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Emkay Confluence 2017 brought together 134 companies across various industries and was attended by over 500 institutional investors and FIIs. The conference also featured keynote addresses on Global Market Stability & India's Positioning and Perspectives on Indian Agriculture Sector. Two panel discussions were held on "Housing sector - advent of a new era" and "Rural economy - revving up for an upturn". Corporate meetings were dominated by fact checks on the prospects of earnings recovery after one more quarter of disappointing results in Q1FY18. Given below are the key takeaways.
GST causing dislocations - expectations of normalization varies across sectors:Uncertainty caused by the implementation of GST has compounded the lingering impact of demonetization shock, thereby impacting the economy, both on the supply as well as demand side. While most companies expect these events to have short term ramifications, the outlook appears to be more rewarding over the longer term. Companies confirmed varied degree of transition from the unorganized sector to the organized sector. In the immediate term, weakness in business activity can be seen in sharply lower ad-spends by companies. As per the media companies, the situation in the recent months has been even worse than the demonetization days. The early onset of the festive season and demand revival in H2FY18 are keeping hopes of an eventual turnaround alive.
Margin pressure relapsing, demand recovery key to earnings trajectory: Revival in raw material prices is seen as a headwind for the Manufacturing sector and the passage of higher input costs by companies has been partial due to weak demand, which has been exacerbated by GST and demonetization shock. Revival in demand, which is expected in H2FY18, remains key to the earnings growth revival. Quicker revival in rural demand based on higher government spending will likely see relatively better outlook for rural-centric sectors. The Agri input sector will experience better margins due to the absence of discounts given last year, resulting in better realizations and higher expected volume growth.
Rural-centric industries appear more confident: Consumer companies expect the normal monsoon to resuscitate demand in H2FY18 following dislocations caused by GST. Festival demand is likely to build starting from September. Auto companies like M&M, Escorts and Hero MotoCorp, which cater to rural demand, are far more confident of volume growth. Tractor sales of Escorts and M&M are expected to grow by 10-12% while Two Wheeler sales are expected to grow by 8-12%. The Fertilizer sector is expected to see volume growth of 15-20% on the back of a good monsoon and a favorable base. Companies highlighted change in seasonal inventory push to a more demand-led backfill of distribution channels. However, Agro Chemical companies fear risks arising from government price controls and import restrictions.
IT companies are confident about facing digitization challenge: Major IT companies sounded more positive about confronting the challenges posed by IT spends moving towards digitization. For instance, TCS appears to be ahead in the game. Endowed with over 200k trained individuals, it is well prepared to scale up opportunities emerging out of digitization. Smaller players are confident on growth sustenance as they have already developed niche capabilities. Notwithstanding the positive directional guidance, we did not gather any concrete numbers on the same. Interactions with the IT companies also reinforced our view that IT companies with product or software orientation will do better than pure service oriented companies. Mejesco is the only product company we hosted. On the services side, we continue to like TCS and Mphasis.
Lack of visibility on capex, recast of govt orders are near term risks: There have been visible disruptions in the Capital Goods activity due to GST. The new indirect tax regime has led to re-pricing of some earlier government contracts, which need to be re-tendered. Hence, Q2-Q3FY18 new orders activity, especially the government contracts, is likely to be subdued. Q4FY18 might witness some bunch up in activity, to regain from subdued activity in Q2-Q3FY18. Cement companies are banking on a volume growth of 8-9% in H2FY18. The growth is likely to be largely from housing for all/ affordable housing. So capital formation in H2FY18, is likely to relatively perform better than H1 while the recovery will largely depend on government spending.
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