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Strategy: Cyclicals to lead earnings recovery over FY20-22 - ICICI Securities

Posted On: 2020-07-05 21:56:49

Key drivers of Q4FY20 NIFTY50 earnings:

- Sectors with topline growth > Q4 nominal GDP growth of 7.5%: private banks (strong NII growth), Telecom (ARPU increase), agrochemicals (strong volume demand), pharma (improved demand) and Utilities (capacity addition).

- Food-FMCG, IT and Infrastructure grew at less than nominal GDP. PSU bank had flat NII growth.

- Sectors with declining Q4 topline indicates weak demand due to lock-down effect and/or price erosion: Weak demand for Cement and discretionary consumption - Auto, Media, Paints, Jewelry, Tobacco and Non-Food FMCG.

- Metals and Oil & Gas sales decline due to weak demand and price decline in global commodities.

- Operating profit margin (EBITDA margin) improved / remained stable in the growing sectors (Agrochemicals, Telecom, IT and Pharma) as well as declining topline sectors (Paints and Cement). NIM's for private financials stable while remained under pressure for PSU Bank. Other sectors saw a dip in Operating margin.

- Q4 PAT largely impacted by sectors with adverse operating leverage (consumer discretionary and commodities) and COVID-19 related provisions by Financials (NBFCs more vulnerable in terms of rise in NPA).

- Our readings of the Q4FY20 management commentaries indicate supply side normalization, private capex deferment, rural demand ahead of urban, essentials ahead of discretionary, austerity drive in corporates and households, weaker credit growth, among others. Refer our detailed report dated 30-Jun'20 (link).

- Outlook: Overall NIFTY50 'Profit after Tax' (PAT) dipped by 22% in Q4 resulting in FY20 PAT growth of 5%. We expect NIFTY50 EPS growth to be extremely volatile over FY21 and FY22 due to the dip and recovery resulting in CAGR of 13.8% over FY22-20. Our one year ahead (Jun'21) NIFTY50 target stands at 11,200 based on a multiple of 17.3x (+0.25 s.d. of LTA). Nominal GDP for India is expected to grow at ~4% over FY20-22. Earnings growth within the NIFTY50 over FY20-22 is expected to be driven by Conglomerate, Bank, Oil& Gas, Telecom, Utilities, Cement and Auto.

Top picks - HDFC Bank, Kotak Mahindra Bank, SBI Life, Ultratech, Bharti Airtel, NTPC, HPCL, TVS Motors, Siemens, Pfizer and Alkem

- Signs of a slow recovery in June…will pick up momentum in Q2FY21 as festive season approaches: High frequency data for June shows slowing down of the sharp decline seen in previous months in the form of PMI (37.8 versus 14.8 in May), Improving Google mobility trends, digital transactions, highway toll data, Job surveys, GST collections and evidence of reverse migration.

- Limited evidence of pent-up demand: However, there is no major evidence of pent-up demand getting released so far except for some mandatory pre-monsoon related construction and allied activities.

- INR is showing signs of resilience on a comfortable external environment of current account surplus in Q4FY20, falling inflation and positive flows (FDI plus FPI).

- Accommodative stance of global central banks on liquidity and interest rates continues as the US FED embarks on direct purchase of corporate bonds.

- Key risks to revival include: (a) COVID-19 cases continue to rise in India although the doubling rate (20 days) has been reducing, (b) rising geo-political tensions between India and China, (c) Vulnerable Government finances due to weak revenue prospects although lower than expected fiscal stimulus and higher excise collection on oil prices to mitigate the risk.

Source: Equity Bulls

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