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Last Updated : Jun 07, 2019 11:19 AM IST | Source:

Motilal Oswal handpicks 10 'focus' stocks post Q4 earnings; do you own any?

Top upgrades for FY20E includes names like UPL, State Bank of India, Tata Motors and Tata Steel have seen EPS upgrades of 32.4 percent, 23.3 percent, and 9.3 percent respectively.

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The March quarter corporate earnings-reports were in line with expectations for both Nifty as well as stocks in Motilal Oswal Universe. However, the broader universe continues to witness more downgrades than upgrades.

Domestic cyclicals continued driving earnings growth for the second consecutive quarter, led by financials which contributed almost the entire earnings delta, but still fell short of expectations, said the note.

Nifty's earnings per share (EPS) grew by 7 percent to Rs 481 in FY19, and Motilal Oswal's Nifty FY20/21 EPS estimates remain unchanged at Rs 604/706, building in the growth of 25.6/16.9 percent.


However, the direction of earnings revision for the broader markets still remains downward, with 55 companies in the Motilal Oswal universe witnessing an earnings cut by more than 5 percent and 28 companies witnessing upgrades of more than 5 percent.

For the  Motilal Oswal Financial Services (MOFSL) universe, at the sectoral level, PSU banks and capital goods saw an earnings revision at a 19 percent and 3 percent gain respectively, while consumer, pharmaceuticals, and metals have seen cuts of 4 percent, 5 percent, and 4 percent, respectively.

Top upgrades for FY20E includes names like UPL, State Bank of India, Tata Motors and Tata Steel, which have seen EPS upgrades of 32.4 percent, 23.3 percent, and 9.3 percent respectively.

Top downgrades for FY20E include names like Asian Paints, Hindalco Industries, Sun Pharma and Bharti Infratel, which have seen EPS downgrades of 16.5 percent, 12.9 percent, 8.8 percent, and 7.9 percent respectively.

Motilal Oswal handpicks 10 stocks in its ‘Focus List’ post-March quarter results:

State Bank of India:

The bank's loan growth stood at 13 percent YoY and about 7 percent on a QoQ basis, driven by the growth of 27.9 percent YoY in home loans and 15 percent YoY in the corporate book.

Further, it expects a loan growth of 12-14 percent in FY20. Slippages moderated to Rs 7,960 crore, which, coupled with healthy recoveries and higher write-offs, led to an asset quality improvement.

Overall, the bank expects recoveries of Rs 35,000-38,000 crore in FY20. It expects the credit cost trend to moderate significantly, going forward.


Retail loan mix now stands at 60.2 percent (+120 bps QoQ). Fresh slippages stood at Rs 3550 crore, but healthy recoveries/upgrades of Rs 1520 crore and write-offs of Rs 7,320 crore drove a 105 bps/52 bps QoQ decline in the GNPL/NNPL ratios to 6.7/2.06 percent.

The quantum of BB and below assets declined to Rs 175.2 crore (-7 percent QoQ). ICICI Bank expects credit cost to normalise significantly from FY20. It maintained its consolidated RoE target of 15 percent by June 2020.

Larsen & Toubro:

Consolidated revenue grew by 10.5 percent on a YoY basis to Rs 44,900 crore on a strong base of last year, taking full-year revenue growth to 18 percent (v/s guidance of 12-15 percent).

EBITDA margin shrank 80 bps on a YoY basis on account of one-off provisions in the core E&C business. Q4 FY19 did not witness any slowdown in execution/order inflow on account of scheduled elections in April-May. L&T remains our top pick in the capital goods sector.

UltraTech Cement:

The company stabilized operations of Binani’s assets, which operated at 72 percent utilization in March 2019. Overall, volumes for UltraTech Cements grew 15 percent YoY to 21.3 MT.

The company successfully ramped up the profitability of Binani’s assets, which achieved EBITDA/t of Rs 830 (excluding one-offs), an improvement of Rs 740/t.

With various cost-efficiency programs, cost/t for UTCEM declined 2 percent YoY. Thus, EBITDA/t increased 13 percent YoY to Rs 1,039. Consequently, EBITDA increased 30 percent YoY to Rs 2,200 crore, with the margin expanding 2.2 percentage points YoY to 21.1 percent. Adjusted PAT was up 42.5 percent YoY at Rs 1,010 crore.

Maruti Suzuki India:

Maruti Suzuki’s EBITDA remained under pressure due to factors such as inventory de-stocking at the company ( down 50 bps QoQ), Gujarat new line and engine plant fixed cost (down 70 bps QoQ), Gujarat plant depreciation (down 50 bps QoQ), Fores (down 60 bps QoQ) and conversion cost inflation (down 50 bps QoQ).

We believe that MSIL will see the full impact of headwinds on both volumes and margins over H1 FY20. We estimate FY20 volume growth of 6 percent, which will be highly influenced by spread out of monsoon and new product launches.

Despite headwinds, EBITDA margin will likely expand by 30 bps to 12.9 percent in FY20, as an increase in prices and lower discounts will partially offset the impact from operating deleverage.

Bharti Airtel:

India wireless business made a strong comeback with a beat on all fronts – EBITDA grew 32 percent on a QoQ basis. The minimum recharge strategy drove ARPU by a steep 19 percent QoQ to Rs 123, while the subscriber base fell by a merger 1 percent.

The recent rights issue, impending Africa IPO/Bharti Infratel stake sale and the peak-out of capex intensity should act as a key catalyst in alleviating concerns around burgeoning leverage.

Bharti is well poised to regain momentum. A turnaround in the India wireless business, coupled with a steady uptick in the Africa business, should propel overall growth.

Coal India:

Coal India's Q4 adjusted EBITDA (ex-OBR) grew 4 percent YoY, driven by higher realizations and volumes, partly offset by a higher wage bill.

Excluding the wage bill, cash cost was down by around 4 percent YoY. We expect Coal India's cash costs per ton to decline as it continues implementing productivity measures and shuts down old mines.

This, along with 5-6 percent growth in volumes, should drive around 8 percent earnings growth over the next two years. The stock is attractive at current levels at around 4x EV/EBITDA (v/s historical average of 7x) and P/E of 7-8x (v/s average of  around 14x).

Indian Oil Corporation:

Led by its highest-ever marketing margins, IOCL’s EBITDA came in 45 percent above our estimate. PAT exceeded our estimate by 63 percent, driven by higher other income and a lower effective tax rate.

No threat of a spike in oil prices, combined with a continuity in reforms, is likely to result in stable marketing margins. The quality of earnings is likely to improve with the commissioning of the PP plant at Paradip and the ramp-up of the Ennore LNG terminal.

It is trading at par with the FY15-18 deregulated period, while it should command a premium due to higher free cash flow.

Federal Bank:

Fresh slippages moderated to Rs 2.6 billion (1.1 percent annualised), driven by a 32/50 percent YoY/QoQ decline in SME slippages and nil corporate slippage.

The bank expects the slippages trend to moderate, and thus, guided for 55-60 bps of credit cost for FY20, and continued RoA improvement over FY20/21. Also, the bank expects a 250 bps improvement in the C/I ratio over the next two years.

Asian Paints:

The results were disappointing, with 12 percent sales growth and 2 percent EBITDA and PAT decline (absolute EBITDA/PAT miss of 16 percent/ 17 percent). Ongoing top-line slowdown particularly amid massive capacity expansion (50 percent capacity added in 6 months ending

March 2019) and a deteriorating mix indicates a weak earnings outlook.

The valuations at 59.5x FY20E and 48.8x FY21E EPS are rich for a company with a weak earnings growth outlook and return on capital employed (RoCE) likely below 20 percent for FY20 – as a result, we downgraded our rating on the stock to sell.

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First Published on Jun 7, 2019 11:19 am
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