The 4QFY18 earnings season exhibited a mixed picture, with a healthy performance from the Consumption and Commodity oriented sectors, but marred by a drag from Corporate Banks and Capital Goods.
Siddhartha Khemka, Head- Retail Research, Motilal Oswal Securities, continues to maintain his positive stance on the consumption recovery theme in CY18, with a focus on rural consumption. In the run up to general elections, he expects infrastructure stocks to remain in the limelight but rules out major moves.
Khemka sees consumer inflation rising to 5.4 percent in June. If the trend continues, he factors in another 25 bps rate hike FY19.
On crude, he expects prices remaining in a broad range of $65-75/bbl in the near term.
Edited excerpts from his interview with Moneycontrol’s Sunil Shankar Matkar:
The market has been highly volatile due to global cues and movement in crude oil prices and dollar-rupee. Do you expect it to remain rangebound or could it cross its previous highs in the second half of 2018?
Elevated valuations (19 times one-year forward earnings) along with challenging macros (high crude price, weak rupee versus the dollar and rising interest rates) and busy political calendar is likely to keep the index rangebound in 2018.
How do you read the March quarter earnings season? Some experts say the worst may be over for earnings and recovery should start from current year. Will FY19 will see a revival in earnings or is there a chance of a downgrade in earnings?
The Q4 FY18 earnings season was mixed, with healthy performance from consumption and commodity-oriented sectors, but marred by a drag from corporate banks and capital goods. Hopes of a long-awaited earnings recovery in FY19 stays intact. While aggregate sales and earnings before interest, tax, depreciation and amortisation (EBITDA) were in line, profits missed our estimates.
The miss can be entirely ascribed to corporate banks, which reported a significant jump in slippages and provisions, aggravated by the change in Reserve Bank guidelines on non-performing asset dispensations. For Q4 FY18, Nifty aggregate sales grew 15.5 percent year-on-year, EBITDA 13.1 percent and PAT 5.1 percent, dragged lower by corporate banks like State Bank of India (SBI), ICICI Bank, Axis Bank.
Excluding these three, Nifty PAT growth for the reaming 47 companies came in at 15.6 percent as against our estimate of 13.6 percent. Our FY19 profit growth estimate of 27 percent is on the back of an expected rebound in profitability in corporate banks. The latter is driven by bottoming out of asset quality.
Excluding corporate banks, profit of Nifty constituents are expected to rise 19 percent in FY19. SBI alone is expected to contribute 22 percent of incremental FY19 Nifty profits, while ICICI Bank and Axis Bank are expected to contribute 5 percent each.
Apart from corporate banks, other cyclicals that are contributing disproportionately to expected Nifty profit growth in FY19 are Oil and Natural Gas Corporation (ONCG) and Tata Motors. The duo is expected to contribute 15 percent and 7 percent, respectively, in incremental profits for FY19.
Crude has been rangebound after hitting a 3-1/2-year high of $80.50 a barrel. Where do you see crude prices heading in the near term?
We expect crude prices to remain in a broad range of $65-75/bbl. While US oil production is at record highs, Organisation of Petroleum Exporting Countries (OPEC) is still undecided on any significant production ramp-up. There is a risk of a ban on oil exports from Iran which could negatively impact. The OPEC meeting scheduled for June 22 is likely to provide some direction to oil prices in the near term.
Do you see inflationary pressures due to higher crude oil prices and can retail inflation cross 6 percent in June? Do you expect a hawkish stance or a rate hike from RBI in FY19?
Consumer inflation rose to a three-month high of 4.6 percent YoY in April from 4.3 percent in March. While most food items witnessed a pick-up in inflation, this was offset by a sharp fall in vegetable prices. Core inflation surged to a 45-month high of 6 percent YoY in April from 5.2 percent in the previous month. We expect inflation to rise over the next two months, touching 5.4 percent in June.
This would be higher than the 4.8-4.9 percent expected by RBI in its latest policy meeting. While RBI has also highlighted multiple risks on account of: 1) Uncertainty owing to global financial market developments; 2) Rising household inflation expectations; 3) House rent allowance revisions by state governments; 4) Revision in minimum support prices; and 5) Monsoon.
We believe that none of these factors support a rate hike at this stage. In fact, one of these risks is benign (monsoon), one will be looked through (HRA statistical impact), another has had muted effects so far (higher household inflationary expectations) and the remaining two are uncertain at this stage (global financial markets and MSP hikes). This, along with the MPC’s decision to maintain a neutral stance, creates uncertainty about further hikes.
Do you expect the dollar-rupee to hit 69 levels by 2018-end?
The rupee has been depreciating against the dollar on the back of softening crude oil price and 25 bps hike in the repo rate. We do not expect the rupee to touch 69 against the dollar anytime during 2018. The trend of higher inflation could lead to RBI hiking rates by another 25 bps somewhere during this fiscal, which may keep the rupee stronger.
What do you expect from the Narendra Modi government ahead of general elections 2019 and what should be investors’ strategy ahead of general elections 2019?
We have been positive on the consumption recovery theme in CY18, with a focus on rural consumption. Corporate commentary in the recently concluded Q4 FY18 earnings season reaffirms our view of: a) Accelerated value migration in favour of private financials; b) Consumption recovery; and c) Delayed private capex revival. Prediction of the third consecutive year of normal monsoon, expectations of higher MSP hikes, expansion of the Direct Benefit Transfer scheme and a busy election calendar should ensure a supportive and conducive backdrop for rural consumption.
Do you expect big movements in infrastructure stocks ahead of general elections next year?
The National Democratic Alliance has been known for its work in the infrastructure space. The current government has also done a lot of work on roads, railways, airports and power infrastructure. The most visible improvement is on road infrastructure, where order awarding and implementation has improved significantly.
Going by the past trend, infra stocks could continue to remain in focus, but we don’t expect big movement as some of these stocks have had a decent run in the past couple of years.
Almost all state-run banks reported losses in Q4 on higher provisions following new norms by RBI. Is the worst over for PSU banks? Will FY19 would be a year of stability in earnings or there is more to come?Net stressed loans (net non-performing asset and outstanding standard restructured loans) of coverage companies remains at elevated levels. RBI’s revised stressed asset guidelines will keep pressure on provisioning requirements as banks may have to refer increasing number of cases to the National Company Law Tribunal. We expect credit costs of state-run banks to remain elevated in FY19. Recoveries from the NCLT-related cases (in H2 FY19) will be a positive for state-run banks.