Market was readying for the next round of downgrades for earnings for FY20 from 24 percent to 18 percent, but we are now again looking for a 24 percent growth in Nifty earnings for FY20, the extra 6 percent is being aided by lowering of the corporate tax.
For September 2019 quarter, the average sales growth of our coverage companies Ex Financials is expected at 5 percent YoY versus 9 percent YoY last quarter and the Net Profit growth after accounting for Corporate Tax benefits are expected at 14 percent vs 14 percent last quarter wherein the tax benefits were not included. For FY20, we expect our coverage companies (ex-financials) to report sales growth of 9 percent and Net Profit growth of 19 percent.
Our Nifty Expected EPS for FY20 is 603 and in this sense, the market currently is trading at 19 times FY20 forward PE. The new tax regime now empowers companies to strategize further growth with better working capital. Management commentary on the utilization of tax benefits will be closely tracked.
The banking sector is likely to witness moderation in loan growth at 12 percent YoY on account of slowdown in the economy with SME, auto and corporate loan growth underperforming. NPA accounts continue to hit certain banks, though we believe, new NPAs are rather smaller in amount though higher in numbers.
Infusion of Rs 70000 crore of equity into the PSU banks will trigger the growth going ahead. Total Net profits of 19 Banks under our coverage will be at Rs 21000 crore versus Rs 11390 crore last year the same quarter on account of lower provisioning, stable Pre provisioning profits, and lower tax rate.
We continue to like HDFC Bank, Axis Bank, ICICI Bank, and SBIN. Growth will remain under pressure across the NBFC sector. AUM is expected to grow by 17 percent versus 24 percent last quarter. We prefer Bajaj Finance, CREDITACC, and Can Fin Home, in the NBFC space.
In the consumer space, volume growth of 6 percent is expected with revenues to grow by 8 percent. Crude and mentha oil will support margins for some while increased milk and barley prices will impact gross margins negatively. On QoQ basis, NPM will increase from 14 percent to 17 percent primarily due to Tax benefits. We prefer, HUL, ITC, Nestle, United Spirits and D-MART within the space.
In Technology, Tier 1 companies are expected to post 1 percent to 5.1 percent QoQ in cc terms while mid-cap companies will vary from 0.8 percent to 4 percent QoQ. Wages hike to drag margins for midcaps. We remain positive on Infosys and HCL Tech.
Lower Auto monthly numbers along with huge discounts already guide for a sharp decline in revenues. Topline is expected to de grow by 20 percent YoY while Ebdita margins are expected to fall by 200 bps on YoY basis. There has been a 25 percent contraction in Auto volumes in the first 5 months and hence FY20 will close with 10-15 percent degrowth. There are strong expectations that the festive season may fuel up demand in the current quarter. We prefer Bajaj Auto and Maruti Suzuki in this space.
Second-quarter is generally seasonally weak for Infrastructure companies. Revenues are expected grow only by 8 percent YoY despite the strong order book on account of heavy monsoon and delay in appointment dates for projects. New orders too are not flowing in and there is delayed land acquisition and lower credit availability. We prefer L&T and PNC Infra in this space. Working Capital has been a serious cause of concern for such companies and this should be kept in mind while selecting companies for investment.
For metals, Revenue in 2QFY20 is expected to be soft due to lower volume growth and reduced metal prices (except steel).
Pharmaceuticals will show some revival as Indian players have now begun transitioning the US business to specialty/complex generics where competition is lower. Cost control measures are being done. However, Roe still is suppressed for most of the companies.
The Author is Head of Research, Narnolia Financial Advisors Ltd.
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