Lack of pick-up in investment cycle is a reason to worry: Gautam Duggad

We expect 26% earnings growth in FY20 for Nifty firms, says Gautam Duggad

Nifty earnings growth for 2018-19 has been lowered to 9 per cent. And, revival in the banking sector, which is set to drive earnings in 2019-20, can help achieve this target, says Gautam Duggad, head of research, Motilal Oswal Institutional Equities. During the brokerage’s investor conference, Duggad told Samie Modak that earnings recovery and politics remain key concerns for investors. Edited excerpts:

How was the December quarter for India Inc? What were the key takeaways?

December quarter earnings were in line with expectations both for Nifty firms as well as those in our coverage sphere. Nifty firms posted 6 per cent profit growth against an expectation of 8 per cent. 

However, excluding oil marketing companies (OMCs), profit growth was 21 per cent, which was the estimate. The quarter’s performance was hit by OMCs, which posted a 90 per cent year-on-year decline in profits. 

There was broad-based margin contraction seen in the December quarter. The key highlight for us was the continued recovery in asset quality of corporate banks and strong trends in consumption. The information technology (IT) sector posted a stable performance with profit growth at multi-quarter high. However, we have lowered the earnings by 3 per cent for FY19 Nifty earnings, led by downgrades in Tata Motors, ONGC and HPCL. 

Lack of a tangible pick up in investment cycle and continued moderation in auto numbers were key disappointments. 

NBFCs have reported a sequential moderation in disbursements, given the liquidity constraints and rising cost of funds.

Will consensus estimates for FY19 be met?

The estimates have been cut in the last nine months. We are now expecting 9 per cent earnings growth in FY19 for Nifty firms. Recovery in asset quality of corporate banks makes us feel the revised estimates will be achieved.

What’s the earnings forecast for the next financial year? What will provide impetus to growth?

We expect 26 per cent earnings growth in FY20 for Nifty firms. It will largely be driven by banks such as ICICI Bank, SBI and Axis Bank, given the recovery in asset quality and decline in provisioning costs. Excluding corporate banks, we expect 14 per cent growth for Nifty in FY20 earnings. Other sectors that will contribute to the earnings growth next fiscal are auto, driven by Tata Motors, and consumers.

How are the valuations stacked up right now? Any sector or stock that looks attractive? What are the ones that can be avoided?

Valuations are now fair at 17 times the estimated FY20 earnings. We are at the bottom of the corporate profit-to-GDP ratio (2.8 per cent for FY18) and given that context, we believe current valuations look fair. We like private banks, IT, consumption and autos. Utilities look attractive, too, given the beaten-down valuations. We are cautious on cement, capital goods, telecom, pharma, oil & gas. Our top picks include ICICI Bank, Axis Bank, Maruti Suzuki, SBI, Titan, HUL, Infosys, L&T, Coal India, M&M, HDFC, LIC Housing Finance and Federal Bank.

What were key highlights of the Motilal Oswal India Investor Conference?

We saw good participation from funds and corporates across sectors. While activity levels are down, investors are keen to find out ideas in the mid-cap space after the sharp correction over the past 15 months. Earnings recovery and politics remain key concerns in the near term for overseas investors. Given the stability in macros and expectations of benign interest rates, India does appear attractive from a medium to long term viewpoint. This, coupled with the expected earnings recovery led by corporate banks and continued strong consumption trends, make the India story solid.

What are the key global trends and how will they impact corporate earnings?

Any potential slowdown in the global economy will have repercussions for cyclical sectors like metals and oil & gas, globally. That apart, slowdown in the US economy can impact IT earnings. Geopolitical headwinds coupled with concerns around a trade war can result in higher risk premium for India. Rising crude oil prices do constitute a near-term risk for Indian macros. Similarly, respite on the global trade war front will augur well for emerging markets like India.