Recent earnings gains failing to endure
* The positive impact of demand recovery and a favorable base effect in Q3FY18, when the profit growth of our coverage universe stood at 14.6% yoy, is seen fading in Q4FY18 despite continued strength in demand conditions. This is largely because of higher tax burden, up 33% yoy. Improved demand is seen sustaining owing to better rural demand and recovery in global trade scenario. Further evidence of recovery is seen in the recovery of credit demand and higher government spending. Growth in non-food credit has recovered to 11% by mid-Mar’18 from 5% a year back. The Consumer space, including Staples and Discretionary (like Autos) are expected to witness a fairly healthy performance. The Agriculture side of the rural sector is still facing headwinds in the form of weak farm produce realizations and feeble net cash flows, resulting in weak demand for agriinputs. There also appears to be a modest pick-up in the Capital Goods sector, largely propelled by government spending.
* But, notwithstanding these tailwinds, the margin pressure appears to be emerging, indicating that pricing power across sectors is still to gain further traction. As per CMIE, new investment projects announced by the private sector declined by 47% yoy during Q4FY18, resulting in a cumulative decline of 50% during FY18. Escalation of global trade conflicts pose risk to the nascent positive spillover of the ongoing global recovery on the Indian corporate performance.
* Sales growth for Emkay Universe (ex-Financials and Oil & Gas) is expected to moderate a bit to 9% yoy in Q4FY18 from 11.3% yoy in Q3FY18. EBITDA growth is expected at 11.0% yoy (vs 12.8% yoy in Q3FY18) while APAT is estimated to grow by 4.2% yoy (vs a growth of 14.6% yoy in Q3FY18). Excluding the outliers (top 3 & 5 companies), APAT is estimated to contract by 1.3% & 4% yoy, respectively. Sales growth in Q4FY18 will be led by sectors like Auto Ancillary (34% yoy), Engineering & Cap Goods (21.1% yoy) and Automobiles (18% yoy). Telecom (-10.1% yoy) and Metals & Mining (1.1% yoy) are likely to drag sales growth.
* EBITDA margin in Q4Y18 is expected to remain flat, reflecting weak pricing power. The improvement in EBITDA margin is expected to be led by sectors such as Power (360bps), Metal & Mining (289bps) and Media (169bps). Telecom (-240bps), Construction & Infra (-140bps) and Pharmaceuticals (-126bps) are expected to see compression in overall margins.
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