Motilal Oswal cuts FY19 Nifty EPS estimate by 2%, says Q2 show uneventful so far

India Inc earnings for the September quarter have managed to just about meet Street expectations so far. Until October 29, most of the 28 Nifty companies that released their Q2FY19 results reported net profit and EBITDA either in-line or just above estimates.

The earnings season has been uneventful so far with headline numbers broadly meeting estimates and a few disappointments. Of the 28 companies, 18/23 have either met or exceeded our estimates on the PAT/EBITDA front, Motilal Oswal said in a note.

The broader narrative around earnings has not changed much with continued earnings downgrades, it said. For the MOSL Universe, sales, EBITDA and PAT grew 25.8%, 13.9% and 6.3% YoY, respectively, as against expectations of 23.6%, 14.1% and 9%, respectively.

Among the Nifty constituents, Yes Bank, IndusInd Bank, Ultratech Cement, BPCL, Bharti Airtel, HCL Tech and Reliance Industries have missed our PAT estimates, while ICICI Bank, Bajaj Finance and Dr. Reddy’s have exceeded estimates, said MOSL.

The domestic brokerage firm slashed Nifty EPS estimates for FY19 by 2.1 percent to Rs 528 from Rs 539, primarily driven by Reliance Industries and Bharti Airtel. For FY20, Nifty EPS has been cut by 1.4 percent to Rs 665 from Rs 674.

“We are building in Nifty EPS growth of 16%/26% for FY19/20,” said the note.

Motilal Oswal highlights 10 sectoral highlights post Q2 results:

Information Technology

The seasonal strength of Q2 manifested across top-tier IT. The revenue performance was patchy across tier-II with Hexaware, Mindtree, and Persistent Systems missing expectations. An overall commentary, on-demand environment remains positive and is substantiated by another quarter of healthy deal wins.

Banks

Private Banks continued reporting steady trends in loan growth, though the margin performance has been mixed – ICICI Bank and RBL Bank reported an improvement, while Kotak Mahindra Bank and IndusInd Bank exhibited a modest decline.

Asset quality has been stable for retail banks, though worries remain on the exposure towards IL&FS Group (sizeable exposure with IndusInd Bank and YES Bank). ICICI Bank has reported surprisingly benign slippages, despite management change.

NBFC

Most NBFCs continue reporting strong numbers on the business front. All vehicle financiers have reported strong growth and stable-to-improving margins. HFCs have reported in-line numbers, but yields for smaller HFCs continue to be under pressure. Management commentary on liquidity has been divergent.

Autos

Results so far have been in line with expectations. Continued raw material cost pressure and currency volatility (MSIL) in 2QFY19 have been managed by price hikes and cost-control initiatives.

Even though OEMs see the impact of raw material inflation easing in 2HFY19 (except steel), the risk on margin remains due to currency volatility and higher discounting because of heightened competitive intensity.

Consumer

Results of consumer companies have been good so far with sector heavyweights HUL and ITC reporting in-line numbers and indicating an improving trend. Nestle reported an impressive set of numbers on all fronts.

While Asian Paints disappointed on margins, its volume growth was robust and ahead of expectations. Colgate’s results were also in line with low expectations. Given that these five stocks contribute nearly 70% of sectoral EBITDA and PAT, the results season on a weighted average basis is likely to be in line with expectations.

Oil & Gas

Only RIL and BPCL have reported numbers so far. Both have reported a sequential contraction in the refining margins. We expect pressure on the refining margin to continue in the third quarter as well.

Petrochemical margins have also contracted sequentially for RIL. We expect margins pressure to continue due to the impact of higher prices on demand, and also the start-up of two new ethane crackers in the US.

Telecom

Bharti witnessed a sluggish quarter, while Vodafone-Idea is also expected to deliver a muted performance. ARPU down trading (mainly in the postpaid category) and the burgeoning debt have been the key concerns.

We believe that (a) the shift of competition among top three players (v/s smaller players earlier) for higher subscriber market share and (b) Jio Phone’s healthy offtake would continue exerting pressure on incumbents’ performance.

Metals

Although steel prices dipped in July due to seasonal volatility in demand, average realization remained stable QoQ for JSW Steel. Margins, too, remained close to historical high as cost inflation was benign.

A similar stable margin trend is expected for Tata Steel and SAIL. Margins for steel companies have clearly peaked on the recent increase in coking coal prices and the INR depreciation.

Capital Goods

Results have been mixed so far, with BHEL’s operating performance coming in much below expectations (adverse revenue mix impacted the company’s margins profile), while Bharat Electronics delivering extremely strong results.

Pharma

Performance in the Pharma space has been mixed. US business continues witnessing pricing pressure (albeit the intensity is now lower). Domestic formulations business grew at a subdued rate due to a high base of the past year. Favorable currency movements led gains to some extent.

Disruption in China on account of pollution concerns is providing a window of opportunity to backward-integrated Indian companies. In particular, DIVI and ALPM have delivered a strong beat on earnings. DRRD and JLS’ results were largely in line. GLXO’s performance was below expectations.