Naveen Kulkarni
We expect reasonable revenue growth of 11 percent on a YoY basis for Q2FY19 while the earnings will decline by 3 percent YoY for our coverage universe of 103 stocks which is representative of the broader market.
Earnings growth for our coverage universe ex-Tata Motors will be 2 percent on a YoY basis as we expect a significant loss for the company. The BFSI sector is likely to register flattish pre-provisioning profit growth while pressure on operating performance will persist.
IT, Consumer and Capital Goods are likely to report solid earnings growth while automobiles, pharmaceuticals, and cement will continue to witness margin pressures leading to subdued earnings.
The power sector is likely to report flattish earnings growth even though the operating metrics in the sector are gradually improving.
Construction sector will see robust revenue growth but sluggish earnings on account of the negative impact of financial leverage in rising interest cost scenario.
Our key ideas for the quarter are as follows:
IT and Consumer to deliver robust growth
IT sector is the current allocation favourite of most fund managers as it is the biggest beneficiary of the recent sharp depreciation in the rupee.
We expect the large-cap universe (top 5) led by TCS to deliver robust revenue and earnings growth of 1.5 percent on a QoQ basis in USD and 5.3 percent QoQ (INR growth) respectively.
The overall revenue growth for the sector will also be 1.5 percent QoQ indicating a robust growth profile for the sector. In the mid-cap space, Cyient is expected to deliver healthy QoQ earnings growth of 22 percent.
Consumer sector will also deliver robust earnings growth of 13 percent YoY driven by the discretionary space. Even the Staples category is expected to deliver healthy double-digit earnings growth.
Pressure on margins and management commentaries on the ability to pass on input cost hikes will be the key factors to look for in the quarterly results.
Top Picks: Key result picks for the quarter from IT and Consumer sectors are TCS, Cyient, Sonata, Titan, Jubilant Foodworks and HUL.
BFSI to see pressure on operating performance
The quarter gone by has seen significant activity on the asset quality front apart from rising concerns on liquidity.
Treasury yields for the quarter were volatile, but the benchmark 10-year bond yield closed at 8 percent which was only 10bps higher QoQ.
With these factors as a backdrop, profitability for the quarter will remain weak and NII growth at 11 percent YoY will decline sequentially.
Top Picks: We continue to prefer high quality private retail banks and our top picks for under that theme are HDFC Bank, IndusInd Bank, and DCB Bank.
Pharmaceuticals and Cement will continue to witness margin pressures
We expect the cement sector to register a healthy volume growth of 12 percent YoY and pricing is likely to remain largely stable QoQ in a seasonally weaker quarter.
However, rising costs will lead to lower EBIDTA margins impacting the operating profit and earnings growth. Pharmaceuticals sector will see slower growth because of sluggish US business, but it is likely to see improvement on a sequential basis.
Automobile sector:
Automobiles will see significant margin pressure in two of the largest companies of the sector, Tata Motors and Maruti. Overall the auto sector will report a sharp decline in profitability.
Top picks: Our key result ideas with a positive bias from the above-mentioned sectors are Sun Pharma, Escorts, Bajaj Auto, ACC, and Heidelberg.
Construction and power utilities to deliver flattish earnings
Construction sector will register robust revenue growth while earnings growth is likely to be flattish because of rising interest costs.
Power utilities are seeing decent traction in the generation and all India PLF is improving but the improvement is quite gradual and translation to earnings is limited.
Capital goods sector is expected to deliver robust revenue and earnings growth of 13 percent YoY and 23 percent YoY, respectively.
Top Picks: Our key result picks are HG Infra, NCC Limited, KEC International, Kalpataru Power, Power Mech Projects, Engineers India (EIL) and NTPC Ltd.
Disclaimer: The author is Head of Research at Reliance Securities. The views and investment tips expressed by investment experts on Moneycontrol are his own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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