Why Q3 earnings will be keenly watched by D-Street

We have quarterly earnings around the corner which will further decide the market direction and we expect companies to deliver robust number.

   

The Indian equity market emerged as one of the best performers globally in 2018 in the wake of resilient macroeconomic factors despite heavy volatility. The Nifty index delivered a positive return compared to a negative return by major global indices.

With the controlled crude prices, strengthening rupee and positive macros India is likely to record even better economic performance during 2019. Also, with a major correction in international oil prices, trade and current account positions are likely to improve considerably.

However, we expect the market to remain volatile for the first half of the year driven by a series of global and local events like the US Fed’s rate action, the progress of US-China trade war, US' action against Iran’s oil exports and Central election.

Also, North Korean Kim Jong Un's warning to President Trump on taking a 'new path' in nuclear talks if the US didn’t relax economic sanctions adds up to the worry.

The auto sales number for December 2018 did not meet street expectations. Quarterly earnings that are around the corner and expected to be robust will chart the market direction.

Here are the stocks we are bullish on:

Asian Paints | Rating: Buy | Target: Rs 1,491

Asian Paints is India’s leading paint company and Asia’s third largest paint company, with a group turnover of ₹169 billion.

The company has to its credit a leadership position in its market, proven track record of adapting to changes in market conditions, professional management, history of innovative strategies in marketing, efficient manufacturing and logistics in place and prudent financial management.

In terms of growth, we continue to expect the Indian paints industry to grow at around 8-12 percent in the next few years and demand factors remain strong in terms of growth.

At CMP, We recommend a BUY on the stock with a target price of Rs 1,471 per share.

Indraprastha Gas | Rating: Buy | Target: Rs 319

The recent Supreme Court decision, which proposes that Indraprastha Gas buy Haryana City Gas Distribution will add to volumes and provide visibility for growth in the years ahead. Delhi’s green budget with plans to provide concession of 50 percent on the registrations of CNG cars will promote the cleaner fuel.

Environmental concerns in Delhi have brought to the fore the urgency of using cleaner fuels, which puts IGL in a sweet spot. IGL has a unique identity of a company with a rare mix of volume growth and strong margins, supported by relatively lower gas prices and supportive governmental initiatives.

We expect the volume growth momentum to continue for the company as State government will add 2,000 new buses in FY19, and expansion of its pipeline network in the new areas- Karnal, Rewari and part of Gurugram will add volumes from H2-FY19 onwards. We maintain our BUY rating on the stock with a target price of Rs 319 per share.

Hindustan Unilever | Rating: Buy | Target: Rs 2,250

Hindustan Unilever Limited (HUVR/HUL) is India’s largest fast-moving consumer goods (FMCG) company with a heritage of over 80 years.

With HUL being the largest FMCG Company with one of the largest footprints in terms of products and distribution network and its strategy to target volume growth primarily should drive healthy growth in medium term.

The company has also entered into health drinks segment with the proposed amalgamation of GSK Consumer business which we believe is value-neutral while earnings accretive for HUL at current ratio.

In terms of per capita, FMCG consumption India stands lowest within its developing country peers at just around US$29 as against Indonesia which amounts to almost double while China at four times India’s consumption.

For the H1-FY19, HUL has reported a growth of 11.2 percent in its revenues of which volume growth was around 11% for the period.

We expect HUL to grow at a CAGR of 13.5 percent in the next two years. We estimate the company to report revenues of Rs 401,280 million in FY-19E and Rs 457,561 million in FY-20.

MORE WILL UPDATE SOON!!

PSU banks look attractive after recent developments

All eyes would be on last budget of the current government to be presented before the general elections.

 

We expect volatility to remain in the market and street participants would now track global cues and Q3 earnings season. We believe Q2 earnings season has been mixed bag but Q3 can be much better. The monthly sales numbers of auto companies have been subdued in December 2018.

All eyes would be also on the last budget of the current government to be presented before the general elections. We do expect volatility as the central government may resort to populist measures to gain back popularity amongst the rural community especially farmers, after its loss in key states like Madhya Pradesh, Rajasthan and Chattisgarh.

The strategy at present should be to invest in a phased manner in companies which are not connected to any political party, have a robust business model, strong earnings and cash flow visibility, low debt and backed by quality management especially on the corporate governance front.

Considering the above factors, investors can have a stock specific approach in midcaps and smallcaps as there are many companies which are trading at a discount of 50-70 percent to their peak price in early 2018. We believe the falling crude oil prices will benefit paint companies. On the other hand, there would be significant inventory losses for OMCs.

Last week, Finance Minister Arun Jaitley said on Thursday that creditors are expected to get Rs 70,000 crore as some of the big cases, including Bhushan Power & Steel and Essar Steel, are likely to be resolved in this financial year.

They have already recovered Rs 80,000 crore from 66 cases resolved by the National Company Law Tribunal (NCLT). According to FM, increase in conversion of NPAs (non-performing asset) into standard accounts and decline in new accounts falling in the NPA category show a definite improvement in the lending and borrowing behaviour. All these factors would augur well for PSU banks which are trading at depressed valuations.

For short-term investors, the strategy can be to sell on rise and buy on declines up to the general elections. On a safer side, we would suggest long-term investors to have a look at pharma MNCs, consumption stocks, auto stocks, PSU banks – trading at depressed valuations (looking better after the cleanup of NPA mess, progress made under the NPA resolution framework under IBC, faster resolutions under NCLT and proposed recapitalisation), IT sector and private insurance companies at the current moment.

Stock Ideas

3M India | CMP: Rs 20,357 | | Target: Rs 24,800 | Upside: 22 percent

We like 3M India due to its unique and sound business model. The company’s products touch life of citizens on a daily basis in some way or the other with products in different segments like abrasives, automotive, casting and splinting, dental, filtration, food service and hospitality, hand hygiene, marine maintenance and repair, medical device and optical components, orthodontic, painting equipment & supplies, patient monitoring, safety products, securement and immobilization-dressing securement, skin and wound care, sterilization monitoring, surgical solutions, tapes and adhesives, vascular access and wire and cables.

With renewed rigour around priority market segments such as automotive, infrastructure, energy and retail, the company is well aligned to address customers’ challenges with its strong expertise in science and innovation.

There is no similar and comparable company in India with its unique products. As the country prepares for the 2019 general election, there are expectations of more focus on execution and increased expenditure on infrastructure by the government. All this augur well for the company’s business segments that are focused on domestic growth in the future.

The company enjoys a strong balance sheet with virtually zero debt company. The significant correction in the stock price gives investors an opportunity to take a pie of this great company who had missed the bus earlier.

In the recent turmoil, the stock has corrected from levels of Rs 26,662. At difficult times like now, it is better to accumulate companies of such kind which can give you multibagger returns over the horizon of 5-10 years. In the near term, we expect an upside of 22 percent.

Eicher Motors | CMP: Rs 20,103 | Target: Rs 25,129 | Upside: 25 percent | Horizon: 9-12 months

The company's motorcycle division (flagship brand – Royal Enfiled) reported subdued monthly sales numbers in December 2018 which resulted in steep correction of the stock price in the previous week.

Royal Enfield aims to lead and grow the mid-weight (250-750cc) motorcycle segment globally, and Interceptor 650 and Continental GT 650 will help the company accomplish this. The company’s strategy of new exclusive stores format introduced in India and international market is also auguring well.

Volvo Trucks is the market leader in the premium truck segment. VE Commercial Vehicles Ltd, a Volvo Group and Eicher Motors joint venture, reported 2.4 percent increase in sales for December 2018 to 6,236 units.

We believe this company is available at cheap valuation only at distressed times. One may argue that Royal Enfield market share might be impacted owing to competitors introducing new range of bikes to compete with Royal Enfield.

We believe, the company will be able to manage competition in a good manner owing to its strong technical capabilities and high brand recall among customers. Brand loyalty for Royal Enfield is huge.

Regarding the LMD and HD vehicle production, we expect the company to increase the same to an average of about 300 vehicles a day in next three months of this financial year as against about 260 vehicles a day, till December 2018.

We advise investors to stick with a quality company like Eicher Motors during difficult times as history has proved that great companies always bounceback when bull run starts.

MORE WILL UPDATE SOON!!

IT firms expected to deliver strong Q3 earnings; slowdown in US could be a risk

FY19 guidance by Infosys and HCL Technologies, and next quarter guidance by Wipro will also be the key metrics to watch out for.

 

Indian software companies, which will kick off Q3 earnings season later this week, are expected to continue to do well in December quarter driven by consistent growth in US business and BFSI segment, and rupee depreciation, brokerage houses said.

But the only risk, they see, is any slowdown in the US economy going ahead.

According to brokers, the range for revenue growth in constant currency (CC) could be around 1-5 percent along with cross-currency headwinds, largely aided by big deal wins.

Despite seasonal weakness due to furloughs in Q3, we expect the top 5 Indian IT largecaps to register healthy USD sales growth of 1.5-4.8 percent QoQ in CC (with Infosys at the lower end and HCL Technologies at the upper end) with cross-currency headwinds of 50-80bp," CIMB said.

The research house expects robust growth in financial services (BFSI) across most companies. "Increasingly, the ramp-up in large deal wins for most companies should help boost growth."

Edelweiss also agreed and said as seen in previous quarters, robust growth in digital and large transformational deal wins should accelerate revenue and lead to positive management commentaries.

In a seasonally weak Q3 attributable to furloughs and holiday season, the research house expects the top-5 IT players—Tata Consultancy Services, Infosys, Wipro, HCL Technologies and Tech Mahindra—to clock 2–3.3 percent QoQ revenue growth in constant currency.

Depreciation of major global currencies against the USD is likely to hurt revenue growth again by 40–70bps QoQ, but at the same time, the INR's depreciation against the USD would lift margins 40–60bps QoQ, it said.

The rupee fell nearly 10 percent against the US dollar in 2018 as the dollar appreciated by 1.3 percent against pound and 1.9 percent versus euro in Q3.

On the operational front, margin expansion is expected to continue in December quarter on rupee depreciation and operational efficiencies, and as a major portion of the cost increase was already witnessed in the first half of FY19.

CIMB expects the top 5 Indian IT companies (except Infosys) to report a 10-30bp QoQ rise in adjusted EBIT margins, led by marginal currency benefits, ramp-up of deal wins and ongoing operational efficiencies.

With increasing supply-side issues in onsite locations, management’s views on margin outlook in near-medium term will be a key thing to watch.

Edelweiss expects the maximum margin expansion sequentially for the quarter.

The broker expects margins at the top-five IT companies to expand 70–100bps driven by INR depreciation and operational efficiencies.

During Q3FY19, the INR on average depreciated 2.7 percent against the USD, which should increase margin by 40–60bps for the quarter. Headwinds such as visa costs and wage hike are behind now. However, the impact will be limited due to lower utilisation owing to furloughs, investments in digital and localisation, and training of freshly inducted employees.

In the case of Infosys' full-year revenue guidance, most brokerages expect Infosys to maintain its guidance, but CIMB and Motilal Oswal expect the IT firm to revise up its lower-end of USD sales growth guidance to around 7-8 percent, from 6-8 percent in CC terms, with its increasing order book. However, Edelweiss, Jefferies, PhillipCapital and Nirmal Bang expect the company to retain FY19 revenue guidance.

For HCL Technologies, brokers do not expect any changes in its USD sales growth guidance of 9.5-11.5 percent for FY19 in CC terms. For both companies, they also do not expect any change in their EBIT margin guidance for the full year.

Key things to watch out for would be the commentary on the deal-flow and CY19 IT budgets, commentary surrounding Brexit, US tariffs on Chinese imports, commentary from largecaps on client IT spending, pricing pressure, growth in digital services, BFSI outlook, Europe revenue growth rates, and changes in employee matrix, viz., hiring and attrition.

FY19 guidance by Infosys and HCL Technologies and next quarter guidance by Wipro will also be the key metrics to watch out for.

Commentary on 2019 outlook will be keenly watched especially given recent concerns over US economy and growth uncertainty indicated by Accenture.

MORE WILL UPDATE SOON!!