1QFY12- Earnings preview :: Motilal Oswal

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1QFY12- Earnings preview

Key Highlights

• 1QFY12 earnings will be weak; PAT growth of 8% ex Oil & Gas
• Sensex PAT growth is low at 11%:
• DUSK v/s DAWN: an 18-month battle for the markets

DUSK or DAWN?

The full picture's not yet clear … but the scenes are getting better

Indian markets underperform in 1HCY11: The BSE Sensex closed 1HCY11 at 18,800

levels, down 8% over December 2010. A late rally towards June-end helped Indian markets

to recoup part of the losses made over the last few months. India has been among the

most underperforming markets during this period, led by heightened concerns on inflation

and slowing industrial activity. During this period, FY12 earnings estimates have been

cut by 5%, and FII flows have been negligible at USD1b v/s USD23b in 2HCY10 and

USD7b in 1HCY10.

1QFY12 - a tough quarter for earnings: June quarter will mark another tough quarter

for earnings. While aggregate earnings seem healthy with PAT growth (ex RMs) of 15%

YoY, the growth is not widespread. Ex Oil & Gas, PAT growth is sub-8%. Most sectors

are likely to report a drop in EBITDA and PAT margins. We expect PAT growth to remain

modest even in 2QFY12 and 3QFY12 at 16-18% before picking up in 4QFY12 to 25%.

Biased for DAWN: Our model portfolio reflects our positive investment bias, as we believe

that another quarter of consolidation at current levels will make markets attractive. Our

earnings estimates for FY12 and FY13 still imply a strong 18% CAGR. Our Economist

expects inflation to peak in June-July and then gradually moderate thereafter. RBI's

monetary tightening is also expected to pause post 3QCY11. These factors, coupled

with any fresh reform impetus from the government (Parliament session in August will be

crucial for this), dawn well for the markets.

Top bets: Meanwhile, sectors where valuations have corrected and/or headwinds are

expected to subside will likely perform well. In our model portfolio, we are raising Autos

to Overweight, increasing exposure to NBFCs, and introducing several mid-caps. Our

top large cap bets are ICICI Bank, Bajaj Auto, NTPC, Infosys and Tata Steel.