A few companies have already released their Q3 numbers with many more to follow in the days to come.
India Inc. posted a fairly good set of numbers during Q2FY19 growing at the fastest pace in 7 quarters. Here, we look into how India Inc. will fare in Q3 and present our earnings expectations for various sectors.
But first, a look at how various micro and macro factors played out during the quarter:
Crude oil – The behemoth of all factors
Oil prices are crucial for India, given the high import dependence (~80% of oil requirements) of the country. Brent crude hit the year’s peak of $86/bbl in early October, sparking major fears of an economic slowdown in the country.
The profitability of most sectors, directly or indirectly, is impacted by crude oil, given that the commodity serves as a raw material to several businesses and also affects fuel costs.
The gyrations in the rupee/USD levels were most prominent in the last quarter. The rupee appreciated ~5% over the Oct-Dec quarter. However, through 2018, the rupee depreciated from 63/$ levels, which serves as a tailwind for Pharma and IT.
Set off by IL&FS’ subsidiary’s interest default on a commercial paper, the chain reaction could be seen in the plunging stocks of housing finance companies (HFCs) and other NBFCs & financial companies across September. Fears of more defaults and shrinking liquidity in the system still haunt the sector.
Weak festive season to weigh on sectors
Auto and consumer-focused sectors are expected to post bleak data for the quarter owing to weak festive offtake. To add to this, the Auto sector has been grappling with several other issues such as shrinking liquidity and high fuel prices.
Sector-wise earnings expectations:
- The Indian IT sector is expected to perform well in a seasonally weak quarter aided by large deal wins and strong momentum in new-gen services.
- We expect the focus to turn to the outlook for CY19 IT budgets as the macros look uncertain in developed markets. However, as per industry sources, there aren’t any severe concerns (from various management interactions) as the demand pipeline is strong led by digital.
- HCL Tech is expected to lead growth, +5.2% qoq, on seasonal strength in the IP business, deal ramp-ups, and contribution from the HDI acquisition.
- As for mid-tier IT, lower exposure to legacy services and deal ramp-ups would lead to outperformance vs. large cap peers.
- The Indian FMCG sector is expected to witness healthy volume growth in Q3FY19E aided by stable demand trends. We are estimating 11% yoy revenue growth for our coverage universe, similar to what was witnessed in the previous quarter.
- We expect the spend on promotions in the quarter to be high as crude prices corrected mid-quarter. HUL, Britannia, GSK Consumer Healthcare (GSKCH), and Nestlé are expected to report strong results, whereas TGBL and Godrej Consumer Products (GCPL) are likely to witness a subdued Q3FY19E.
- Net profit growth for the sector is expected at 14.5% yoy (ex-ITC 17% yoy). Healthy growth would be seen in Nestle, HUL, JLL, and GSKCH.
- However, TGBL is the only company expected to report PAT decline (down 10.8% yoy) on account of higher tax rate and EBITDA pressure. GCPL, Bajaj Corp, and Emami are the other companies that are likely to witness a subdued PAT due to weak EBITDA performance.
Banking: Select private and corporate banks to dominate performance
- During this quarter, we believe that the credit costs of wholesale banks will decline qoq, while retail banks’ performance would remain strong.
- We expect domestic loan growth to improve for PSU banks, especially for State Bank of India (SBIN) and Bank of Baroda (BoB), partly driven by NBFC portfolio buyouts.
- Earnings of PSU Banks for the quarter would be driven by (a) sequential moderation in slippage rates, (b) lower credit costs, (c) better margins due to better income recognition, and (d) reversal of MTM bond losses and treasury gains.
- Key themes to track in Q3FY19 would be (a) loan growth and market-share shift to private banks, (b) run rate of slippages, which is estimated to moderate, and (c) reversals likely to be taken in MTM provisions and bond gains owing to a sharp decline in bond yields.
- We expect corporate banks like Axis Bank, ICICI Bank, and SBI to report sequentially lower slippages and better earnings. IndusInd Bank's earnings will be closely watched for hits on its IL&FS exposure and fee-income progression.
NBFC: Earnings likely to be muted
- NBFCs are likely to report a relatively muted Q3FY19. Further, loan growth and core earnings growth will remain subdued for the quarter.
- Apart from HDFC, others have maintained higher balance sheet liquidity or lower disbursements in the last quarter.
- For vehicle finance NBFCs, disbursement trends in December will see moderation too.
- NIMs will be impacted sequentially as well, due to elevated cost of funds and higher balance sheet liquidity.
- We do not expect any major worsening in asset quality in the quarter.
Retail: Healthy festive demand to benefit apparel retailers
- Retail and textile players are expected to register a very positive quarter owing to healthy festive demand for apparels and superior operating performance with the likes of Trent, ABFRL, etc., expected to report double-digit revenue growth during the quarter.
- Avenue Supermarts is also expected to report robust revenue growth on the back of aggressive discount offerings. However, aggressive discounts are expected to have a negative impact on DMart's EBITDA margin.
- Apparel retailers like Trent, ABFRL, etc., are expected to report double-digit revenue growth during the quarter.
Auto OEM: Multitude of headwinds to suppress top-line growth and margins
- We expect Auto OEMs to exhibit weakness at the top-line and EBITDA level in Q3FY19. Top-line growth is likely to be affected by several factors such as weak festive off-take, higher fuel prices, system-wide liquidity crunch, and the rise in price of vehicles due to higher insurance costs.
- The street will look out for management commentary indicating any green shoots, price hikes, or normalization of demand. We expect Q4FY19 to be better as low input prices and diminishing discounts are expected to boost margins.
- We expect HMCL, ALL and MSIL to see margin contraction due to lower volumes and diminishing operating leverage and BJAUT to see margin pressure despite strong volumes due to its aggressive pricing strategy.
- Auto ancillary players will be better placed in Q3FY19 compared to their Original Equipment Maker (OEM) counterparts, as strong after-market demand will make up for weak OEM demand.
- Battery-makers (Exide Industries Limited – Exide and Amara Raja Batteries Limited - AMRJ) and tyre manufacturers (MRF Limited – MRF, CEAT Limited – CEAT, Apollo Tyres Limited – ATL) will see 10-20% yoy revenue growth.
- Upstream chemical companies are likely to continue their strong performance trajectory during the quarter backed by sustainability in the demand scenario and strong levels of realization.
- The strong performance is also expected to be on account of increasing competency of Indian players across the globe as the disruption of chemical market in China continues to persist.
- Chemical players who are net importers are likely to witness easing of input cost pressures with the decline in prices of crude derivatives and INR appreciation vs. USD.
Agri-Inputs: Export market to offset subdued domestic scenario
- Domestic agrochemical players are likely to report subdued earnings for the quarter on account of decline in rabi acreage (down ~5% yoy) and below average rainfall (~44% below).
- Further, below average kharif season has also led to decline in the farm income across various states. Agro-players with global presence and export revenues in areas like Latin America (LatAm) are expected to witness higher volumes backed by filling up channel inventory.
- The private sector annual premium equivalent (APE) under life insurance increased by 10% yoy during the quarter. Amongst the listed players, SBI Life and Max Life witnessed an increase in APE by ~17% and ~13% respectively during Q3FY19.
- Most of the large insurance companies are shifting towards traditional policies with a focus on high-margin protection business. The value of new business margin of listed players has improved on account of this change in segment mix.
- Overall, the net earnings are expected to remain strong for the general insurance players based on above factors and stable investment yields.
- Leading broadcasters Sun TV Network Ltd (Sun TV) and Zee Entertainment Enterprises Ltd (ZEEL) are expected to report ~16% and ~13% revenue growth, respectively.
- Sun is expected to benefit from box office collections of its movies and growth of the subscription revenue. On the other hand, ZEEL, which had a network market share of 19.9% in Q2FY19, is expected to benefit from strong advertisement revenue growth.
- Revenues for steelmakers are likely to be down sequentially in Q3FY19E due to a fall in steel prices over the past quarter.
- Due to the weakness in prices leading to a contraction in spreads, EBITDA margins are likely to shrink ~200bps qoq in Q3FY19E.
- This, combined with weak Chinese macros, are likely to keep investor sentiment subdued.
- We expect top three airline companies (IndiGo, Jet Airways and SpiceJet) on cumulative basis to report net loss for the Q3FY19.
- However, barring Jet Airways, financial parameters for the remaining two are likely to improve on qoq basis primarily on the back of lower fuel costs.
- We are bullish on SpiceJet, considering its strong fleet size to capture demand growth, improvement in fuel efficiency and lower maintenance cost going ahead.
- We expect strong and organized realty players will significantly gain from liquidity crunch, which will recede only gradually over the few quarters.
- We are bullish on Sobha, Oberoi Realty and Sunteck Realty from our coverage universe.
- We expect healthy top-line growth for engineering and capital goods companies in Q3FY19, driven by pick-up in execution amid strong order backlog.
- Among the key players, we are bullish on L&T, Siemens, Cummins and Bharat Electronics.