Y-o-Y earnings growth for Q2FY11 is expected to come in at 24.7% for the Sensex and at 20.1% for our coverage universe (ex OMCs). Many sectors, especially metals, BFSI, and engineering & capital goods, are likely to post robust growth. However, cement and telecom are expected to register Y-o-Y declines. The overall rising trend in Q2FY11 is in contrast to Q1FY11 earnings, wherein the earnings trajectory had softened.
Q-o-Q, as well, there could be a few positives. Our coverage universe’s earnings are expected to jump 6.8% (ex OMCs) led by increases in engineering & capital goods, autos, tech and hospitality sectors.
n EBITDA margins set to improve
EBITDA margins will be a key monitorable for the quarter. Our coverage universe (ex OMCs) is likely to post EBITDA margins of 21.3% in Q2FY11 versus 20.7% in Q2FY10 and 21.0% in Q1FY11. While Y-o-Y, margin improvement is likely to be strong in metals and mining, Q-o-Q they are likely to rise in auto, engineering & capital goods, oil & gas, telecom, FMCG, and hospitality.
n Consumption-driven sectors: Strong performance to continue
Y-o-Y revenue and profit growth is expected to be healthy for consumption-driven sectors (FMCG, auto, retail, and media). Discretionary spending is expected to strengthen on back of a healthy monsoon, falling inflation, and rising disposable incomes by way of increased salaries.
On an aggregate, top line of consumption-driven sectors is expected to grow by a healthy 26% Y-o-Y in Q2FY11, while PAT is expected to jump 14% Y-o-Y. PAT is expected to increase sequentially as well by 8.8% driven by robust growth in the auto sector (16.3% Q-o-Q). On the top line front too, autos along with retail are expected to post healthy growth rates (31.3% Y-o-Y and 31.8% Y-o-Y, respectively).
n FY11 earnings outlook: Positive; revisions cycle ahead?
We expect Sensex earnings to grow 30% in FY11E to INR 1,081. Commodity-driven sectors like metals are expected to lead this growth while cement and telecom are likely to be laggards. Metals and oil & gas together contribute ~40% to Sensex PAT for FY11E.
A few positives reinforce our confidence that earnings estimates will be met. For one, although not yet broad based, upgrades to earnings estimates have resumed to some extent (FY11E EPS upgraded from INR 1,050 in June to INR 1,082 in September). Second, robust performance of foreign subsidiaries (JLR, Novelis and Corus) of Indian companies was the big surprise in Q1FY11 earnings. Given that global macro scenario has somewhat stabilised, in recent months, this performance could well continue, further boosting earnings. Further due to good monsoons many sectors such as real estate and construction saw reduced activity. With second half traditionally being a busy season, we expect activity to pick up substantially. Key risks include any fresh weakness in the global demand environment.
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