Progression towards cyclical revival
The combination of demand revival in rural sector, positive rub-off from lower GST rates, fiscal expansion (India Strategy: Supplementary grants fortifies reflationary theme), shift from unorganized to the organized space and recovery from the demonetization shock (around a year ago) are likely to have a favourable impact on corporate performance in Q3FY18. The gradually improving scenario is also reflecting in the revival of credit growth to 11% (especially for private banks), and rise in consumption demand manifesting in higher volume growth for FMCG, Automobile and Media (ad spends) sectors.
* Concrete efforts to improve the rural economy has started to reflect in some sectors’ performance. We believe that going forward, this trend is likely to intensify and the benefits of the same would be reflected on a broader scale. Most of the sectors are expected to witness a turnaround in demand conditions in H2FY18. However, infrastructure-related activity continues to remain lackluster, as indicated by the latest CMIE data.
* Sales growth for Emkay Universe (ex-Financials and Oil & Gas) is expected to further improve to 10.8% yoy in Q3FY18 from 9.4% yoy in Q2FY18. EBITDA growth is expected at 11.8% yoy (vs 8.0% yoy in Q2FY18) while APAT is estimated to grow by 12.8% yoy (vs a growth of 4.1% yoy in Q2FY18). Excluding the outliers (top & bottom 3 & 5 companies), PAT growth is however estimated lower at 5- 7% yoy. Sales growth in Q2FY18 will be led by sectors like Auto Ancillary (26.9% yoy), Retail (17.5% yoy) and Cement (17% yoy). While sectors such as Telecommunications (-10.4% yoy) is likely to witness a decline in sales growth.
* EBITDA margin in Q3Y18 is expected to be flat, reflecting weak pricing power. The improvement in EBITDA margin is largely expected to be led by sectors such as Power (246bps), Speciality Chemicals (203bps) and Metals & Mining (188bps). While Pharmaceuticals (- 410bps), Telecom (-171bps) and Auto Ancillaries (-128bps) are expected to compress overall margins.
* Potential surprises: Negative – Blue Star, DB Corp and Voltas
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