Q4FY12 Result Preview - Soft patch continues :: Edelweiss PDF link

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Q4FY12 is expected to be yet another weak quarter with a 6.4% PAT growth for Sensex, while earning for the coverage universe is expected to remain flat YoY (a major part of earnings growth is contributed by SBI). Revenue growth is also expected to slow down to 16% (coverage universe, ex OMCs) against a healthy 20%+ recorded over the past few quarters with margins contracting ~280bps YoY. Core defensive sectors (pharma and consumer goods) are yet again expected to post good set of results while growth in cyclicals is expected to lag. Going into FY13, the earnings trajectory seems to be bottoming out as reflected in the rising upgrade to downgrade ratio. Besides, high frequency macro indicators suggest that the economy is emerging from a phase of extreme weakness.

Another quarter of tepid earnings growth

Earnings growth for Q4FY12 is likely to be weak with the Edelweiss coverage universe (ex-OMCs) expected to remain flat YoY, marking the fifth consecutive quarter of a sub-par earnings growth. Meanwhile, Sensex is expected to clock earnings growth of 6.4% YoY, just above ~2.0% clocked in Q3FY12, with a major portion contributed by SBI. If we are to exclude SBI, both coverage (ex OMCs) as well as Sensex earnings growth slip into the negative. Revenue growth is also expected to moderate, slowing down to 17% (coverage universe, ex OMCs) against a healthy 20%+ recorded over the past few quarters. The contraction in margins is expected to continue with YoY EBITDA margins down ~280bps.

Defensive sectors yet again to the fore

The bulwarks of the current earnings season could again be the defensive sectors- pharma and FMCG. We expect the FMCG sector to post a strong Q4FY12. Importantly, amidst a declining trend in margins, FMCG is one of the few sectors where margins are expected to remain stable because of calibrated price hikes.  Meanwhile, the weakness in some of the cyclical sectors such as cap goods and construction is expected to continue. Asset quality issues with PSU banks are likely to persist with higher restructuring.

Earnings outlook: Incrementally better

We believe that we are in the midst of a long drawn bottoming out process of earnings growth and expect revival of earnings growth in coming quarters. For one, macros are incrementally turning positive with some high frequency indicators pointing to a cyclical uptick in industrial activity. Secondly, the overall earnings trajectory for FY13 is showing improvement with overall revisions balance turning in favor of upgrades. Both these factors should be supportive of earnings growth in the coming quarters.

Q4FY12 Result Preview - Soft patch continues

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