The June quarter earnings of the financial year 2017-18 remained soft, but on expected lines as the fallout of GST
implementation led to channel destocking and discounting across consumer-facing industries. Given this, automobiles, auto-ancillaries, consumer staples, white good manufacturers and healthcare sectors faced the brunt.
The under-performance was exaggerated with input cost inflation yet to play out. The rise in commodity prices was also not passed on entirely in this quarter, as the inventory was liquidated at a discount to avail input tax-credits before GST
implementation. That apart, compensation was given to the dealers / stockists / supply chain distributors for the losses they incurred on GST
A few companies did manage to deliver better return in comparison to what analysts had pegged, and such companies got rewarded by the markets. The under-performance of IT, pharma and telecom
continued. A recovery stayed elusive for IT
companies amid headwinds like lower utilisation and digital investments still continuing, leading to further payback periods, while growth in revenues and volumes is still recovering in a gradual fashion.
For pharma, the troubles due to USFDA-related issues continued with elevated remediation costs plaguing the balance sheets, high R&D expenses and pricing pressures weighing on EBIDTA margin and the slower key niche drug approval pipeline is also taking a hit on the earnings.
Revenue accretion was a challenge for the telecom
companies, which is evident from the ARPUs that the companies reported. Bottom-line was impacted due to high leverage levels. Reliance Jio’s aggressive price stance and the spectrum payout has resulted in data tariffs coming down, which has been compensated by the large data volume growth.
continued the good show. The demand is expected to come back strongly in the second quarter. The FMCG sector is likely to see the impact of restocking in the second quarter. Festival demand and good monsoons aiding spending both on the rural and urban side along with payouts related to the seventh pay commission recommendations are the additional positives.
Retail private banks had a good show too as asset quality pressure was not evident. Good traction was seen in the advances growth along with credit cost reaming low leading to improvement in NIM and ROE.
However, the same cannot be said about corporate-facing banks where stress continued and slippages remained high, but stable (except few PSUs which witnessed deterioration). However, the resolutions expected on the back of Bankruptcy Code (IBC) can have relative improvement in the coming fiscal year. The pick-up in the credit growth cycle and the private capex in the second half, preferably by Q4, should also boost the earnings trajectory, as widely anticipated by the analyst community, and justify the multiples that the index is currently deriving.
With m-cap/GDP at 81%, the Indian markets are nowhere close to the peaks seen in 2007 and on a price to book (p/b) parameter at 2.6xFY19 earnings, close to the median 10-year averages. The earnings picked up in the second half and the range of 13-14% might justify the premium valuations for the full fiscal year.
Domestic liquidity remains strong. Since there are no lucrative alternative investment opportunities for any other asset classes at this point of time to deliver superior returns vis-a-vis equities, the flows through the SIP route in domestic MF’s would continue lending support to any sharp correction.
Investors should have a stock-specific approach in autos, auto ancillaries, private banks, FMCG, white good players, selective mid-cap IT stocks
and selective pharma stocks, but they should also remain cautious on capital goods, PSU banks and have a staggered manner on investing in qualitative names within these sectors. For a new investor, going through MF mode is still the best way to play the long-term Indian growth story.
The author is a Fund Manager at Angel Broking
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.