The upcoming earnings report season is likely to mark one more quarter of muted earnings, said Motilal Oswal in a Q3 earnings preview report. As per the brokerage, economic growth momentum has decelerated and corporate earnings have remained tepid for the last two years. Nonetheless, as per the report, the FY20 corporate earnings story is all about the financial sector, with the Nifty ex-BFSI earnings expected to decline 2 percent for the year.
The calendar year 2019 turned out to be a year where the markets got further polarized in terms of both earnings and performance, the report noted. While the Nifty delivered 12 percent returns, the Nifty Midcap-100 and Nifty Smallcap-100 were down 4 percent and 9 percent, respectively.
Cumulatively over two years, the Nifty has now outperformed the Nifty Midcap-100 and Nifty Smallcap-100 by 35 percent and 51 percent, respectively.
As per the brokerage, this polarization will reverse only if growth recovers and gets broad-based. From that perspective, CY20 holds some promise, it added.
"The government and the RBI have also taken some steps to revive growth, however, the effect of which will be visible with a lag. Meanwhile, some sectors are showing signs of stability/bottoming out with support from festive season demand and few macro indicators like Services PMI have also bounced. Corporate tax cuts have prevented a further slide in earnings estimates," the report stated.
Going ahead, the brokerage expects forthcoming budget will be a crucial policy event with the market focus on potential near-term demand-booster from the government and [b] the contours of fiscal deficit arithmetic.
Another key concern as per the brokerage is the recent geopolitical that flared-up between the US and Iran and has led to a spike in crude prices and intensified macro worries.
In its model portfolio construction is premised on earnings visibility, balance sheet/cash flow comfort and market leadership position. Over the last two quarters, the brokerage has added/raised weights in a few high-quality Cyclicals in the portfolio, given their attractive valuations and improved business prospects. It also maintains a positive stance on financials, consumption, IT and telecom, and underweight stance on commodities (metals, oil & gas).
Let's take a look at Motilal Oswal's model portfolio: Banking: The brokerage stays overweight on corporate banks. Its preferred picks are SBI, ICICI Bank and Axis Bank. Large-ticket resolutions in IBC will boost the earnings of Corporate Banks in Q3FY20, meanwhile, in some Banks, value unlocking from subsidiaries is expected to provide further upside. NBFC: In this space, it maintains weights in HDFC, and replace M&M Financial Services with L&T Finance Holdings. Focused retail strategy and reducing reliance on wholesale lending are likely to drive a re-rating of L&T Finance Holdings, as per the broekrage. Consumer: The broekrage retains HUL, ITC, and Titan in the model portfolio. It continues liking HUL in staples, given the solid volume/margin outperformance versus industry. The brokerage added that the integration with GSK Consumer will offer further margin synergies. Meanwhile, it replaces Marico with Tata Global Beverages (TGB) as TGB has shifted its focus back to the highly profitable India beverage business in order to build a dominant, natural beverage brand in the country. Information Technology and Telecom: In IT, the brokerage is replacing Tech Mahindra with HCL Tech. As the trend of repatriation of workloads from public cloud to on-premise/hybrid cloud picks up, HCL will benefit the most given its stronghold in Infrastructure Management Services, it added. The brokerage is also introducing L&T Infotech in the portfolio as, over the past four years, L&T Infotech has continuously strengthened the moats around its business through a slew of measures.
telecom space, it further raises weights in Bharti Airtel, given the improving underlying business dynamics in the Telecom sector post the tariff hikes by key players. Oil & Gas: In this space, the brokerage is marginally cutting our weights in RIL after its recent sharp outperformance and the challenging context for the petrochemicals segment. Cement: The brokerage raised the weight in Ultratech Cement as the market mix has improved post-acquisition of Century’s cement asset and Binani, with north/central India contributing 45 percent of volumes and the share of weaker regions declining. Automobile: In this sector, the brokerage added Eicher Motors as it is relatively well placed for BS-VI transition due to the 5-7 percent price hike. It is also raising the weight of Ashok Leyland as it believes worst is over for the CV industry, although volumes will remain volatile due to the upcoming BSVI 6 transition. Unlike in the previous cycles, Ashok Leyland is on a very strong footing and focused on adding new revenue/profit pools, it added.
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