Sentiments in global equities recovered in June after a sell-off in May, with Indian equities placed among the outperformers. Favourable outcome of Greece elections and some effective measures taken in the EU Summit buoyed the global equities. Domestically, hopes of policy action firmed up as PM took additional charge of Finance Ministry. Going ahead, market is likely to take cues from government action, progress of monsoons and forthcoming earnings season. We anticipate overall sales growth in Q1FY13 to moderate further to ~16.5% from ~19% previously but importantly, we expect improvement in EBITDA margins as in the slowing demand scenario, businesses adjust by shifting focus from growth to profitability through cost rationalization.
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EU Summit: Better approach
In the 19th EU Summit post eruption of EU crisis, steps taken were directionally positive as EU leaders tried to address the crisis for the first time at a multi-lateral level (more powers to ESM, Euro-wide banking supervision etc), rather than through individual sovereigns. Moreover, the steps reiterated leaders’ commitment to Euro. However, the measures were not far-reaching. Not only they face issues of implementation, but also the size of EFSF/ESM fund is limited, given the scale of EU crisis. We reiterate that to turnaround the situation decisively, Europe needs to use the ECB’s balance sheet (either directly or through EFSF/ESM) much more aggressively, like outright purchases of sovereign debt on large scale, to stop the contagion to the larger economies.
Monsoon: Weak so far, but too early to panic
Below normal rainfall in June, coupled with still lingering risk of El Nino, has raised concerns over the monsoon outlook and its potential implications on an already weak economy. However, we think that while risks have surely risen, it is too early to reach a definitive conclusion. First, June deficit is high but not as bad as seen in 2009 and rainfall deficiency is highest in North-West region, where rain-dependency is low. Also, July rains are more crucial for sowing compared with June. Second, barring oilseeds and coarse cereal, sowing has been normal in paddy, cotton and sugarcane.
Earnings likely to be lackluster, yet again
Q1FY13 earnings are likely to be weak with the Edelweiss coverage universe (ex-OMCs) expected to post a tepid growth of 5.1% YoY (Sensex 7.8%), marking yet another lackluster quarter in a prolonged slowdown phase. The revenue trajectory continues to moderate even as the top line is expected to expand 16.6% YoY (ex-OMCs) compared to 18.8% YoY in Q4FY12 and way below 25.2% in Q1FY12. However, despite the slowdown in top line growth, sequential recovery in EBITDA margins is likely which is expected to come in at 18.3% for coverage universe (ex-OMCs) and 18.7% for Sensex (versus 18.1% and 18.4% in Q4FY12). This trend is broadly in line with the view highlighted in our strategy note, At the limits of realism, dated June 29, 2012, wherein based on our study of previous slowdown phases, we had highlighted that profitability ratios stabilize in mid-cycle even as sales continue to remain weak.
Regards,
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