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India Equity Strategy
3QFY11 Earnings Preview: Decelerating, or Stabilising?
17% Sensex (Ex-Oil) growth — India’s headline Sensex 3QFY11 earnings
growth should be a robust 25%; but it’s a little more modest (17%) excluding
ONGC’s spike, is similar for a broader-base (CIRA univ. ex-Energy) at 16%, and is
a deceleration over 1HYFY11 (35% YoY for Sensex ex-oil) – all partly explained
by an expected ‘diminishing base effect’. While there is a deceleration in quarterly
earnings growth momentum, we do not expect earnings to swing/gyrate or be
anything like as weak as the equity market leading into the results season
suggests. The current quarter probably also reflects the more steady earnings
profile of 19% growth we forecast for FY12 at this point.
Earnings Energy dependence is rising — There are concentrations; Energy
profit growth accounts for over 50% of expansion while the top 4 sectors account
for 100% of the profit swing. There is at the same time a certain smoothening in
earnings too – foreign subsidiaries’ share of profit growth is down, the base effect,
particularly in commodities, has eased, and at a wider level – CIRA coverage (130
Co’s) – earnings growth is 25% YoY, and is 17%+ excl commodities.
Maintaining margins, Sales growth moderating (a worry?) — The relatively
high-inflation environment is not being reflected in earnings drivers. Margins –
which should face pressure – are expected be stable (ex energy, where they
expand), while sales growth – which should rise – is moderating. The moderation
in sales growth could be a worry (a reflection of the demand environment that we
believe is fairly broad-based); at 19% for CIRA universe (ex-energy), it remains
reasonably strong, but should be on a watch-list for any further signs of easing.
Energy, Autos, Banks lead - Telecom and Cement lag — There are sectoral
skews; 10/14 sectors should see 15+% growth, with Energy, Autos, Banks and
commodities drive 85% of profit growth (CIRA set)– Telecom and Cement continue
to make up the rear. Upside surprises - Sun Pharma, Tata Motors, BGR Energy,
Canara Bank and HCL Tech. Downside Surprises - Hindalco and Aban Offshore.
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