Rising input costs, interest rates and depreciation in rupee is expected to put pressure on Nifty50 company’s margins, says Vinod Nair of Geojit Financial Services.
After subdued Q1 result, the market is expecting better performance in Q2FY19. As per the review of Q1FY19, PAT of Nifty50 was expected to grow by around 14 percent on a YOY basis, however, it grew only 2.5 percent due to heavy losses suffered by State Bank of India, ICICI Bank (NPA problem) and Tata Motors (JLR issue).
If we adjust these losses, a large portion of which is considered by the market as a one-time pain and unlikely to happen in the long term, the net income would have grown by around 23 percent YOY. This growth would have been in-line with the consensus estimates led by low base too.
The good numbers were from sectors like FMCG, oil & gas, metals and NBFCs. Consumption-oriented businesses also did well due to outpace in rural demand, attractive financing and reduction in soft commodities. Three sectors which exhibited poor performance were auto due to higher raw material cost, telecom due to pricing issue and banks due to NPAs.
Post this setback, the market is hoping for 15 percent growth in PAT for Nifty50 in Q2FY19. This growth is likely to come from sectors like oil & gas, IT, BFSI and metal.
Oil & gas due to rising crude prices, IT benefited by rupee depreciation, banks due to lower provisioning and fair growth in loans while metals due to rising steel prices and robust demand in domestic construction.
Having said the positive side, on a board basis, rising input costs, interest rates and depreciation in rupee is expected to put pressure on Nifty50 company’s margins.
The auto sector’s performance is likely to be impacted by the higher base of last year, shift in festival season, slower demand in few regions and higher raw material cost.
Telecom sector continue to be under pricing pressure and debt while financial segment is facing a change in interest rate cycle and tight liquidity. All these factors also declare that it would be difficult to continue these earnings growth in the future.
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Mahindra CIE Automotive: Hold | CMP: Rs 263 | Target: Rs 281 | Return: 7%
Mahindra CIE is among the top global forging players with a strong presence in both Europe and India. Currently 2/3rd of the revenue comes from Europe (split btw CV’s & PV’s) while rest from India (PVs).
Revenue to grow by 15 percent CAGR over CY17-19E backed by strong order from MCIE Europe & new launches from key domestic customers. Revenue grew 29 percent YoY in Q3CY18 led by strong European sales (32 percent YoY) and India business growing at 26 percent YoY.
HDFC Bank: Buy | CMP: Rs 1,991 | Target: Rs 2,388 | Return: 20%
HDFC Bank is the second largest private sector bank in India. The bank has a nationwide distribution network of 4,804 branches and 12,808 ATM's in 2,666 cities/towns.
We are structurally positive on the bank given its top-notch asset quality, robust retail franchise, strong balance sheet growth and best-in-class management pedigree.
We expect the bank to maintain superior return ratios with RoE of 19 percent and RoA of 2 percent over FY18-20E. Further, we expect NII/PAT to grow at a CAGR of 20/21 percent over FY18-20E on the back of 20 percent growth in loans coupled with improving operating efficiency.
As a result, HDFC bank will continue to enjoy premium valuation within the banking space. Hence, we maintain buy rating on the stock with a target price of Rs 2,388.
Havells India: Reduce | CMP: Rs 601 | Target: Rs 557
Havells India is a leading player in electrical consumer goods in India. Its key verticals include switchgears, cables and wires, lighting fixtures and consumer appliances.
Despite revenue growth of 23 percent YoY, PAT grew by modest 4 percent YoY in Q2FY19. EBITDA margin shrunk by 250bps YoY due to delay in pass through of higher commodity prices.
Investment in new product categories, focus on premiumisation & expanding retail touch points will benefit the company in long term.
Considering the near term impact on margins and premium valuation, we downgrade our rating on Havells to reduce and arrive at a target of Rs 557, which implies FY20E P/E of 32x.
The author is Head of Research at Geojit Financial Services.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.