India Strategy
QE Sep-10 Earnings
Preview: Moderation in
Earnings Growth Momentum
Quick Comment: MS analysts forecast 7% YoY
growth for 108 companies: This compares with a
decline of 4% YoY in QEJun-10. Excluding govt.-owned
oil companies, earnings are forecast to rise 13% YoY
versus 27% growth in QEJun-10. They expect BSE
Sensex earnings to increase 12% YoY vs. 13% growth
in QE Jun-10.
Margin compression in 5 out of ten sectors: MS
analysts expect aggregate revenues to grow 18% YoY
with flat YoY EBITDA margins. Ex- the oil companies,
EBITDA margins will likely rise 42bps. Five out of the 10
sectors are likely to see margin expansion led by
industrials and financials. Our analysts expect strong
earnings growth for industrials (ex-Tata Motors earnings
up 33% YoY) followed by metals companies (up 24%
YoY), whereas telecoms and energy earnings are likely
to be the weakest for the third consecutive quarter.
Key observations about our analysts’ forecasts: a)
Depreciation expenses are up 36% YoY, they rose 24%
in 1QF2011, b) Net financial income is down 92% YoY
(exceptions are materials and technology) vs. a net
financial expense in 1QF2011. This is creating pressure
on net margins and, thus, a third of our coverage
universe is likely to report a drop in net profits YoY
(compared to a fourth in the previous quarter). That said,
nearly a third of the companies will likely report profit
growth in excess of 25%. Earnings growth dispersion is
a key driver for sector performance in the coming
months, in our view. Earnings growth breadth is still not
back to its previous peaks even as earnings have
crossed their previous highs.
Broad market likely to beat narrow market for the 6th
consecutive quarter: The June quarter marked a new
high for the narrow and broad market earnings. We think
that a sequential decline in earnings growth is in the
offing due to the base effect and is consistent with our
earnings growth leading indicator.
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