Kotak expects net profit of Nifty50 companies to grow 13 percent in FY19 led by banks and Coal India
Overall, the December quarter earnings season was a mixed bag. However, Nifty50 companies outperformed as constituent banks reported improvement in asset quality and oil marketing companies reported better-than-expected earnings.
Improved earnings in the quarter prompted brokerages to expect strong earnings growth in FY20 for Nifty50 companies in general, and especially for banks, pharma and select consumption-related companies.
Kotak Institutional Equities expects net profit of the Nifty50 to grow 26 percent in FY20 led by (1) steep increase in profits of certain banks whose FY2017-18 profits were affected by high credit costs, (2) recovery in profits of the automobile sector in FY20 led by higher volumes, (3) recovery in profits of pharmaceutical companies led by revival in US generic revenues and (4) moderately strong growth in net profits of consumption-related companies.
It expects net profit to grow 13 percent in FY19 led by banks (lower loan-loss provisions due to peaking of NPLs, lower slippages and reasonable provision coverage ratio) and Coal India (price increases in the second half of FY18).
In Q3FY19, net profit of the Nifty50 companies increased 2.1 percent YoY and was 5.5 percent above Kotak's expectations largely due to better-than-expected results of the downstream oil companies, which offset the large miss in the case of Tata Motors.
Tata Motors reported a net loss of Rs 26,961 crore for the quarter ended December 2018 impacted by an exceptional item of asset impairment of Rs 27,838 crore, against profit of Rs 1,214.6 crore in the same quarter last fiscal.
After this earnings season, Kotak has made changes in its Model Portfolio. It has added ABB India (200 bps) to the portfolio, but for that to fund it reduced exposure to HDFC (by 50 bps to 750 bps), HDFC Bank (by 30 bps), Mahindra & Mahindra (by 50 bps to 240 bps), and Reliance Industries (by 70 bps to 8.2 percent).
The research house also included United Spirits (200 bps) in the portfolio, and for that, it trimmed positions in Infosys (down by 140 bps to 860 bps) and Tech Mahindra (down by 60 bps to 250 bps), taking note of the strong performance in the IT stocks and likely limited potential upside to 12-month fair valuations.
In the Midcap Model Portfolio. Kotak added M&M Financial and removed Laurus Labs after December quarter earnings.
Kotak feels market valuations look reasonable now and sees no major trouble ahead though there are lots of macros and political noise over the next few months.
The research house said, in the next few months, the Indian equity market will have to deal with (1) continued debate around global slowdown (China and the US in particular), (2) related monetary policy actions of global central banks, (3) implications for global bond yields and currencies and (4) general election in India.
The Indian equity market expects the BJP-led coalition to stay in power after the general elections in April-May 2019, it added.
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The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
