Against the backdrop of the domestic economic slowdown and lukewarm volume growth across sectors, performance in the October-December quarter of FY20 (Q3FY20) was broadly on expected lines, ICICI Direct said.
At the index level, adjusting for impairment charge at Tata Motors in the base quarter, for the Nifty (ex-financials) topline de-growth in Q3FY20 was 2.9 percent year-on-year (YoY) but including financials, topline growth was nearly flat YoY with the bottom line outperforming with the growth of 9.8 percent YoY, it added.
The brokerage said profit growth for the Nifty (ex-financials) was at 1.8 percent YoY courtesy expansion in Earnings before interest, tax, depreciation and amortization (EBITDA) margins and lower effective tax rate while operating profit growth was in the positive territory i.e. up 4.8 percent YoY.
EBITDA margins in Q3FY20 were at 16.3 percent, up 120 bps YoY courtesy soft commodity prices, the benefits of which were partly negated by the perils of negative operating leverage, it added.
From a broader perspective, excluding the turnaround in the banking space and adjusting for impairment charge at Tata Motors in the base quarter, large-caps continued to outperform the mid-caps and small-caps in the prevailing muted demand scenario, ICICI Direct feels.
For the listed universe (around 2,500 companies), sales grew 0.7 percent YoY while profit grew 9.8 percent YoY, it said.
Among sectors, the key outlier in Q3FY20 was the banking space with improving asset quality and recovery of stressed loan accounts, it feels.
The brokerage said healthy i.e. mid to high single-digit growth in topline was witnessed in the information technology, pharmaceuticals and capital goods domain, while weakness was persistent across the commodity pack i.e. oil & gas and metals courtesy soft realisations and muted demand prospects.
Weak consumer sentiment continued to weigh on the auto space given the near double-digit decline in volumes, it said.
Going forward, amid a pragmatic Union Budget 2020-21 that further carried the government’s vision of developing India as a manufacturing hub thereby promoting investments and generating jobs, the brokerage expects corporate earnings to grow at a healthy CAGR of 18.6 percent in FY19-22.
With rolling over the valuations to FY22, ICICI Direct upgraded its Nifty50 target and now valued Nifty at 13,350 (from 13,150 earlier) i.e. 18.5x P/E (1x PEG) on FY21-22 average EPS of Rs 723 with corresponding Sensex target at 43,650 (against 43,000 earlier in December 2019).
After the inline earnings season, the brokerage picked five stocks - Apollo Hospitals, Bharti Airtel, Brigade Enterprises, Hero MotoCorp and KEC International - given their strong set of earnings in Q3FY20. It believes these companies are more fundamental and sustainable in nature.
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