With Nifty trading close to 12,000, the index PE is at 21.5 times FY20E and is optically at the higher band. We, however, understand that this optically high PE is a factor of many one-offs expenditures in the income statement of companies owing to regulatory payments, higher provisioning in banks and NBFCs, impairment of assets, etc in past 8-10 quarters.
The current quarter earnings are important as a lot of companies have been betting on a better earnings environment in the second half of FY20. It will be important to understand management commentaries on their take on the market demand scenario and their strategies to tackle the slowing growth. For December 2019, the average sales growth of our coverage companies ex-financials are expected at 4 percent YoY and the net profit growth is expected at 5.6 percent. We expect Nifty EPS to grow by 14 percent for FY20 and clock in an EPS figure of Rs 554 for FY20.
Banks are expected to report an average of 14 percent YoY growth in net interest income and net profit of 20 banks under our coverage is expected to grow from Rs 13,274 crore in Q3FY19 to Rs 28,690 crore in Q3FY20. Loan growth is expected to remain moderate as stress in the auto, MSME and the corporate segment continues while housing, personal and credit card segments will show up growth.
Deposits growth will outpace credit growth with higher liquidity in the system. Asset quality continues to have pressure from DHFL and some in the SME segment too. However, higher recovery from Essar Steel and Ruchi Soya will cushion provisions. NBFCs will report total Income growth of 13 percent on YoY and 2 percent on QoQ basis. We prefer HDFC Bank, ICICI Bank, SBI and Cholamandalam in financials space.
Respite in automobile sales is expected with aggressive discounts for adjustments of BS-IV stocks and margins may improve sequentially with declining commodity prices. On a QoQ basis, sales is expected to grow by 8 percent while EBITDA is expected to grow by 10 percent.
Consumers sector's sales is expected to grow by 5 percent YoY with a 3 percent YoY volume growth. Gross margin is expected to decline on account of input inflation like crude, milk & its derivatives, palm oil, etc. and higher consumer promotions while EBITDA margin is expected to be stable due to cost-saving measures and advertisement cost rationalization.
Technology will report moderate growth of 3 percent QoQ in revenues. Major margin headwinds such as wage hikes and visa costs are now behind. Midcap IT companies are expected to report better numbers than largecaps. Commentaries on the new deal win and IT budget spend remain the key. HCL Technologies and Infosys remain our preferred bet.
Q3 and Q4 are normally stronger quarters for infra companies due to higher execution. Order book in Q3 stayed strong though order inflows haven't improved yet. 12 percent YoY revenue growth is expected with 15 percent EBITDA Growth. There has been a delay in appointment dates and cancellation of projects due to land acquisition. Ordering from railway side has been relatively good. We prefer L&T, KEC International, and PNC Infratech in this segment.
Cement companies will see margin expansion driven by lower power & fuel cost and logistics cost on the back of lower pet coke prices and supply chain efficiency measures undertaken by the companies.
In pharma, US sales are expected to be flat due to increased scrutiny and lack of significant launches though low double-digit growth is expected in domestic business. Margin protection continues through R&D costs rationalization.
In metals and mining space, sales and net profit to de grow by 7 percent and 10 percent on YoY basis due to reduced volume growth.
(The author is Head of Research at Narnolia Financial Advisors.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.