But for SBI, corporate India would have fared much better…
An interesting study by Bloomberg Quint highlighted that the EPS for the Nifty 50 companies at the end of the first quarter stood at Rs.114. Ironically, this EPS would have been at a more impressive Rs.120.25 had it not for the Rs.4800 crore loss that SBI had booked in the first quarter. This loss was not only attributed to the NPAs provided for but also substantially referred to the front ending of the investment provisions due to higher bond yields. But, what were the real takeaways?
Certainly some good news
To be fair, the quarter had a decent share of good news on the quarterly results front. Revenues were up by 22% in the quarter but that could be misleading due to the base effect. The quarter ending June 2017 saw some aggressive de-stocking ahead of the launch of GST. That resulted in a low base and probably explains this sharp growth. Most sectors managed to show double digit growth in revenues. Profits also grew in double digits and could have been much better but for the impact of banks. At least, the signals of a bottoming out of the NPA cycle appear to be there and that is some good news for the banking sector. In the case of the auto sector and the FMCG sector, the base effect appears to be quite pronounced. On the positive side, pharma saw some recovery in sales but profit pressures are still continuing as the margins are down sharply.
Banking is the worry…
There are two major worries on the numbers front. Firstly, the problems on the banking front are not yet too clear. While NPAs are showing signs of bottoming out, the worry over restructured loans and power sector and sugar loans are still persisting. The bigger worry for the banking space is on the bond yields front. The yields have stayed below 8% for now, but if the RBI goes in for another rate hike, then it may be tough for benchmark yields to stay below the 8% mark. That will put additional pressure on credit off-take as well as on bond write-offs. In a way, banking could hold the key to the next few quarters. Additionally, the weak INR could also weigh on the banks!
What about valuations?
That is the million dollar question. The EPS of Rs.114 would discount the current Nifty level at about 24.5 times annualized earnings. Remember, this was a robust quarter so earnings estimates could be slightly on the optimistic side. Also, this is the higher end of the valuation band that the Nifty has historically traded. The Nifty has traded above this level only in the peak of bull markets like in 1999, 2007 and in 2010. The big message is that the earnings will have to show real traction to justify upsides from here. The green-shoots are there; now it is the turn of actual performance delivery!
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