After beginning on a strong note, the Q3FY18 earnings season lost sheen towards the end, led by disappointment from heavy-weights like SBI, Tata Motors, Lupin, and ONGC.
However, what’s more, encouraging is that the earnings picture is getting brighter, with the recovery expected to gather pace in FY19, Motilal Oswal said in a note.
Recovery in consumption-oriented sectors, with a broad-based volumes pick-up in Staples, Discretionary, Cement, and Auto, albeit on a low base of demonetisation and upbeat commentary on rural consumption were some of the highlights of December quarter results, it said.
The brokerage firm saw sequential asset quality improvement and a decline in slippages in Private banks, even as PSU banks posted a mixed performance on the asset quality front.
There was a semblance of a recovery in order inflow for Infrastructure, Construction and Capital goods companies after the GST-related pangs of Q2FY18.
On the technology front, D-Street witnessed optimistic commentary from the IT sector after a while, even as QQFY18 saw a good beat from tier-II IT names.
While aggregate sales and EBITDA were in line, profits missed Motilal Oswal estimates. “The miss at the PAT level for both MOSL and Nifty Universe can be entirely ascribed to PSU Banks – elevated provisions and MTM losses in the bonds portfolio dragged the bottom line,” said the report.
The proportion of companies reporting a PAT decline (at 29 percent of our MOSL Universe) is at a 12-quarter low. “Within our MOSL Universe, out of the 19 sectors we track, 4/7/8 posted profits that were above/in-line/below our expectations. The surprise/miss ratio at 0.9x deteriorated sequentially,” it said.
Earnings downgrade to upgrade ratio moderated on a sequential basis (QoQ) as 65 companies saw earnings cut of over 3 percent (58 in 2QFY18) and 43 companies saw earnings upgrades of over 3 percent (49 in 2QFY18).
“The upgrade/downgrade ratio weakened from 0.84x to 0.66x. We have revised our Nifty EPS estimate downward by 3.2 percent for FY18E and 0.6 percent for FY19E. However, a large part of Nifty EPS cut is flowing from SBI, which reported losses in 3QFY18,” said the report.
Nonetheless, the earnings estimates for FY18 are relatively more stable v/s FY15/16/17. “We expect Nifty EPS to grow 13 percent to Rs471 in FY18 and 26 percent to Rs595 in FY19,” it said.
Here is a list of ten stocks to buy from Motilal Oswal post-December quarter results:
ICICI Bank has recorded a steady decline in overall net stressed loans over the last eight quarters. The bank is focused on building a robust retail portfolio in both assets and liabilities, and also improve fee income traction while reducing the international loan book.
While in the near-term, credit cost is likely to stay elevated due to the ageing of NPAs. We expect it to moderate from FY19, enabling the bank to deliver 12 percent return on equity (RoE) by FY20E.
Chola is among the earliest entrants in both vehicle finance (VF) and LAP. Its profit growth has been exemplary at 21 percent/29 percent AUM/PAT CAGR over FY12-17; 20 percent/37 percent AUM/PAT growth in 9HFY18.
Also, no state accounts for more than 12 percent of AUM. VF book is also diversified, with a healthy mix of LCV, M&HCV, tractors, cars and used vehicles.
Chola posted RoE of 18 percent in FY17 and 20 percent in 9MFY18. While GNPL ratio of 3.7 percent seems high, its credit cost of 1.1-1.2 percent is the lowest in our NBFC coverage universe.
Credit costs have been low and stable since the consumer lending fiasco in the prior decade. It trades at 2.9x FY20E BVPS.
Mahindra & Mahindra (M&M) is the best bet on a rural recovery, as it would improve the visibility of volumes in the tractor and UV businesses. Rural market contributes ~56 percent of the revenues and 72 percent of S/A PAT.
Several levers are available to margin improvement – such as mix (higher tractors and pick-up volumes), lower CV and 2W business losses, lower marketing spend, and positive op. leverage.
We estimate ~40bps margin improvement to 14.8 percent over FY18-20E. While the 3QFY18 operating performance was a miss due to a lag in price pass-through and higher other expenses, adj. PAT was in line due to higher other income, lower interest, and depreciation & tax.
Favourable industry structure is likely to drive further consolidation, driven by the GST-led shift from unorganized to organized players.
After the last couple of years of muted earnings growth, we expect a recovery driven by auto segment, stabilization in the industrial segment, and newer avenues like e-rickshaws and traction batteries.
AMRJ’s 3QFY18 revenues grew 17 percent, driven by strong growth in auto and a QoQ recovery in telecom tower batteries. In-line operating performance was boosted by higher other income, which drove ~20 percent YoY PAT growth (v/s est. of 11 percent).
Strong SSSG growth meant a huge margins surprise, as businesses like these have high operating leverage.
While management has not called out any significant recovery in consumer sentiment and JUBI’s SSSG performance was actually weaker for yet another quarter (compared to other QSR players like Westlife and Yum Brands, despite a negative SSSG base in 3QFY17), there is no reason for us to remain negative on the prospects.
We, thus, upgrade to Neutral. The valuations after stock run-up is fair, despite an increase in our earnings projections.
Return to double-digit volume growth and the company being able to cross the 15 percent hurdle for the first time on operating margins (hence remarkable 30 percent EBITDA growth YoY) were the key highlights from the results.
Two aspects from management commentary stood out. (1) The broad-based biscuits segment recovery augurs well for Britannia. (2) 20 percent+ growth for all its erstwhile weak states indicates that there are multiple engines firing in conjunction for Britannia.
MGL showed resilience to high LNG prices and reported volume growth of 7 percent YoY in CNG and 8 percent in the PNG. EBITDA/scm also stood at strong INR8.
Increasing focus on pollution, along with the regulatory board coming up with the bidding of as many as 100 cities, is likely to re-rate the company.
With little juice left to squeeze out from the lever of utilization factor, Infosys has moved its focus toward improving onsite/offshore mix and roll ratios onsite, and fresher hiring onsite to support its cost structure.
Infosys still maintained guidance of 23 percent-25 percent EBIT margin and left its 5.5 percent-6.5 percent growth guidance unchanged (implying a broad range of -0.5 percent to +3.0 percent for 4QFY18).
Consolidated EBITDA increased 17 percent QoQ (+26 percent YoY) to Rs16bn, led by an improvement in the steel business in India and Oman. Steel production is at inflection – we expect 29 percent CAGR to 6.4mt over FY18-20.
Strong long product prices in India, operating leverage, and timely volume growth augur well for earnings. Nearly 25 percent of the raw material cost is insulated from input price risk due to captive iron ore mines and coal linkage.
With the result being largely in line, the key highlight from the 3QFY18 result has been the sharp pick-up in order flow. Order inflow during the quarter was up 38 percent on a YoY basis, driven by pick-up in the infrastructure and hydrocarbon verticals.
Domestic E&C execution seems to be picking up (+14 percent YoY), supported by the infrastructure segment (+21 percent YoY). We remain positive on the stock with a SOTP target price of Rs1,650.
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