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| Edited By: Dharmesh Kant |Source: DNA |Updated: Mar 24, 2018, 06:29 AM IST
In the truncated week gone by Nifty failed to surpass the high made in last week and dragged down further erasing gains due to lower than estimated IIP number, lower FY18 guidance by Infosys and rising concern over geopolitical tension. Nifty lost 0.51% week on week by 47 points to close at 9151 level. Adding to woes further FIIs turned sellers to the tune of 2455 Crores, though DIIs continued to buy adding worth 1795 Crores of equities.
Q4FY17 earnings season kicked off on a somber note as Infosys guided for growth of 6.5-8.5% YoY CC for FY18 lower than earlier 7-9% guidance. Infosys guidance was keenly awaited as a cue to any potential recovery in demand given the positive BFSI undertones – which took a slight dent. : INFO's CC revenue was flat, as against our estimate of +1% QoQ, EBIT margin contracted by 40bp QoQ to 24.6% while PAT came fell 2.8% QoQ at INR36b.
On Macro-economic front IIP shrinks unexpectedly while inflation came better than consensus. CPI moved up to a five-month high of 3.8% YoY in March 2017, better than consensus of 3.95%, but worse than our expectation of 3.4%. Separately, IIP declined unexpectedly by 1.2% YoY in February 2017, in sharp contrast to our expectation (and market consensus) of growth of 2% YoY. The uptick in inflation was entirely driven by higher-than-expected inflation in fuel items. Core inflation excluding gasoline items (the so-called core core inflation) was unchanged at 4.4%, the lowest since the series is available from January 2015. In IIP, the entire fall is attributed to a sharp decline in 'food products & beverages', excluding which IIP would have grown 0.6%. The second contraction in capital goods in three months, however, is concerning. Overall, although IIP is a highly volatile series, the slowdown in economic activity is real, subdued inflationary pressures are in line with weak growth.
We expect earnings to bounce back in Q4FY17 on account of lower base of prior year, though concerns on quality of earnings remain high. Nifty is likely to deliver double digit earnings growth for second consecutive quarter on YoY basis driven by PSU Banks, Metals and Oil & Gas.PSU Banks would benefit from a favorable base (AQR-related provisions), posting profit of INR34b versus losses of INR146b in the base quarter while Private Banks are expected to post 18% YoY PAT growth. We expect Metals to post 2.8x jump in PAT to INR91b, the highest in 19 quarters. Cement, Telecom, Media, Retail and Utilities would have a lackluster quarter, with YoY earnings decline.
Key factors to watch out for will be impact of sharp currency appreciation of 4.5% in 4QFY17 which was unexpected and panning out of policy reforms which though are long term positive but impacting short term earnings. Pass on of higher commodity costs. FY16 was marred by asset quality review mandated by the RBI, while 2HFY17 has seen the adverse impact of demonetization on earnings of select consumer-oriented sectors. FY18 will have some disruption from GST implementation.
We expect bouts of volatility amidst boarder consolidation pattern. Reactions to earnings update will be sharp where misses are likely to be punished severely. On downside 8950 to 9000 remains a strong support zone on Nifty while it looks difficult to surpass 9300 in near future.
The writer is head-retail research, Motilal Oswal Securities
