After Q3 earnings, 3 banks make it to Motilal Oswal's list of 10 focus stocks

The domestic brokerage firm expects the Nifty EPS to grow 9 percent in FY19 and 27 percent in FY20. Nearly 81 percent of the earnings cut is driven by Tata Motors, SBI, HPCL, and ONGC. In Nifty, approximately 60 percent of incremental earnings for FY20 is expected to be contributed by financials.

In terms of sectors, Consumer, IT and Retail have seen marginal upward earnings revision, while Autos, Oil & Gas and Cement have seen considerable cuts.

Motilal Oswal handpicks 10 focus stocks from 3QFY19 earnings season:

Axis Bank: Buy| Target: Rs 850

Axis Bank under the leadership of a new CEO reported the highest profit in the past 11 quarters at Rs 1681 crore, led by steady net interest income (NII) growth, controlled operational expenditures and healthy recoveries/treasury gains.

The net interest margin (NIM) expanded by 11 bps on a QoQ basis to 3.47 percent. Fresh slippages also moderated to Rs 3750 crore which, coupled with healthy upgrade/recoveries/write-backs, enabled a sequential decline in the GNPL/NNPL ratio by 21bp/18bp to 5.8%/2.4%.

ICICI Bank: Buy | Target: Rs 450

For ICICI Bank, the net interest income or NII grew 20.5 percent on a YoY basis to Rs 6870 crore for the quarter ended December. Margin improved by 7bps QoQ to 3.4 percent, mainly led by a healthy recovery in one of the large NPL accounts.

Fresh slippages moderated sharply to Rs 2090 crore. This, along with healthy recoveries/upgrades and resolution, drove a 79bp/107bp QoQ decline in the GNPL/NNPL ratio to 7.75%/2.58%.

State Bank of India: Buy | Target: Rs 340

State Bank of India (SBI) reported a net profit of Rs 3950 crore due to lower other income (-14% QoQ) and higher operational expenditures (+21% YoY). The NII growth was robust at 21 percent on a YoY basis, driven by strong loan growth (+12% YoY) and expansion in the domestic NIM (+17bp QoQ to
2.97%).

Gross slippages moderated to Rs 6540 crore, as corporate slippages declined to Rs 1300 crore. Retail slippages were also lower at Rs 490 crore.

Provisions declined 68 percent on a YoY basis, mainly due to write-backs on the treasury portfolio, while provisions toward NPAs increased 37 percent QoQ to Rs 13970 crore, as SBIN further improved its coverage ratio to 74.6% (2QFY19: 70.7%).

LIC Housing Finance: Buy | Target: Rs 550

Despite the tight liquidity environment, the loan book grew 3 percent QoQ basis and 16 percent on a YoY basis to Rs 181000 crore. The repayment rate (annualized) declined meaningfully from 20% to 16% YoY – the individual lending repayment rate of 15.3% was the lowest in the past 14 quarters.

On a calculated basis, spreads remained sequentially stable at 1.3 percent, as the 15 bps increase in the cost of funds was offset by higher home loan yields.

Titan Company: Buy | Target: Rs 1180

Titan continued reporting strong top-line growth in jewelry, with a 37 percent increase in segmental sales while segmental margins expanded 290bp YoY. The management commentary indicated that the outlook for jewellery remains buoyant.

Maruti Suzuki India: Buy| Target Rs 8131

Factors such as higher discounts, commodity, FX, negative op. leverage and one-time staff cost led to a multi-quarter-low EBITDA margin of 9.8 percent. However, with the partial easing of these factors, margins are likely to recover in 4QFY19 to 12.4 percent.

Mahindra & Mahindra: Buy| Target: Rs 840

The EBITDA remained under pressure for M&M, with auto segment PBIT margin down by about 260bps on a YoY basis to 5.8 percent.

This was led by raw material inflation (RM) impact (~120bp) and higher discounts (~40bp). Tractor segment margin shrank 130bp YoY to 19.2 percent. M&M has taken a price increase and managed to pass on partial (60-70%) RM inflation impact of 4-4.5 percent in 9MFY19.

Tech Mahindra: Buy| Target: Rs 860

The CC revenue grew by 4.3 percent on a QoQ basis in the quarter. EBITDA margin expanded 50bps on a QoQ basis to 19.3 percent and PAT increased by 27.7 percent YoY to Rs 1200 crore (28% beat).

Deal wins were a positive surprise for the second consecutive quarter, with total total contract value (TCV) of USD440m, on the back of USD550m in the previous quarter.

Coal India: Buy| Target: Rs 338

The company delivered a strong quarter, well ahead of estimates, driven by the benefit of price hike and lower cost. The revenue increased by 16 percent on a YoY basis even as volumes grew by just 2 percent.

EBITDA (ex-OBR) and PAT increased by 44 percent and 52 percent, respectively, on the back of lower cost (ex-OBR). For 9MFY19, EBITDA (ex-OBR) and PAT have doubled YoY.

Coal India has managed to strictly control the cost of production (cash CoP down ~5% YoY in 9MFY19), adding on the benefit of higher realization.

Bharti Airtel: Buy| Target: Rs 380

Bucking the downtrend of the last four quarters, consol. EBITDA came in flat QoQ in 3QFY19. The quarter was characterized by a deceleration in the sequential decline in India wireless EBITDA and continued robust growth in Africa EBITDA.

Notably, the strategy of minimum recharge plans appears to be working well, with an 18% QoQ increase in India wireless ARPUs offsetting the drop in wireless subscribers. Management indicated that Dec-18 exit revenues were even better.

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