On a rally, in expectation of Q4, monsoon and election…


Net profit of Nifty50 companies is expected to grow by 20% YOY for Q4FY19. The growth is mainly driven by banking sector due to low base in Q4FY18. The low base in the banking sector was mainly due to losses from SBI and Axis bank, and NPA issue in the economy leading to higher provisions. Today, improved asset quality, credit growth and reduction in slippages are expected to drive profit growth for banks.

Excluding banking stocks, Nifty50 is expected to de-grow by 2% on a YoY basis. Apart from the banking sector, growth is expected to be seen in cement, FMCG and IT sectors. Better profitability in cement sector is due to robust growth in cement production due to higher demand from road construction, affordable housing and some revival in real estate leading to higher cement prices. The auto, metal and telecom sectors are estimated to see negative growth this quarter. Weak prices of industrial metals like steel, copper, and aluminum and lower demand from China are expected to put pressure on metal stocks while intense competition will continue to plague the telecom sector earnings.

Auto sector is expected to post weak earnings due to inventory buildup issues and weak demand. In the last two quarters, Auto sector is witnessing sluggish demand and we expect this trend to continue till 1HFY20. Post which, we expect pre-buying before shifting from BS-IV to BS-VI platform in FY21. During FY19, the Indian Original Equipment Manufacturers (OEMs) registered a growth of 10%, led by 5% in PV, 11% in 2/3W and 15% in CV which was below our expectation. This has led to production cut by major OEMs due to higher inventory and lower liquidity. This muted trend can continue in the short-term, however we remain positive over the long-term owing to lower valuation, increase in the rural income and higher infra spending. Currently the Nifty Auto Index is trading at 16.5x on a 1 year forward basis which is reasonable compared to its 3yr historical average at 16x.

Market was impacted when Skymet came with a subdued outlook on India monsoon relating it with El-Nino effect. Agriculture is only about 15% of the GDP and a weak monsoon impacts more if it is on a consecutive period. Increased percentage of irrigation has reduced the effectiveness of weak monsoon in the economy. But it does impact the sentiment, growth of the rural economy and allied ancillaries. And given the higher weightage of primary items in the inflation index it impacts CPI, interest cycle and NPA issue in agriculture credit having a dire effect on the respective segment of the economy. These concerns dimmed this week when India Meteorological Department (IMD) came out with its first long-range forecast for 2019 southwest monsoon with near normal monsoon. The rainfall is likely to be 96 per cent of the Long Period Average (LPA) with a model error of +/- 5 per cent. A near normal rainfall range is given as 96-104 of the LPA. LPA is the average of rainfall between 1951 and 2000, which is 89 cm. IMD stated that neutral Indian Ocean Dipole (IOD) conditions are prevailing over the Indian Ocean, indicating positive IOD conditions during the monsoon season.

Posted: April 18, 2019


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