In-line Q1FY12 performance for Sensex:: IDFC research,

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In-line Q1FY12 performance for Sensex

Earnings growth of 7.9% yoy for the Sensex companies was in line with our expectation of 6.4%, driven by robust performances by Consumer Goods (up 20.9%) and Petrochemicals (16.7%). For the broader IDFC universe, bottom-line growth (ex oil & gas) came in at 8.6% yoy, as against our expectation of 6.2%. A strong demand environment translated into healthy top-line growth for the Sensex (25.9% yoy) and IDFC universe (28.9% yoy). However, raw material cost pressures and higher wage costs led to a sharp contraction in EBITDA margin for both the Sensex (200bp yoy) and IDFC universe (160bp yoy).

Raw material price pressures and high interest costs dent profitability

Sensex bottom-line growth moderated to a seven-quarter low on account of persistent input cost inflation and rising interest rates. Despite strong top-line growth across sectors – Petrochemicals (39.1% yoy), Metals (24.1% yoy), IT Services (23% yoy), and Automobiles (22.7% yoy) – bottom-line growth skidded to 7.9% yoy in Q1FY12 from 9.7% in Q4FY11 and 32.5% in Q1FY11. Sharp contraction in NIMs andhigher provisions for restructured portfolio and NPAs hit the bottom line of financials. In telecom, 3G-related depreciation and interest expenses and expiration of tax holidays dented profitability. Bottom-line growth of metals was muted on account of rising input costs and sluggish demand, while real estate was affected by input cost inflation and recognition from low-margin past projects.

Sensex earnings downgraded by 1.6%; bottom-line growth of ~17% yoy for FY12E

We have downgraded our Sensex EPS estimate for FY12 by 1.6%. This is driven by earnings downgrades of 9.6% in Real estate, 9.3% in Telecom, 3% in Metals and 2.9% in Automobiles. While higher fuel costs and project delays have driven earnings downgrade in the metals space, moderating volume growth and lower margins have affected the bottom-line of automobiles. Lower assumptions of high-end residential sales and higher interest expense have led to earnings downgrade in DLF.

Global macro environment in chaos; domestic demand drivers still strong

The weakening global macro environment has resulted in a sharp correction in the prices of global commodities (including crude oil), giving a much-needed reprieve from the persistent inflationary pressure. While higher ‘core inflation’ would prompt RBI to hike policy rates by another 25-50bp, we believe we are almost at the end of the rate hike cycle. Lower commodity prices and lag impact of monetary policy tightening would moderate inflation to 7-8% by March 2012. On the earnings front, domestic demand drivers continue to be strong, as reflected in strong top-line growth of our broader universe. We expect profitability to improve as moderation in commodity prices allays margin concerns. Further, we expect policy triggers from the government to revive the sentiment and kick-start investment spends. In line with our positive outlook, our 12 month Sensex target is in the range of 20000-21000.