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Is RBI rate hike and yet another EPS downgrade a thing to worry?.

Date: 06-08-2018
Subject: Is RBI rate hike and yet another EPS downgrade a thing to worry?
Nifty has hit a new all-time high amid corporate quarterly results announcements. At least 35 companies comprising 85 percent of Nifty weight are out with their quarterly numbers. The earnings season started on strong footing and the first three weeks suggested chances of upgrades in earnings estimates.

The last week was, however, a dampener when ICICI bank and Tata Motors declared results much below street’s consensus. NBFCs, IT sector and Consumer staples outperformed expectations while Automobiles were a major setback.

The Nifty earnings’ sensitivity towards banks and automobiles, primarily Tata Motors, was highest during the quarter due to the base effect. Below street expectations numbers by ICICI Bank, Axis Bank, Tata Motors and Bharti particularly has resulted in thus far reduction in Nifty earning growth by 2.2%. Nifty EPS growth estimates for FY19 now stands reduced to 20.3%.

While the market will again see another downgrade of EPS estimates, RBI credit policy raising rates by further 25 bps puts doubt on the sustainability of market valuation at current levels.

However, the neutral stance of RBI is a relief. It will be a difficult choice of RBI going ahead as the impact of rising MSP and fiscal slippage makes inflation trajectory uncertain. Increasing the interest rates any further will hurt velocity of economic growth

Indian Stock Market is trading at 20.6 X FY19 earnings. Continued domestic flow can always take the market to 22X and that’s a reasonable upper target for Nifty going ahead.

Though, earning downgrades particularly if accompanied by the possibility of further cut in Q2 can put downward pressure. 15 companies which comprise 15% weight in Nifty are yet to declare their results and the consensus remains hopeful of earning growth upwards of 20% for FY 19 and that should be enough fuel to keep domestic markets buoyant.

Nifty Majors- SBI, M&M, Cipla, Lupin, Gail, Hindalco, OMCs- HPCL, BPCL and IOC and Coal India etc will be reporting their numbers in the coming week.

Key trackables in the results for the week are:

SBI- Recoveries in NCLT accounts

M&M- Automotive margins and commentary on new launches

OMCs- HPCL, BPCL and IOC- normalization of margins, Inventory and forex changes

Lupin- Goa and Indore facility remarks and growth strategies in a challenging environment

Cipla- Growth strategies for coming years, comments on domestic formulation business

Coal India- E-auction volumes and realizations

Disclaimer: The author is Head of Research at Narnolia Financial Advisors. The views and investment tips expressed by investment experts/broking houses/rating agencies on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

Source: moneycontrol.com

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