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Sensex revenue to grow at 26% yoy, but margins to shrink by 200bps
We expect to see a continuing trend of robust revenue growth in the June
reporting quarter (Sensex: +26%yoy; DB universe: +24%yoy) - underscoring the
strong underlying demand dynamic in the economy. However, corporate margins
should remain under pressure on account of high input costs - leading to a lower
Sensex’ EBITDA growth of 15%yoy with EBITDA margin shrinking by ~200bps.
However, Sensex earnings growth will likely move back into double digits
(+13%yoy, after a disappointing Mar-qtr) while for DB univ (ex- PSU OMCs),
earnings should grow by +11% yoy.
Key leaders: IT Services, FMCG, Telecom and Utilities
We expect following sectors to post above trend EBITDA growth: (i) IT Services
(+22% yoy) – where top tier IT companies will likely benefit from (a) normalization
in revenue growth after seasonally weak Mar-qtr and (b) better utilization, (ii)
FMCG (+20% yoy) - as we expect both HUVR and ITC to post healthy volume
growth, with ITC benefitting from 5% growth in cigarette volumes. In addition, we
have factored in a ~300bps cut in ad/sales for HUVR – which should mitigate the
raw material cost pressures. (iii) Utilities (+18%yoy) – driven primarily by NTPC’s
fresh capacity commissioning of 3000 mw. (iv) Telecom (+17%yoy) – as the
sector will likely benefit from moderating competitive intensity, slowing decline in
tariffs and robust minutes growth. Additionally, Bharti should be positively
impacted from a continuing momentum of turnaround in African operations.
Key Laggards: Pharmaceuticals, Real Estate and Autos
Following sectors are expected to be key laggards in EBITDA growth: (i)
Pharmaceuticals (-8% yoy), as we expect Cipla to be hit by dual headwinds of
pricing pressure and rising input costs; (ii) Real Estate (+9.6% yoy), as continuing
pressure on account of input costs dilutes the strong revenue growth of 36% on
account of plot sales; (iii) Automotives (+10% yoy) – as we expect the sector to
be impacted by continuing input cost pressures and a slowdown in demand
growth in Jun-qtr. However, M&M and Bajaj Auto are expected to buck the trend
by posting 19%yoy EBITDA growth as demand for tractors and 2-wheelers
remained above trend.
We see a continuation in tactical upmove for Indian equities
While the earnings season will be one of the key determinants of market
performance in the near term, we continue to believe that the recent
outperformance of the Indian markets should sustain further driven primarily by (i)
a perceptible improvement in the policy environment, (ii) a softening in stance of
environment ministry, as evident in the recent clearance of 5 coal blocks in the No-
Go forest area, (iii) expectation of positive signals from the likely cabinet reshuffle,
(iv) expected softness in global commodities prices, (v) a reasonable monsoon
season thus far, propping up consumption demand in the hinterland and (vi) rate
tightening cycle approaching its peak. Maintain year-end Sensex target of 21000.
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