SBI, ONGC to lead Nifty earnings growth in June quarter: Morgan Stanley

As India Inc prepares to report its April-June 2019 quarter numbers for financial year 2019-20 (Q1FY20), analysts at Morgan Stanley expect the financial sector to lead earnings growth. For the recently concluded quarter, they peg the earnings growth for the companies they cover (ex-financials) to fall 4 per cent year-on-year (YoY), but rise 29 per cent YoY if the oil PSUs are excluded from the aggregate.

“Financials sector is the biggest driver of the acceleration in earnings while the energy sector, particularly the oil marketing companies, are the biggest negative contributors to the earnings growth,” wrote Ridham Desai, their India equity strategist in a co-authored report with Sheela Rathi.

In this backdrop, they warn of “significant stock volatility” in days to come.

So far, information technology (IT) forerunner Tata Consultancy Services (TCS) has released its numbers for Q1FY20, while Infosys is next in line to release the earning figures on July 12. The season, however, will pick up steam next week onwards with Mindtree, YES Bank, Wipro, ACC, Dabur and Reliance Industries slated to declare their numbers for the recently concluded quarter.

Despite the financial sector being in slumber, Rathi and Desai put their bets on the segment to contribute heavily towards the earnings growth. Among stocks, they remain hopeful that State Bank of India (SBI), ICICI Bank, Oil and Natural Gas Corporation (ONGC), HDFC Bank and Axis Bank to lift the earnings for the recently concluded quarter. Indian Oil Corporation (IOC), they say, could dent the overall picture.

Excluding SBI and IOC, Morgan Stanley pegs the Sensex and Nifty earnings growth in Q1F20 at 10 per cent (YoY) and 7 per cent (YoY), respectively.

"In Q1F20, our analysts expect revenue, EBITDA and earnings growth of 7 per cent YoY, 3 per cent YoY and 18 per cent YoY, respectively, for stocks under Morgan Stanley coverage," the report says.

At the bourses, the Nifty Bank index has outperformed the benchmark Nifty50 index between April and June. The banking sector index rose 2.5 per cent during the period while the 50-share index gained only 1 per cent. The energy index, however, slipped 2.9 per cent during the June quarter.

Based on consensus estimates and their own analysis, earnings for the Sensex and Nifty indicate a growth of 4 per cent and 6 per cent YoY, respectively at the aggregate level. Net profit growth, Morgan Stanley says, is expected to rise 37 per cent and 15 per cent YoY respectively for the Sensex and Nifty companies, while EBIDTA margin compression of 24bp for Sensex companies and 115bp for Nifty companies is expected.