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Key takeaways from 1QFY19 earnings season….

India Inc has ended the last leg of its earnings season for the quarter ended June 2018. Although some interesting trends were observed during the course of the earning-report season, we note that the underlying narrative stays the same – a healthy performance from the Consumption- and Commodity-oriented sectors marred by higher provisioning costs at Corporate Banks. A low base of 1QFY18 indeed provided some succor to several sectors.

Key trends of 1QFY19:

[1] Asset quality woes of PSU and Corporate Banks appear to be stabilizing. Fresh slippages moderated, and Corporate Banks raised the provisioning coverage ratio further.

[2] Consumption – both urban and rural – remains strong, with companies from FMCG, Auto, Durables and Retail pointing toward a healthy demand outlook.

[3] Cyclicals continue leading from the front, with Metals and O&G driving more than 100% of incremental earnings for the MOSL Universe.

[4] IT delivered a healthy quarter, with improved commentaries on demand in the US BFS market. [5] In Healthcare, pricing pressure in US generics is stabilizing even as earnings downgrades haven’t abated.

While aggregate sales and EBITDA growth was healthy and in-line, profits missed our estimates. The miss at the PAT level for both the MOSL and Nifty Universe can be entirely ascribed to Corporate Banks, which were impacted by elevated provisions. Strong inventory gains in OMCs boosted the aggregate profits.

Among the 19 sectors we track, 2/8/9 posted profits that were above/in-line/below our estimates.

The proportion of companies reporting 30%+ PAT growth (at 41% of MOSL Universe) is the highest since Mar-10, partly aided by the low base of 1QFY18 in several consumption-oriented sectors.

One of the important takeaways from this earning season is the peaking of asset quality stress for corporate banks. Provisioning costs could moderate significantly beginning 2HFY19 and provide a lift to broader earnings for 2HFY19 and FY20, in our view.

In BFSI, while NBFCs maintained their earnings growth trajectory (44% PAT growth, multi-quarter-high), Private Banks missed our estimates owing to higher provisions at ICICI and Axis. Early signs of margins pressures on Retail lenders were evident. Improving asset quality of corporate banks and margin pressures on Retail banks could potentially drive a near-term performance divergence in Financials space.

Recent currency depreciation has added to the prevailing macro concerns. However, from the earnings perspective, we note that ~50% of Nifty profits are positively co-related with the depreciating INR.

For the quarter, earnings were led by Consumption and Commodity, with Metals and Oil & Gas accounting for more than 100% of incremental earnings growth for our MOSL Universe. Within the Consumption pack, Auto lagged with a broad-based miss on profits and consequent earnings downgrades.

Global Cyclicals single-handedly drove the quarterly performance, led by Metals and OMCs (inventory gains drove profits). Defensives posted double-digit earnings growth for the first time since Jun-16, buoyed by Healthcare and Consumer, while Domestic Cyclicals posted a 12% YoY PAT decline dragged by corporate banks.

Telecom posted the fourth consecutive quarter of loss, while Healthcare profits rebounded off a low.

#MarketView | Don't see too much room for upside in valuations for Nifty. ICICI Bk preferred pick among banks as see things settle down. Risk reward favourable for the Bk, says Gautam Duggad of Motilal Oswal Securities (@MotilalOswalLtd) @nikunjdalmia @AyeshaFaridi1 @tanvirgill2 pic.twitter.com/leohiIewJE

— ET NOW (@ETNOWlive) August 9, 2018

Earning moderate led by drag in Corporate Banks: 90 companies saw earnings cut of 3%+ (78 in 4QFY18), while 39 companies saw earnings upgrades of 3%+ (53 in 4QFY18). Our FY19/20 Nifty EPS estimates have been cut by 5.6%/1% to INR547/688 v/s INR580/694 earlier. Broader market earnings estimates have held on well.

However, higher provisioning by ICICI and SBI and big margin miss at Tata Motors played culprits. Nearly 80% of the FY19 Nifty earnings cut is driven by ICICI, SBI and Tata Motors.

We are building in 19/26% EPS growth for Nifty for FY19/20. Excluding corporate banks, Nifty earnings growth is expected at 16%/17% for FY19/20 vs. 11%/16%/10% in FY16/17/18.