Q3FY18 Earnings: Highest during FY18 & 2nd best since 2014

A few years of higher interest rates is getting baked into the India story. Macro tailwinds we enjoyed these past years (like oil, inflation, CAD etc) are turning negative at the margin, but not alarmingly so. Meanwhile, micro-underpinnings have solidified, for e.g. spinoffs from unorganized to organized, rationalization of logistics following GST, resolution and repair for Banks following new bankruptcy code, grassroot level demand strengthening on policies like housing for all, electricity for all and MUDRA all point to higher economic growth.

However, over the last couple of years, we have seen stock prices rising ahead of earnings delivery. Going forward we expect earnings growth to come thru. However price performance will now lag or be relatively muted as PE multiples are expected to soften on the back of expected rise in interest rates. Companies where expectations are high (reflected in relatively rich multiples) would be vulnerable if earnings growth doesn’t stack up sufficiently.

Having said that, Q3 FY18 earnings result have not been too bad so far, although we do reiterate that they have to be read with caution due to the low base from last year caused by demonetization.

Q3 FY18 earnings season

Q3FY18 earnings growth of 22% YoY (ex OMCs and SBI - reported a loss of Rs 24.2 bn in Q3FY18 on sharp increase in provisions on investments/NPAs) has been the highest during FY18 and the second best since 2014. Aggregate earnings for the 150 companies under our coverage universe are in line with our expectations. Large sectors which positively surprised our estimates are (1) NBFC – Largely driven by HDFC on account of huge one-time gain from its stake sale in HDFC Life; (2) IT - Midcap space saw strong growth across verticals in a seasonally weak quarter. Margin performance was driven by utilization uptick and cost controls. and

(3) Resources – Better-than-expected steel realization. Cement as expected posted 10% decline in earnings. Earnings growth nearly doubled for Retail sectors, while it grew more than 20% YoY for Engineering, Infrastructure and Resources.

Sensex companies: The best earnings quarter since 2014. 28 companies posted earnings growth of 24% YoY, in keeping with our estimates. The key contributors to this superior growth are HDFC, Infosys, Tata Motors, Tata Steel, HDFC Bank and L&T. We marginally increase our Sensex EPS estimate for FY18 by ~1% and maintain FY19 estimate. EPS growth for FY18 stands at 12% (Rs 1,603) and rises to 20% (Rs 1,931) in FY19.