India Strategy Report Back
India Strategy: Still in the works
10-Jul-2017

As we commence the first quarterly earnings season of FY18, the macro and broader market context appears sanguine with the timely implementation of GST, decent progress of monsoon, controlled inflation and a stable currency backdrop. Positive macro factors notwithstanding, the quarter will be faced with several sector-specific headwinds and GST-related destocking in some B2C sectors. We thus expect 1QFY18 to be a lackluster quarter from earnings growth perspective. We expect MOSL Universe PAT to decline 1.8% YoY, but grow 6.6% YoY excluding OMCs. Growth will be led entirely by Domestic Cyclicals, while Defensives are expected to post third consecutive quarter of profit decline. We cut our FY18/FY19 Nifty EPS estimates by 1.5%/1%% to INR497/INR601. We now expect Nifty EPS to grow 17%/21% in FY18/FY19.

Key sectoral trends/highlights

  • PSU Banks will report 5x YoY jump in profits and contribute 83% of YoY earnings delta for the MOSL Universe excluding OMC's.   
  • NBFCs trajectory should return to normal, with earnings growth of 20%.
  • Consumer and Cement universe is expected to post flattish PAT YoY. The impact of GST-related destocking will impact our Consumer universe.
  • Autos would report weak performance,  with 5% YoY PAT decline (6.4% YoY PAT growth excluding Tata Motors). This would be the third straight quarter of PAT decline for our Auto universe.
  • Technology is expected to report second consecutive quarter of PAT decline.
  • Oil & Gas, Healthcare, Telecom and Logistics would have a lackluster quarter with YoY earnings decline.
Three key trends to watch out for:
1.The Rural Stimulus: A series of farm loan waivers,  coupled with two consecutive years of normal monsoon and the highest MSP hike in five years, should act as a stimulus for rural consumption,  in our view. Nonetheless, we highlight that the magnitude of this stimulus is much lesser compared to that in FY09.
2.The narrow FY18 earnings recovery: While FY18 earnings growth for our broader MOSL Universe/Nifty is expected to be healthy at 15%/17%, we notice that this recovery is narrow and led by three sectors – Autos, Metals and PSU Banks, which account for 60% of MOSL Universe earnings delta in FY18 (35% in FY19).
3.GST makes FY18 a story of two halves, like FY16/17: In FY16/FY17, broad market earnings were impacted by asset quality review (2HFY16) and demonetization (2HFY17). In FY18, we expect GST to result in similar disruption. FY18 is also expected to turn out to be a story of two halves – with 1HFY18 earnings growth of only 8% for the MOSL Universe (1.8% decline for 1QFY18)