The Good, the bad & the ugly of March quarter results; where should investors park their money now?

Bad news: Q4FY18 results were quite weak:

The 4QFY18 net profits of the Nifty50 Index declined 9 percent and were 12 percent below our estimates led by
(1) larger-than-expected slippages and provisions for banks,
(2) weaker-than-expected realizations and/or profitability for automobile, cement and pharmaceuticals sectors, and
(3) larger-than-expected employee liabilities for Coal India.

The 4QFY18 EBITDA of the Nifty-50 Index (excluding banks) increased 8.3 percent on a year-on-year basis (YoY) and was 5.4 percent below Kotak's estimates. One-time gratuity-linked provision of Rs 74 bn in Coal India dampened the performance at EBITDA level.

Good news is that FY2019 earnings growth is higher:

Kotak Institutional Equities expects the net profits of the Nifty50 index to grow by 23 percent in FY2019 and 19 percent in FY2020 led by:
(1) a sharp decline in loan-loss provisions for banks,
(2) higher profitability in the case of global commodities (metals),
(3) general demand recovery in domestic consumption sectors such as automobiles and staples,
(4) a weaker INR, which will support realizations and profitability in global commodity and services sectors.

The banks account for about 50 percent of the incremental profits of the Nifty-50 Index in both FY2019 and FY2020.

Ugly: Weak macro and related risks to earnings

India's macroeconomic position will be under pressure at high levels of oil prices. High oil prices will affect India’s CAD/BoP (US$10/bbl increase in crude price impacts CAD/GDP by 55 bps), inflation (US$10/bbl increase in crude prices impacts inflation by 50 bps assuming full pass-through of oil prices to consumers) and GFD, in decreasing order of impact.

Also, high oil prices could pose risks to the earnings of downstream and upstream PSU oil companies if the downstream oil companies are not able to raise retail prices of diesel and gasoline to pass on the increase in global crude oil prices (including the impact of a weaker INR).

What should be the Investment strategy?

The investment strategy in the current environment of ‘uncertain and weak macro and improving micro’ boils down to:

(1) staying invested in expensive ‘growth’ stocks in private retail banks, consumer staples, and discretionary sectors and hoping that they do not de-rate and/or,
(2) buying inexpensive ‘value’ stocks elsewhere and hoping that they re-rate at some point in time either from improved macro and/or from company-specific issues.

Disclaimer: The views and investment tips expressed by Kotak Institutional Equities on moneycontrol.com are its own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.