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Essence of the Week
Feb 06, 2017 | Source: AxisDirect
The budget came and went, setting off a relief rally. Why not, it’s easy to beat expectations when they are quite soggy to begin with. Bond markets were more measured in their response (maybe those looking for 3% were disappointed); though in truth, other questions linger for bonds like RBI move next week, US jobs data over the weekend and the size of state government borrowing without NSS. These concerns should dissipate. With so much liquidity in the financial sector, even a flat trajectory for general govt. market borrowing is good news.
We have crossed several milestones in the last few months relatively unscathed, from Fed hike to Trump inauguration to the budget. Maybe all that liquidity helped.
A few more milestones linger in the horizon: - USD/INR reaction to US policy on trade, taxes and spending; GST rate slab discussions beginning 18 Feb; Russia sticking to its production cut promise and potential Iran sanctions for oil; remonetization by March (currency in circulation@ Rs. 10.1 trn on 27 Jan vs. Rs. 17.9 trn on 4 Nov 16).
In a nutshell: Q3FY17 company results thus far Demonetization impacted demand for consumer companies with rural focus, while urban businesses were largely unaffected. Despite this, operating margins for companies in our universe were maintained at ~22% thanks to cost rationalization. For example, in 74 companies (ex OMCs) that declared results in our universe, revenue expectation has come in line at ~7% YoY, but growth in both EBITDA and PAT were ~200 bps above expectations at 7% and 3% respectively.
Read across for select sectors
Autos: Earnings driven mainly by other income, but at operating level marginally below expectations
Cement: Ultratech saw good earnings on the back of strong volume growth in south and east
IT: Revenue growth below expectation on account of pressure in traditional service lines
Telecom: Negatively impacted due to higher than expected pricing pressure
So far, EPS estimates for FY17 Sensex downgraded by ~1%, while FY18 remains unchanged. EPS growth for FY17 currently stands at 7% (Rs 1,502) and FY18 at 22% (Rs 1,830).
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