Muted expectation on Q1FY20…

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In Q1FY20, revenue and net profit for Nifty50 is estimated to grow by 8% and 11% respectively on a YoY basis. After adjusting the financial sector, Nifty50 PAT growth number changes from positive to negative to a de-growth of -8%. The finance and cement sectors are expected to be strong performers, while weaker sectors are likely to be auto, metal and oil and gas due to weak consumer demand, lower realizations and slowdown in the global economy.

The banking sector growth is expected to continue on the back of low base in Q1FY19 in which ICICI and SBI had reported huge net losses. Private banks are expected to see better asset quality, less competition from PSU banks and reduction in NPAs. Cement volume growth was mere 2.5% YoY impacted by general election and partly by base effect. However, cement prices have grown strongly by average 12%-15% in various regions which will support revenue growth and margins. Additionally, on the cost front, fuel prices softened since Q3FY19 quarter and will benefit in the quarter.

The IT sector is expected to see a mixed performance in the coming quarter with constant currency revenue expected to be positive for few companies but wage revisions, higher visa costs, investments and absence of rupee benefits could marginally impact margin in the near-term. Tier 1 IT companies are likely to post flat to positive results but Tier 2 and 3 will be mixed. Weak consumer demand and sluggishness in the rural may lead to muted volume growth for the FMCG sector.

Auto sector will continue to see weak earnings in the Q1 & Q2. The economic downturn, slowdown in rural demand and financing crunch has lowered the volume growth. During Q1 the industry witnessed a negative growth of 10.5% in which passenger and 2/3 wheeler segment de-grew by 15%/10% whereas commercial vehicle declined by 13.6% respectively. Costs are expected to further increase on the account of regulatory changes (enhanced safety features & transition to BS-VI) and margin to remain under pressure. We expect the situation to show some respite as the dealer inventory level is correcting, however CV will remain elevated. The government focus action plan on infrastructure development, improving rural demand and pre-buying due to change in emission norms can be the growth catalyst in H2FY20E.

In the metal sector, volumes are expected to improve on a YoY basis but lower metal prices combined with a 19% increase in global iron ore prices during the quarter is expected to negatively impact the bottom line. The correction in the Brent crude prices from $65/barrel to $50/barrel during the last quarter could result in refining and marketing inventory losses for OMCs in 1QFY20.

We had a one year forward target of 12,700 for Nifty50 which was based on the stronger mandate of the country reducing the political risk and expectation of revival in economic growth in FY20. We had factored Nifty50 EPS of Rs615 and Rs708 for FY20 and FY21. But post the budget, the horizon hoping for a revamp in economy has reduced given the lack of supportive measures of the government given a conservative approach to manage the weak fiscal position. While updated economic data and business outlook suggest further down trend in sentiment. This trend is likely to continue for some more time which is matching with the preview analysis of Q1FY20.

Based on this preliminary analysis we are marginally cutting the expectation for Nifty50 by 4% to EPS Rs590 and Rs679 in FY20 and FY21 respectively. This is subject to the actual performance of Q1 as market still hopes for an earnings growth of plus 20% in FY20 while Q1 is expected around 11%. On a one-year-forward basis the market is trading at a P/E of 19x based on our EPS expectation which is at a premium. We cut our one year target of Nifty to 12,400.

Posted: July 18, 2019

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