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Strategy
Earnings growth to carry the Sensex forward
The Indian stock market declined in the early part of 4QFY2011
on the back of negative news flows that kept coming in
persistently. High food inflation, rate hikes by the central bank
and political crisis in the Middle East and North Africa (MENA)
sent jitters in the market, continuing the negative momentum
witnessed in 3QFY2011. However, latest developments related
to food inflation, fiscal deficit and interest rates look positive
and we believe improvement is likely in these macro indicators
going forward. More importantly, the market has been largely
range-bound for entire FY2011 (the Sensex is up just about
10%), even though earnings growth has been reasonably
healthy. As the market increasingly starts acknowledging and
factoring in FY2012 and FY2013 earnings growth, in our view,
the Sensex will get a springboard for further upsides.
We believe for the 8-8.5% real GDP growth that India still looks
set to achieve and the resulting strong 17.4% CAGR in Sensex
earnings, a target P/E multiple of 15x on FY2013E EPS looks
reasonable. In this context, even after the recent bounce back,
the Sensex is looking reasonably valued, available at 15.4x
FY2012E EPS, almost 10% lower than its average P/E of 16.7x
since April 2004. In fact, even continuing with this 10% discount
to its seven-year average, our 15x target multiple on FY2013E
EPS translates into a Sensex target of 22,326 by March 2012,
on account of healthy earnings growth expected. This implies
an upside of 15%, with further upsides likely as valuations move
closer to the average P/E. Hence, we maintain our positive stance
on the market, with an overweight view on interest-sensitive
sectors such as banking and infrastructure.
Indian market underperformed sequentially, with some
respite at the end of the quarter
Negative global news, including the Middle East and North
African crisis, which led to a spike in oil prices, and the disaster
in Japan took their toll on emerging markets as well. Notable
exceptions from this list were Russian and Chinese markets,
which were up by 7.1% and 4.3%, respectively, during
the quarter. Ex-Russia, emerging markets were, however,
down by 0.8%.
Developed markets, other than Japan, performed well during
the quarter. Overall, developed markets (ex-Japan) were up by
2.4% during the quarter, despite negative developments
throughout the globe. Japanese markets were down by 4.6%,
as investors feared the impact of the devastating earthquake
and tsunami on the nation's economy.
The Indian market underperformed the others during the
quarter (falling 5.2% qoq), though the market staged a strong
comeback in the last part of the quarter, bouncing back over
1,600 points in March. This was in consonance with our view
that several macro indicators have recently been evolving
in a positive direction.
FII inflows resumed towards the end of the quarter
Negative developments in the first part of 4QFY2011 were
manifested by the reversed flow of FII money, as FIIs turned net
sellers during the period. However, in March, FIIs were back on
a buying spree, pumping in over US $1bn over the period,
compared to net selling of over US $2bn in January and
February combined. Overall, FIIs sold US $1bn during the
quarter, taking their net portfolio investments in India to around
US $24bn in FY2011, slightly above the total investment flows
in FY2010, which stood at US $23bn. The high FII inflow during
the year, despite negative news flows in the recent past,
underlines the strong fundamentals of the Indian economy. In
comparison, DIIs turned net buyers during the quarter, after
selling in the Indian market for the previous two quarters. DIIs
were net buyers to the extent of nearly `12,800cr (US $3bn) in
4QFY2011. Despite this heavy buying in the last quarter, DIIs
were net sellers during FY2011, selling nearly `16,900cr in the
market, reflecting weak mobilisations in equity schemes in MFs
and insurance due to the recent regulatory developments.
Overall, we believe, in the coming quarters, with cyclical
tailwinds in the form of positive macro developments adding to
the structural attractiveness of the Indian market, FII flows are
likely to remain robust.
Macro headwinds are clearing up
In the months preceding the Union Budget, a host of macro
headwinds such as high inflation, high fiscal deficit and rising
interest rates were adding to the negative sentiments created
by slow project clearances, execution hurdles and corporate
governance issues. In our view, several of these macro
headwinds look set to ebb going forward. In our view, interest
rates have peaked and the possibility of a 50-100bp decline in
interest rates cannot be ruled out, though in the near term, for
the next few months at least, a plateau in interest rates can be
expected. In our view, the lack of an upward bias in interest
rates would prove to be a key positive for the market, especially
for interest-sensitive sectors.
There are two variables on which this plateauing (and potential
cooling) of interest rates is predicated. The first is that broader
demand and supply of funds in the economy are showing
positive trends in favour of moderating liquidity and interest
rates. As we had explained in our Budget Review, one of the
key positives of this year's budget was the remarkable restraint
exercised by the finance minister by not undertaking any
incremental populist expenditure. Sure, the subsidy projections
are likely to be overshot but, even after factoring in higher
subsidies, it looks unlikely that overall market borrowing by the
government will be more than `40,000cr-50,000cr above
budget estimates. This would still imply not more than a
14-15% yoy increase in market borrowing, which in our view is
easily manageable. While on the one hand, demand for funds
from the government is set to be in check in FY2012E;
on the supply side also, there is relief – this is because more
insurance sector flows are now being directed towards debt
rather than equity.
In the last couple of months, broader interest rates have already
increased by a substantial 200-250bp, which may cool down
credit growth from the current ~23% levels to more sustainable
18-20% levels. At the same time, deposit mobilisation is expected
to improve in the coming months due to the recent increase in
interest rates. As a result, as far as broader interest rates are
concerned, we believe rates have peaked and banks are unlikely
to change deposit rates until April at least, with further hikes
beyond April too looking unlikely at present.
In fact, in our view, deposit rates were increased by almost
50-75bp more than expected in such a short period of time
because of the sudden steep increase in liquidity crunch and
the subsequent strong moral suasion by the RBI for banks to
correct the imbalance rapidly. Consequently, once liquidity settles
down in 1QFY2012E, it cannot be ruled out that there may
also be some cooling of interest rates. This view is also supported
by the fact that forex reserves have not shown a material increase
in this cycle, unlike in the pre-Lehman period, which we believe
could lead to peaking of interest rates at a lower level in this
cycle as compared to 2007. In the last cycle, huge foreign risk
capital was able to sustain 8%+ GDP growth at higher levels of
interest rates, but similar GDP growth at those high interest
rates looks unlikely in this cycle in the absence of the
corresponding forex inflows, i.e. we expect GDP growth of about
8% in FY2012E and accompanying credit growth of about 20%,
but at current or lower levels of interest rates.
This brings us to the second variable that has a bearing on the
level of interest rate, savings rate and consequent credit/
investment demand and GDP growth – inflation. Apart from
10-12% of pass-on left on the fuel front, much of the bad news
such as high food inflation and reflation of commodity prices
after the global crisis is already built into the inflation numbers.
Looking at incremental month-on-month (mom) trends as well,
there appears to be some respite on the inflation front, with the
latest index numbers showing virtually no increase.
Moreover, incrementally as well, there seems to be increasing
acceptance in policy circles that in a high-growth,
supply-constrained economy like India, certain items such as
food will exhibit structural 6-7% inflation, which will eventually
pass through manufactured goods as well in the form of wage
inflation. Hence, in the absence of any major new unanticipated
negative development on the inflation front, the RBI could pause
after at most another 25bp hike on the repo front (taking it
to 7%), considering that M3 growth is in any case well within
the 17-18% comfort zone.
Policy and broader interest rates have already increased by
~200bp, which, in our view, could be a peak in this cycle in the
absence of huge forex inflows. This is also corroborated by the
slightly weakening trends in IIP growth as well, after eliminating
base effects. This plateauing of interest rates, aided by restrained
fiscal spending and moderating inflation, is likely to support
major areas of private investment, viz. infrastructure, industrial
capex and housing.
We believe with interest rates having peaked and earnings
growth outlook looking healthy, the current valuations of the
Sensex represent a reasonably attractive level to invest. At this
point, we are overweight on interest-sensitive sectors such as
banking and infrastructure, while being underweight on IT and
FMCG sectors, considering their relatively rich valuations.
Sensex EPS to grow at a 17.4% CAGR in FY11-13E
We expect Sensex EPS to grow by 16.9% to `1,262 in FY2012
and by 18.0% in FY2013 to `1,488, implying a 17.4% CAGR
over FY2011-13E. In comparison, Sensex EPS for FY2011E is
expected to end with 21.4% growth.
The main drivers for Sensex EPS in FY2011E are auto, metal
and BFSI stocks. Of the total increase in EPS in FY2011, metal
and auto companies are expected to contribute 44.5% and
44.3%, respectively. Without contributions from either of these
sectors, Sensex EPS growth would come in at 12% for FY2011E.
Both these sectors have gained from improvements in Tata
Group companies. The auto sector has benefited from a bounce
back in the profitability of Tata Motors, while Tata Steel has
boosted the performance of the metals pack. Other metal
companies have also performed well on the back of increased
metal prices. BFSI companies are estimated to contribute 20.3%
of Sensex EPS growth in FY2011, with all the companies expected
to post strong growth.
On the other hand, telecom and oil and gas stocks are the
major drags on the growth in Sensex EPS. Telecom stocks are
estimated to pull down growth by 14.4%, as companies face
competitive pressures, as well as due to higher costs on
account of 3G network rollouts. A fall in the profit of the
index-heavyweight Reliance implies that oil and gas companies
would contribute negative 5.8% to Sensex EPS growth.
In FY2012E, when Sensex EPS is expected to increase by 16.9%,
growth is expected to be primarily on the back of the BFSI sector,
with IT and metal stocks also contributing reasonably well.
The BFSI sector is expected to contribute 35.9% to EPS growth;
the sector is expected to ride on strong performances by
SBI and ICICI Bank. Both the banks are expected to benefit
from improvement in their asset quality, which would lead to
lower provisioning and, therefore, higher profits. Ex-BFSI, Sensex
EPS is expected to grow by 10.8% in FY2012E. IT and metal
companies are expected to contribute 13.9% and 13.2%,
respectively, to total Sensex EPS growth in FY2012E.
Growth in profits of IT companies is expected to be driven by
higher volumes, as the demand scenario remains robust for
these companies. Infosys is expected to fare much better than
the others in FY2012E, as it is expected to garner better
price points. Notably, profits of none of the sectors are expected
to decline in FY2012E.
The story remains similar in FY2013E, with the same sectors
driving Sensex EPS growth. However, the metal sector is expected
to contribute a much higher 24.5% of the increase in EPS, on
the back of strong performance by Tata Steel and Hindalco.
Both these companies would start getting additional profits in
FY2013E from their new capacities coming on stream around
that time. The BFSI sector should continue to be the main driver
of the EPS, contributing 30.2% to the overall increase in
FY2013E. IT companies are expected to contribute 11.4% to
Sensex EPS growth. Again, none of the sectors are expected to
contribute negatively to Sensex EPS growth, even though power,
telecom and FMCG stocks are expected to underperform
compared to the others.
Overall, the primary growth drivers of Sensex EPS over
FY2011-13E are expected to be BFSI, IT and metal stocks, with
the BFSI sector expected to contribute 32.8% to overall growth
in Sensex EPS during the period, while contribution from the
metal sector is estimated to be at 19.5%. Strong performance
by the BFSI sector highlights the underpenetration of financial
services in India, which would drive credit growth in the years
to come. IT companies are expected to contribute healthy 12.5%
to Sensex EPS growth over FY2011-13E, primarily backed by
higher volumes. On the other hand, sectors such as telecom,
power and FMCG are expected to underperform the others.
The combined contribution of all these sectors to Sensex EPS
growth is expected to be 11.7% over FY2011-13E.
4QFY2011 Sensex earnings outlook
We expect Sensex companies to maintain strong top-line growth
momentum, with projected growth of 23% yoy in sales. However,
profit growth is expected to be lower at 14.5% yoy, mainly on
the back of lower operating margins, which are expected to
contract by 92bp during the quarter. Overall, we expect OPM
to come in at 20.9%, vis-à-vis 21.9% in the corresponding period
last year. Net profit margin is also expected to decline to 11.6%
from 12.5%, down by 88bp yoy.
We expect strong numbers to be posted by oil and gas, IT,
capital goods and BFSI sectors in 4QFY2011. The oil and gas
sector is expected to drive growth in Sensex sales and profit,
with 33% and 25% growth in its sales and profit, respectively,
despite a margin contraction of 209bp yoy, mainly on account
of strong 34% top-line growth in Reliance and substantial 41%
profit growth in ONGC. Ex-oil and gas, growth in Sensex sales
and earnings is expected to be 16.1% and 10.3%, respectively.
IT companies are expected to report 26.2% growth in sales,
driven primarily by volumes, while profit growth is expected to
come in at 20.7% yoy. The capital goods sector is expected to
witness strong sales growth of 26%. However, margins are
estimated to fall by 102bp yoy, resulting in bottom-line growth
of 18%. Sequential numbers are expected to be even more
attractive, with a substantial 85% increase in the bottom line,
while sales growth is expected to come in at strong 60% qoq,
as execution picks up in 4QFY2011, compared to 3QFY2011.
BFSI companies are expected to report a 41% jump in net profit,
despite only a 16% top-line increase, mainly on account of low
base effect for ICICI Bank and SBI, as these companies had
considerable provisions in 4QFY2010. Sequentially, the BFSI
sector's top line is expected to grow by 6%, while profit is expected
to increase by 8% qoq. Ex-BFSI, growth in Sensex profit is
expected to be 8% yoy.
Auto stocks are expected to report just 9% yoy growth in
profit, despite a healthy 23% increase in sales, mainly because
of a decline in profits of Maruti Suzuki and Hero Honda,
as these companies face stiff pressure on margins due to high
input costs. We expect FMCG companies to post decent 16.4%
yoy growth in sales, mainly on the back of higher volumes,
while the increase in profits is expected to be a strong 26.5%
yoy. Power companies are expected to post a 19% increase in
sales, while PAT is expected to grow by 15%. OPM is expected
to expand to 21.2% from 20.4% in the corresponding period
last year.
Metals, construction and telecom sectors are expected to
be the major underperformers during this quarter. Metal and
telecom companies are expected to report a decline in profits,
despite substantial top-line growth. The telecom sector is
expected to report a strong 37.8% yoy increase in the top line,
partially because of the inclusion of Zain's numbers in Airtel's
accounts. However, due to increased competition and higher
costs on account of the 3G network rollout, profits are expected
to decline by 41% yoy. Sequentially, the top line is expected to
grow by 5%, while profit is set to increase by 8%. Ex-telecom,
profit growth in the Sensex is estimated at 16.8% yoy. Metal
companies are also expected to witness decent growth of 16%
in the top line, while high input costs are expected to result in
margin compression and an 11% yoy drop in profits.
Sequentially though, numbers are much better for metal
stocks, with sales and profits expected to rise by 9% and
29% qoq, respectively.
In the construction sector, we expect JP Associates to report
a subdued performance. Sales and profits are estimated to grow
by 2% and 4% yoy, respectively, with margins increasing by
140bp. DLF is expected to witness a 430bp correction in its
margin on account of lower realisations due to change in
product mix, because of which profit is expected to increase by
15% yoy, despite a 40% jump in the top line. We expect Cipla
to perform well, with 12% top-line growth and 49% growth in
the bottom line. OPM is expected to expand by 522bp yoy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Earnings growth to carry the Sensex forward
The Indian stock market declined in the early part of 4QFY2011
on the back of negative news flows that kept coming in
persistently. High food inflation, rate hikes by the central bank
and political crisis in the Middle East and North Africa (MENA)
sent jitters in the market, continuing the negative momentum
witnessed in 3QFY2011. However, latest developments related
to food inflation, fiscal deficit and interest rates look positive
and we believe improvement is likely in these macro indicators
going forward. More importantly, the market has been largely
range-bound for entire FY2011 (the Sensex is up just about
10%), even though earnings growth has been reasonably
healthy. As the market increasingly starts acknowledging and
factoring in FY2012 and FY2013 earnings growth, in our view,
the Sensex will get a springboard for further upsides.
We believe for the 8-8.5% real GDP growth that India still looks
set to achieve and the resulting strong 17.4% CAGR in Sensex
earnings, a target P/E multiple of 15x on FY2013E EPS looks
reasonable. In this context, even after the recent bounce back,
the Sensex is looking reasonably valued, available at 15.4x
FY2012E EPS, almost 10% lower than its average P/E of 16.7x
since April 2004. In fact, even continuing with this 10% discount
to its seven-year average, our 15x target multiple on FY2013E
EPS translates into a Sensex target of 22,326 by March 2012,
on account of healthy earnings growth expected. This implies
an upside of 15%, with further upsides likely as valuations move
closer to the average P/E. Hence, we maintain our positive stance
on the market, with an overweight view on interest-sensitive
sectors such as banking and infrastructure.
Indian market underperformed sequentially, with some
respite at the end of the quarter
Negative global news, including the Middle East and North
African crisis, which led to a spike in oil prices, and the disaster
in Japan took their toll on emerging markets as well. Notable
exceptions from this list were Russian and Chinese markets,
which were up by 7.1% and 4.3%, respectively, during
the quarter. Ex-Russia, emerging markets were, however,
down by 0.8%.
Developed markets, other than Japan, performed well during
the quarter. Overall, developed markets (ex-Japan) were up by
2.4% during the quarter, despite negative developments
throughout the globe. Japanese markets were down by 4.6%,
as investors feared the impact of the devastating earthquake
and tsunami on the nation's economy.
The Indian market underperformed the others during the
quarter (falling 5.2% qoq), though the market staged a strong
comeback in the last part of the quarter, bouncing back over
1,600 points in March. This was in consonance with our view
that several macro indicators have recently been evolving
in a positive direction.
FII inflows resumed towards the end of the quarter
Negative developments in the first part of 4QFY2011 were
manifested by the reversed flow of FII money, as FIIs turned net
sellers during the period. However, in March, FIIs were back on
a buying spree, pumping in over US $1bn over the period,
compared to net selling of over US $2bn in January and
February combined. Overall, FIIs sold US $1bn during the
quarter, taking their net portfolio investments in India to around
US $24bn in FY2011, slightly above the total investment flows
in FY2010, which stood at US $23bn. The high FII inflow during
the year, despite negative news flows in the recent past,
underlines the strong fundamentals of the Indian economy. In
comparison, DIIs turned net buyers during the quarter, after
selling in the Indian market for the previous two quarters. DIIs
were net buyers to the extent of nearly `12,800cr (US $3bn) in
4QFY2011. Despite this heavy buying in the last quarter, DIIs
were net sellers during FY2011, selling nearly `16,900cr in the
market, reflecting weak mobilisations in equity schemes in MFs
and insurance due to the recent regulatory developments.
Overall, we believe, in the coming quarters, with cyclical
tailwinds in the form of positive macro developments adding to
the structural attractiveness of the Indian market, FII flows are
likely to remain robust.
Macro headwinds are clearing up
In the months preceding the Union Budget, a host of macro
headwinds such as high inflation, high fiscal deficit and rising
interest rates were adding to the negative sentiments created
by slow project clearances, execution hurdles and corporate
governance issues. In our view, several of these macro
headwinds look set to ebb going forward. In our view, interest
rates have peaked and the possibility of a 50-100bp decline in
interest rates cannot be ruled out, though in the near term, for
the next few months at least, a plateau in interest rates can be
expected. In our view, the lack of an upward bias in interest
rates would prove to be a key positive for the market, especially
for interest-sensitive sectors.
There are two variables on which this plateauing (and potential
cooling) of interest rates is predicated. The first is that broader
demand and supply of funds in the economy are showing
positive trends in favour of moderating liquidity and interest
rates. As we had explained in our Budget Review, one of the
key positives of this year's budget was the remarkable restraint
exercised by the finance minister by not undertaking any
incremental populist expenditure. Sure, the subsidy projections
are likely to be overshot but, even after factoring in higher
subsidies, it looks unlikely that overall market borrowing by the
government will be more than `40,000cr-50,000cr above
budget estimates. This would still imply not more than a
14-15% yoy increase in market borrowing, which in our view is
easily manageable. While on the one hand, demand for funds
from the government is set to be in check in FY2012E;
on the supply side also, there is relief – this is because more
insurance sector flows are now being directed towards debt
rather than equity.
In the last couple of months, broader interest rates have already
increased by a substantial 200-250bp, which may cool down
credit growth from the current ~23% levels to more sustainable
18-20% levels. At the same time, deposit mobilisation is expected
to improve in the coming months due to the recent increase in
interest rates. As a result, as far as broader interest rates are
concerned, we believe rates have peaked and banks are unlikely
to change deposit rates until April at least, with further hikes
beyond April too looking unlikely at present.
In fact, in our view, deposit rates were increased by almost
50-75bp more than expected in such a short period of time
because of the sudden steep increase in liquidity crunch and
the subsequent strong moral suasion by the RBI for banks to
correct the imbalance rapidly. Consequently, once liquidity settles
down in 1QFY2012E, it cannot be ruled out that there may
also be some cooling of interest rates. This view is also supported
by the fact that forex reserves have not shown a material increase
in this cycle, unlike in the pre-Lehman period, which we believe
could lead to peaking of interest rates at a lower level in this
cycle as compared to 2007. In the last cycle, huge foreign risk
capital was able to sustain 8%+ GDP growth at higher levels of
interest rates, but similar GDP growth at those high interest
rates looks unlikely in this cycle in the absence of the
corresponding forex inflows, i.e. we expect GDP growth of about
8% in FY2012E and accompanying credit growth of about 20%,
but at current or lower levels of interest rates.
This brings us to the second variable that has a bearing on the
level of interest rate, savings rate and consequent credit/
investment demand and GDP growth – inflation. Apart from
10-12% of pass-on left on the fuel front, much of the bad news
such as high food inflation and reflation of commodity prices
after the global crisis is already built into the inflation numbers.
Looking at incremental month-on-month (mom) trends as well,
there appears to be some respite on the inflation front, with the
latest index numbers showing virtually no increase.
Moreover, incrementally as well, there seems to be increasing
acceptance in policy circles that in a high-growth,
supply-constrained economy like India, certain items such as
food will exhibit structural 6-7% inflation, which will eventually
pass through manufactured goods as well in the form of wage
inflation. Hence, in the absence of any major new unanticipated
negative development on the inflation front, the RBI could pause
after at most another 25bp hike on the repo front (taking it
to 7%), considering that M3 growth is in any case well within
the 17-18% comfort zone.
Policy and broader interest rates have already increased by
~200bp, which, in our view, could be a peak in this cycle in the
absence of huge forex inflows. This is also corroborated by the
slightly weakening trends in IIP growth as well, after eliminating
base effects. This plateauing of interest rates, aided by restrained
fiscal spending and moderating inflation, is likely to support
major areas of private investment, viz. infrastructure, industrial
capex and housing.
We believe with interest rates having peaked and earnings
growth outlook looking healthy, the current valuations of the
Sensex represent a reasonably attractive level to invest. At this
point, we are overweight on interest-sensitive sectors such as
banking and infrastructure, while being underweight on IT and
FMCG sectors, considering their relatively rich valuations.
Sensex EPS to grow at a 17.4% CAGR in FY11-13E
We expect Sensex EPS to grow by 16.9% to `1,262 in FY2012
and by 18.0% in FY2013 to `1,488, implying a 17.4% CAGR
over FY2011-13E. In comparison, Sensex EPS for FY2011E is
expected to end with 21.4% growth.
The main drivers for Sensex EPS in FY2011E are auto, metal
and BFSI stocks. Of the total increase in EPS in FY2011, metal
and auto companies are expected to contribute 44.5% and
44.3%, respectively. Without contributions from either of these
sectors, Sensex EPS growth would come in at 12% for FY2011E.
Both these sectors have gained from improvements in Tata
Group companies. The auto sector has benefited from a bounce
back in the profitability of Tata Motors, while Tata Steel has
boosted the performance of the metals pack. Other metal
companies have also performed well on the back of increased
metal prices. BFSI companies are estimated to contribute 20.3%
of Sensex EPS growth in FY2011, with all the companies expected
to post strong growth.
On the other hand, telecom and oil and gas stocks are the
major drags on the growth in Sensex EPS. Telecom stocks are
estimated to pull down growth by 14.4%, as companies face
competitive pressures, as well as due to higher costs on
account of 3G network rollouts. A fall in the profit of the
index-heavyweight Reliance implies that oil and gas companies
would contribute negative 5.8% to Sensex EPS growth.
In FY2012E, when Sensex EPS is expected to increase by 16.9%,
growth is expected to be primarily on the back of the BFSI sector,
with IT and metal stocks also contributing reasonably well.
The BFSI sector is expected to contribute 35.9% to EPS growth;
the sector is expected to ride on strong performances by
SBI and ICICI Bank. Both the banks are expected to benefit
from improvement in their asset quality, which would lead to
lower provisioning and, therefore, higher profits. Ex-BFSI, Sensex
EPS is expected to grow by 10.8% in FY2012E. IT and metal
companies are expected to contribute 13.9% and 13.2%,
respectively, to total Sensex EPS growth in FY2012E.
Growth in profits of IT companies is expected to be driven by
higher volumes, as the demand scenario remains robust for
these companies. Infosys is expected to fare much better than
the others in FY2012E, as it is expected to garner better
price points. Notably, profits of none of the sectors are expected
to decline in FY2012E.
The story remains similar in FY2013E, with the same sectors
driving Sensex EPS growth. However, the metal sector is expected
to contribute a much higher 24.5% of the increase in EPS, on
the back of strong performance by Tata Steel and Hindalco.
Both these companies would start getting additional profits in
FY2013E from their new capacities coming on stream around
that time. The BFSI sector should continue to be the main driver
of the EPS, contributing 30.2% to the overall increase in
FY2013E. IT companies are expected to contribute 11.4% to
Sensex EPS growth. Again, none of the sectors are expected to
contribute negatively to Sensex EPS growth, even though power,
telecom and FMCG stocks are expected to underperform
compared to the others.
Overall, the primary growth drivers of Sensex EPS over
FY2011-13E are expected to be BFSI, IT and metal stocks, with
the BFSI sector expected to contribute 32.8% to overall growth
in Sensex EPS during the period, while contribution from the
metal sector is estimated to be at 19.5%. Strong performance
by the BFSI sector highlights the underpenetration of financial
services in India, which would drive credit growth in the years
to come. IT companies are expected to contribute healthy 12.5%
to Sensex EPS growth over FY2011-13E, primarily backed by
higher volumes. On the other hand, sectors such as telecom,
power and FMCG are expected to underperform the others.
The combined contribution of all these sectors to Sensex EPS
growth is expected to be 11.7% over FY2011-13E.
4QFY2011 Sensex earnings outlook
We expect Sensex companies to maintain strong top-line growth
momentum, with projected growth of 23% yoy in sales. However,
profit growth is expected to be lower at 14.5% yoy, mainly on
the back of lower operating margins, which are expected to
contract by 92bp during the quarter. Overall, we expect OPM
to come in at 20.9%, vis-à-vis 21.9% in the corresponding period
last year. Net profit margin is also expected to decline to 11.6%
from 12.5%, down by 88bp yoy.
We expect strong numbers to be posted by oil and gas, IT,
capital goods and BFSI sectors in 4QFY2011. The oil and gas
sector is expected to drive growth in Sensex sales and profit,
with 33% and 25% growth in its sales and profit, respectively,
despite a margin contraction of 209bp yoy, mainly on account
of strong 34% top-line growth in Reliance and substantial 41%
profit growth in ONGC. Ex-oil and gas, growth in Sensex sales
and earnings is expected to be 16.1% and 10.3%, respectively.
IT companies are expected to report 26.2% growth in sales,
driven primarily by volumes, while profit growth is expected to
come in at 20.7% yoy. The capital goods sector is expected to
witness strong sales growth of 26%. However, margins are
estimated to fall by 102bp yoy, resulting in bottom-line growth
of 18%. Sequential numbers are expected to be even more
attractive, with a substantial 85% increase in the bottom line,
while sales growth is expected to come in at strong 60% qoq,
as execution picks up in 4QFY2011, compared to 3QFY2011.
BFSI companies are expected to report a 41% jump in net profit,
despite only a 16% top-line increase, mainly on account of low
base effect for ICICI Bank and SBI, as these companies had
considerable provisions in 4QFY2010. Sequentially, the BFSI
sector's top line is expected to grow by 6%, while profit is expected
to increase by 8% qoq. Ex-BFSI, growth in Sensex profit is
expected to be 8% yoy.
Auto stocks are expected to report just 9% yoy growth in
profit, despite a healthy 23% increase in sales, mainly because
of a decline in profits of Maruti Suzuki and Hero Honda,
as these companies face stiff pressure on margins due to high
input costs. We expect FMCG companies to post decent 16.4%
yoy growth in sales, mainly on the back of higher volumes,
while the increase in profits is expected to be a strong 26.5%
yoy. Power companies are expected to post a 19% increase in
sales, while PAT is expected to grow by 15%. OPM is expected
to expand to 21.2% from 20.4% in the corresponding period
last year.
Metals, construction and telecom sectors are expected to
be the major underperformers during this quarter. Metal and
telecom companies are expected to report a decline in profits,
despite substantial top-line growth. The telecom sector is
expected to report a strong 37.8% yoy increase in the top line,
partially because of the inclusion of Zain's numbers in Airtel's
accounts. However, due to increased competition and higher
costs on account of the 3G network rollout, profits are expected
to decline by 41% yoy. Sequentially, the top line is expected to
grow by 5%, while profit is set to increase by 8%. Ex-telecom,
profit growth in the Sensex is estimated at 16.8% yoy. Metal
companies are also expected to witness decent growth of 16%
in the top line, while high input costs are expected to result in
margin compression and an 11% yoy drop in profits.
Sequentially though, numbers are much better for metal
stocks, with sales and profits expected to rise by 9% and
29% qoq, respectively.
In the construction sector, we expect JP Associates to report
a subdued performance. Sales and profits are estimated to grow
by 2% and 4% yoy, respectively, with margins increasing by
140bp. DLF is expected to witness a 430bp correction in its
margin on account of lower realisations due to change in
product mix, because of which profit is expected to increase by
15% yoy, despite a 40% jump in the top line. We expect Cipla
to perform well, with 12% top-line growth and 49% growth in
the bottom line. OPM is expected to expand by 522bp yoy.
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