The Nifty50 PAT is estimated to grow by around 10% to 12% on a YOY basis in Q3FY19. The growth is mainly led by the financials, metals, pharma and infra sectors. The financial sector is expected to perform well as challenges related to stress assets have passed the peak leading to moderation in provision and improvement in credit growth while reduction in bond yield is leading to higher treasury income. In pharma, shift into complex generics, specialty products and stability in US pricing are aiding performance. Infra sector is expected to do better on a QoQ basis led by cement and construction segment. On the other hand, de-growth in profitability is expected to be seen in telecom, NBFCs and auto sectors. In telecom, aggressive competition and lower Average Revenue per User (ARPU) is impacting while asset quality, liquidity and slowdown in business is plaguing NBFCs and auto sector. The market was expecting 15% and 22% growth in Nifty50 EPS for FY19 and FY20 respectively. The actual EPS growth in H1 is about 8% and given a slowdown in business in H2, this expectation is at risk with downgrade in earnings growth. As per CSO, GDP growth is forecasted to lower to 6.8% in H2 compared to 7.6% in H1.
The Q3 results season will start with IT sector, we remain optimistic on the outlook owing to continued momentum in core verticals and scale up in digital business. Digital business continued to perform well with revenue contribution increasing to 28% (25% Q1FY19) for TCS and 31% (28% in Q1FY19) for Infosys. This was driven by strong traction in demand across cloud, IoT (Internet of Things), cyber and data analytics. A solid revenue growth of 17% (Nifty IT index) for the industry and rupee tailwinds aided margin expansion for the quarter. The industry is expected to deliver double digit growth in H2FY19 buoyed by recovery in BFSI (especially in North America) due to structural improvement in demand and strong order book. On a 1 year forward basis the Nifty IT index is trading at 15x which is reasonable compared to 3 year average. However, strengthening rupee from its peak of Rs75/$ to Rs69.8/$ on Dec end will induce some volatility in the near term.
Oil Marketing Companies (OMCs) are under performing in recent times as government has asked them to forgo a portion of their marketing margins in October as Brent crude prices hit high of $86.7/barrel. Post this; though Brent crude has dropped by 33%, OMCs continue to under perform due to expectation of weak earnings in the near term and general elections. Going ahead, re-rating of the sector will largely depends on the policy adopted by the new government, post elections.
We continue to believe that large-caps is the space we should invest with higher exposure than in mid and small cap in the near-term, given the undergoing domestic and global risk. Currently, we suggest a mix of 82.5% for large-caps while 17.5% for mid and small cap, which can be increased in the future as risk subsides. The focus should be more towards stable domestic stories like consumption, IT, chemicals and export-oriented companies. Value buying stocks in Pharma, NBFCs, Cement and Infra should also be added.
Posted: 10 January 2019
Can we conclude that selling OMCs to buy IT( TCS, INFOSYS, HCL Tech) should be the way ahead, till policies become clear post general elections.
OMC has been under pressure due to change in government policy in the short-term. As election nears, we anticipate this risk to reverse and a flip in trend which shall be supported by moderation in oil prices. OMC can be reasonable performer in the short to medium-term. Regarding IT sector, it should be an important portion of your portfolio. We are suggesting 10% in our model portfolio, which can be higher or lower depending on the risk averseness of the individual, i.e. higher for a risk averse investor and vice versa. Currently, in the large cap our top pick is TCS, while in mid-size, we prefer HCL Tech and Mindtree. We have an optimistic outlook owing to continued momentum in core verticals and scale up in digital business. Digital business continued to perform well with revenue contribution increasing on a QoQ basis. This is driven by strong traction in demand across cloud, IoT (Internet of things), cyber and data analytics. The industry is expected to deliver double digit growth in H2FY19 buoyed by recovery in BFSI (especially in North America) due to structural improvement in demand and strong order book. On a 1yr fwd. basis the Nifty IT index is trading at 15x which is reasonable compared to 3yr average.