is more like a game of snakes-and-ladders than a straight line, we expect more encouraging ladders than slippery snakes in FY19. Also, after the recent correction in the markets and the softening of bond yields, we believe valuations offer enough bottom-up stock-picking opportunities.