While some companies witnessed a post-GST restocking-led volume recovery, others are yet to recover fully. This possibly also reflects the demand environment generally and/or GST-led price increases impacting demand.
Based on the results reported so far, many companies appear to have focused on cost control during the quarter — weak top line but strong earnings was seen in many cases.
Consumer staples/discretionary and cement companies reduced either marketing/advertising spend, staff costs or other expenses. Better availability of input tax credit under the Goods and Services Tax also benefited some companies.
Nifty earnings growth of 7 percent year-on-year so far is not strong (and below expectations), with revenue growth of 9 percent and EBITDA growth of 13 percent (also below expectations). An EBITDA margin of 19.4 percent is somewhat ahead of expectations, and up year-on-year.
A consensus Nifty earnings growth estimate of 13 percent year-on-year for the full 2017-18 financial year (FY18) implies 20 percent growth in H2FY18, considering results in H1 so far, which appears too high. Top-down, we expect 7 percent / 13 percent growth in earnings in FY18/FY19 against consensus 13 percent / 21 percent, implying the potential for further cuts ahead. We see an unattractive risk-reward for Nifty at these levels fundamentally; flows can support rich valuations near-term though.
- Sectorally, margins for autos have surprised so far, leading to an EBITDA beat.
- A gradual recovery in headline revenue growth can be seen for consumers, as trade disruptions slowly abated since GST implementation.
- Private sector banks continue to report strong growth in retail loans but asset quality performance was mixed. Some reported higher gross non-performing loan formation due to divergence from the Reserve Bank of India's audit.
- Non banking finance companies have been a mixed bag; loan growth is recovering for microfinance companies and asset quality performance has improved sharply.
- Lower than estimated operating cost has led to higher than estimated profitability for cement, though we believe cost pressure will resume in the coming quarters, largely led by the recent increase in petcoke prices due to disruption in U.S. production.
- While revenue has missed constant currency forecasts for information technology services, year-on-year trends have picked up from the lows in Q2FY17; many companies beat operational margin estimates.
The July-September quarter trends so far don't change our long-held view of the growth recovery disappointing investors, leading to earnings cuts.
The government's state-owned bank recapitalisation plan and new road-building program have boosted market sentiment and have further supported stretched Nifty valuations, as they have fuelled growth recovery hopes. The recapitalisation amount seems adequate and may create a supportive environment for growth, but it may not drive growth by itself. Currently, weak credit demand reflects economic activity, not just the capital adequacy of state-owned banks. The new road program doesn't alter the growth outlook for road spending or the capital expenditure cycle, in our view. The government's new Bharatmala program was needed because existing program awards were ending. We are Overweight state-owned banks but remain Underweight industrials/infrastructure sectors. Some of our other overweight sectors are auto parts and two-wheelers, consumer staples, retail private banks and real estate.
Gautam Chhaochharia is the head of India research at UBS Securities.
The views expressed here are those of the author's and do not necessarily represent the views of Bloomberg Quint or its editorial team.
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