Published on 12/10/2017 12:51:18 PM | Source: Motilal Oswal Securities Ltd

Turbulence behind; Clear skies ahead - Motilal Oswal

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OMCs and select Cyclicals drive earnings; maintain Nifty EPS estimates


Earnings rebound led by OMCs, Cyclicals and low base


As we prepare estimates for 2QFY18, we can’t help but notice the slight moderation in the Indian macro story – weaker than expected GDP growth for 1QFY18, higher crude prices and some teething troubles pertaining to GST implementation. That said, our Economist, Nikhil Gupta believes that the worst is behind as far as GDP growth is concerned. Post-GST restocking and an early festive season should help 2QFY18 performance of India Inc.

* We expect MOSL Universe PAT to grow 23.4% YoY, but just 4% YoY excluding OMCs, PSU Banks and Metals. Growth will be led by Cyclicals like Metals, PSU Banks, OMCs, while Defensives are expected to post the fourth consecutive quarter of profit decline, dragged by IT and Healthcare.

*  We maintain our FY18/FY19 Nifty EPS estimates at INR487/INR602 and introduce our FY20 Nifty EPS estimate at INR693. We expect Nifty EPS to grow 15%/24% in FY18/FY19.


Key sectoral trends/highlights


* PSU Banks will report 2.9x YoY jump in profits owing to swing in SBI’s numbers from loss of INR5.6b to profit of INR29b.

* gains and higher GRMs, and report 3.2x higher profits.

* Metals will report another strong quarter, led by strong underlying commodity prices and low base – profits are expected to grow 123% YoY.

* Autos will report positive growth in profits after three consecutive quarters of YoY decline, while our Consumer universe will post 10% profit growth.

* Technology is expected to report the third consecutive quarter of muted PAT.

*  Healthcare, Telecom and Cement will have a lackluster quarter, with YoY earnings decline. Utilities’ performance will be buoyed by low base of Coal India.


Three key trends to watch out for:

1. Macros: Worst is behind: After the weak 1QFY18 GDP print, debate has revived around the macro fundamentals. We believe that worst is behind and expect GDP growth to recover, albeit gradually. Recent high frequency indicators like PMI and our own proprietary EAI for July and August point towards the same. We also don’t find any indications of stress on the central governments budgeted tax receipts. While non-tax receipts are likely to be lower than estimated, there is still a good chance that it could be made up by higher-thanbudgeted tax collection. Indirect tax receipts up to August 2017 were 39.5% of full-year budget estimates (BE), marking the highest collection in the first five months in any fiscal year (barring FY08) since FY01.

2. GST: Settling in; 2H to be much better vs. 1H for B2C sectors: Implementation of GST has expectedly resulted in some teething troubles pertaining to compliance, tax return filing for SME’s, Wholesalers and Retailers. However, our channel checks and conversations with corporates in our coverage universe suggest 2QFY18 will benefit from re-stocking of trade supply chain. We also expect 2HFY18 to be much better vs. 1HFY18 for B2C sectors like Consumer, Auto, Durables etc. as trade settles down with the GST. Low base of demonetization in 2HFY17 should also help in our view.

3. Commodity costs hardening: threat to margins? Operating margins of India Inc. benefitted from the commodity cost tailwinds in FY15, FY16 and 1HFY17. We saw eight consecutive quarters of operating margin expansion from Mar’15 till Dec’16 for MOSL Universe excl. OMCs and Financials. Commodity prices have hardened off-late – base metals, crude as well as agro commodities. This could potentially put at risk our estimated 50bps margin expansion for our universe in 2HFY18. Operating margins of sectors like Consumers, Cement, Automobiles, and Durables will be at risk especially since corporates have been reluctant to exercise pricing power in an environment of moderate demand scenario.


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