Equity as an asset class continued to outperform in the week gone by. US equities are trading in uncharted territory making fresh all-time highs regularly.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Back home, Nifty was up 0.32% on week-on-week basis. On the sector front, top gainers were energy (+1.59%), financials (+1.72%), IT (+1.34%) and pharmaceuticals (+1.78%) while infra (-0.92%), auto (-3.04%), realty (-3.47%) and PSU banks (-4.06%) saw profit taking. Foreign institutional investors (FII's) were net buyers in cash and index futures for the week giving much needed sentimental relief to bullish traders. Markets are consolidating around current levels for the past two weeks as Q3FY17 earnings update roll out.

Key highlight of 3QFY17 earnings update, so far, has been margin improvement. It's been the 11th consecutive quarter of margin improvement. Sales growth was led by metals , NBFCs , private banks and oil & gas. Autos and telecom reported sales decline. EBITDA growth was led by metals, capital goods, PSU banks and oil & gas. PAT growth was led by capital goods, PSU banks (loss to profit), metals (loss to profit) and oil & gas. Autos, telecom and private. Banks reported PAT decline. Cyclicals entirely drove PAT growth, driven by a sharp recovery in domestic cyclicals and modest recovery in global cyclicals. However, the defensive sectors witnessed weakest growth in five years, with revenues growing just 6%.

Nifty sales, EBITDA and PAT grew 4.9%, 9.6% and 10.3% v/s our estimates of 5.1%, 10.9% and 13.9%, respectively. Revenue growth in 3QFY17 was at a nine-quarter high, translating into 10-quarter high PAT growth. Nifty EBITDA margin was one of the highest in last six years, with the 16th consecutive quarter of YoY expansion. 63% of Nifty universe posted in-line or higher-than-estimated PAT; 82% posted in-line or higher-than-estimated EBITDA.

We expect Sensex to post earnings per share (EPS) de-growth in FY17E, while for FY17-19E, we expect it to post EPS CAGR of around 23%.

On sectors front, 'consumer' delivered first quarter of no growth in net profit in over a decade reeling under the impact of demonetization. Profit growth for autos/cement moderated as cost inflation rose. However, recent flows suggest volume off-take picking up. Metals posted first quarter of net profit growth after two years of decline. Telecom weighed by Reliance-Jio impact, saw sharp erosion in profitability. Healthcare/technology observed continuance of moderate PAT growth.

Key highlight of Q3FY17 has been signs of asset quality concern for PSU banks bottoming out. Markets are likely to trade firm where corrections are likely to be bought into. We expect liquidity to drive markets now; on the back of improving macro-economic triggers and earnings trajectory of corporates. For Nifty, 8720-8640 is a strong support zone; chances being the index trading past 8900 soon.

The writer is head, retail research, Motilal Oswal Securities Ltd