Earnings Preview (April - June 2012) IDFC Sec

Sensex earnings growth is expected to come in at 11.5% yoy in Q1FY13, as against 16.7% in the previous quarter. Growth would be a more tepid ~7.1% yoy ex SBI (higher earnings due to a low base). Non-commodities are expected to report strong numbers, led by IT Services (45% yoy), Pharma (25% yoy) and Financials (48% yoy). Earnings of commodities are likely to contract by 20% yoy. Companies expected to clock strong bottom-line growth are Tata Motors (37% yoy), Infosys Technologies (49% yoy), TCS (41% yoy), ICICI Bank (31% yoy) and SBI (133% yoy). Top-line growth of Sensex companies is expected to moderate to 14% yoy from 18% in the previous quarter. However, top-line growth of Sensex companies ex commodities would be stronger, at 22% yoy, though lower than 26% in Q4FY12. Continued raw material price pressure is likely to compress margins of Sensex companies by ~135bp yoy (down ~40bp qoq) to 19.3%. Earnings of the broader IDFC universe ex Autos and Oil & Gas are likely to be a muted 8.5% yoy.

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The previous quarter was characterized by deceleration in growth (GDP grew 5.3%, vs expectation of 6.5%), moderating core inflation, sharp depreciation of the INR (down 9% in three months), paltry FII inflows (~US$350mn), sharp correction in crude oil prices (down 22%), lackluster Sensex performance, continued policy flip-flops by the government and further erosion in corporate/ investor sentiment. With the RBI clearly emphasizing the need for fiscal consolidation before embarking on monetary easing, the timing and magnitude of future rate actions would depend on how the growth-inflation dynamic pans out. As a result, the direction of the markets would depend on how global events unfold, particularly global flows, and domestic growth momentum. We believe the pace and magnitude of the RBI’s rate actions would be critical to revive business sentiment and, in turn, the investment cycle. Our Sensex EPS stands at Rs1257 (14% yoy) for FY13 and Rs1377 (10% yoy) for FY14.

Sectors likely to exhibit strong performance

·      FMCG: Steady volume growth and continued price increases to drive growth

·      IT services: Weak revenues; strong margins led by INR depreciation

·      Financials: Stable NIMs and lower pace of NPA accretion for private banks to drive earnings

Sectors likely to witness weak earnings

·      Metals: Sequential decline in operating margins lower realizations to more than offset benefits of lower coking coal prices

·      Oil & Gas: A weak quarter expected overall on the back of declining Singapore GRMs, higher subsidies and rising gas costs

·      Infra developers: Weak earnings due to by lower gas availability and higher interest costs

·      Logistics: Weak port volumes, lower dwell times and higher tax rate to impact earnings

·      Power Transmission: Execution of low margin orders, forex losses and higher interest costs to impact earnings