India Strategy - A season of low expectations ::RBS

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


India Strategy
A season of low expectations
RBS's India analysts estimate only 7% yoy earnings growth for their coverage
universe (ex. Energy) for the June quarter, reflecting last year's high base
coupled with margin pressures. As such, we don't expect significant negative
surprises in this earnings season.


Margin pressures and base effect suggest muted earnings growth
RBS analysts estimate only 7% yoy earnings growth for their universe (ex. Energy) for the
June quarter, down from 50% a year earlier and 14% in the prior quarter. Our analysts
expect net margins to decline 154bp yoy partially offsetting the 19% growth in net sales that
they foresee.
Key sector takeaways
Though RBS expects public sector bank’s net income to decline 9% yoy (due to SBI), we
estimate pre-provision operating profit growth of 12% to be higher than the private sector’s
10%. In autos, we expect 2-Ws to post strong numbers in contrast to flat to down earnings
for 4Ws. We expect mid-cap construction companies earnings to remain under pressure
(down 45% yoy) because of higher interest costs.
Proposed mining bill to impact FY12 headline EPS by around 1%
Based on RBS analyst Rahul Jain’s initial estimates (see GoM approve draft MMDR bill date
7 July 2011), we estimate that the proposed mining bill would impact MSCI India headline
FY12F EPS by only 1%.
Keeping the faith though oil prices are a wrinkle
We remain buyers of Indian equities though the recent run-up in oil prices is a concern and
something to watch. We believe margin compression, which we expect in the June quarter
numbers, should suggest to the RBI that corporate pricing power has weakened – this
supports our view that monetary policy tightening is close to its end. Separately, we think
long-term foreign money is coming back as FII inflows totalled US$1.9bn in June and July
despite some ETF linked outflows (according to our estimates).


A season of low expectations
We believe margin pressures should limit yoy earnings growth to 7% for the RBS universe
(excluding energy) as sales grow an estimated 19%. Including energy, we expect earnings
to decline 5% due to losses at oil marketing companies.