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India Equity Strategy
1QFY12 Earnings Preview – Slowing Sales, Steadying Margins
8.5% Sensex Ex-Oil growth expectations — 1QFY12 should be a relatively slow
quarter, with CIRA ex-Energy growth at 8.2%: a shade lower than the last quarter,
still single digit, and well short of the 23% earnings growth currently anticipated for
FY12. But is this the slump that has increasingly been the top-down view? We think
not, given that ex-SBI Sensex growth would be 15.2%, sales momentum to remain
20+%, and operating profit should be 15%. The quarter clearly offers limited upside
risks, but are high downside risks too consensus?
Slower Sales, Steady Margins — Our estimates suggest that sales growth will
moderate – as demand gets the inflation itch. But margins should be largely flat qoq
(will be down yoy). This mix of stable operating profitability but moderating demand
contrasts with the earnings drivers of FY11: strong demand but falling margins. In
our opinion, the overt top-down caution in the market is the view that both growth
and profitability will face pressure: this quarter could challenge this expectation.
However, it would still challenge the consensus 18-22% earnings growth expectation
for FY12 (only possible if either or both of sales and margins rise). Or will it be a
series of downgrades as we go through FY12?
Energy sector driving growth, with growth rate convergence — Earnings growth
will have a skew: 54% of growth for Sensex will be generated by the energy sector.
However, median growth rates will be more concentrated than previously (36% /
26% CIRA co’s growing 0-20% yoy), operating profits will grow faster than net profits
(interest cost impact), and the broader market should growing in line with the
Sensex. The rising growth convergence does suggest the current earnings growth
pressures are more macro and broad-based rather than very industry-specific.
Upside / Downside surprises — Based on our view on market expectations,
upside surprises would lie with the Cement sector, SBI, Tata Steel, Jindal Steel &
Power, while Cipla, Bharti, Hindustan Unilever and Maruti could fall short of
expectations and surprise on the downside
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Equity Strategy
1QFY12 Earnings Preview – Slowing Sales, Steadying Margins
8.5% Sensex Ex-Oil growth expectations — 1QFY12 should be a relatively slow
quarter, with CIRA ex-Energy growth at 8.2%: a shade lower than the last quarter,
still single digit, and well short of the 23% earnings growth currently anticipated for
FY12. But is this the slump that has increasingly been the top-down view? We think
not, given that ex-SBI Sensex growth would be 15.2%, sales momentum to remain
20+%, and operating profit should be 15%. The quarter clearly offers limited upside
risks, but are high downside risks too consensus?
Slower Sales, Steady Margins — Our estimates suggest that sales growth will
moderate – as demand gets the inflation itch. But margins should be largely flat qoq
(will be down yoy). This mix of stable operating profitability but moderating demand
contrasts with the earnings drivers of FY11: strong demand but falling margins. In
our opinion, the overt top-down caution in the market is the view that both growth
and profitability will face pressure: this quarter could challenge this expectation.
However, it would still challenge the consensus 18-22% earnings growth expectation
for FY12 (only possible if either or both of sales and margins rise). Or will it be a
series of downgrades as we go through FY12?
Energy sector driving growth, with growth rate convergence — Earnings growth
will have a skew: 54% of growth for Sensex will be generated by the energy sector.
However, median growth rates will be more concentrated than previously (36% /
26% CIRA co’s growing 0-20% yoy), operating profits will grow faster than net profits
(interest cost impact), and the broader market should growing in line with the
Sensex. The rising growth convergence does suggest the current earnings growth
pressures are more macro and broad-based rather than very industry-specific.
Upside / Downside surprises — Based on our view on market expectations,
upside surprises would lie with the Cement sector, SBI, Tata Steel, Jindal Steel &
Power, while Cipla, Bharti, Hindustan Unilever and Maruti could fall short of
expectations and surprise on the downside
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