In Q2FY17, our coverage universe’s (excluding OMCs’) sales/Ebitda/PAT grew 7%/ 10%/8% y-o-y as against our 7%/12%/7% growth estimates. After 7 consecutive quarters of contraction, Q2FY17 was the first quarter of profit growth. Sector-wise, the story was similar to last couple of quarters with distressed cyclicals of past 2 years, namely cement and capital goods, metals posting good profit growth numbers. However, the traditional defensives viz., IT and FMCG remained weak recording single-digit profit growth for 8th consecutive quarter. We have downgraded Nifty FY17e/18e EPS by 2-3% each, primarily led by private banks, IT and cement. However, domestic autos and industrials saw earnings upgrades. Our FY17e/FY18e Nifty EPS is now pegged at R476/574 (consensus: R452/546), implying 15-18% EPS growth over FY16-18e.
Top-line growth improves
Our coverage universe’s top-line grew 6.6% (Edel estimate: 6.7%), the third consecutive quarter of growth post 6 consecutive quarters of decline. While growth improved, the level remains weak. Banks/NBFCs, domestic autos and media were the only sectors that posted more than 15% growth. Rural-oriented FMCG and agriculture input companies were major disappointments on top-line front. In FMCG, even a small price hike resulted in sharp slowdown in volumes. Going ahead, the recent demonetisation move could weigh on overall top-line growth which could move lower in H2FY17.
Cyclicals extend good profits relative to defensives
Domestic cyclicals (industrials, cement, etc) continued to report robust profit growth of 20% plus, despite the single digit top-line growth. This was mainly owing to statistical base effect and headwinds fading. Domestic consumption companies, barring autos and consumer discretionary, continued to disappoint posting single-digit profit growth. In banking, disappointment was more in private banks than PSU banks. Going ahead, PSU banks could report healthier profit growth.
Nifty EPS downgraded
In Q2FY17, Nifty EPS downgrade momentum was high with our and consensus FY17E/EPS downgraded by 3% each. IT and banks were primarily responsible for the Nifty earnings downgrades. Even after the cut in earnings, we as well as consensus estimate 11-15% earnings growth in FY17. These numbers especially, for FY17 do appear at risk and could be revised downwards. With regards to quantum of impact and also the impact on FY18 earnings, it is too early to gauge.