We expect Q1FY13 to be yet another quarter of lacklustre growth. A perceptible slowdown in macro-environment is likely to result in another sub-10% earnings growth for the Sensex universe as well as our coverage universe (ex-OMCs). What is further disconcerting is the continued weakness in earnings breadth—almost a quarter of companies under coverage are expected to post an earnings decline of more than 20.0%. The drawdown of revenue trajectory continues with topline growth expected to come in at 16.6% for coverage universe (ex OMCs) and 15.5% for Sensex. Importantly, however, we expect EBITDA margins to improve sequentially, as in a slowing demand scenario, businesses adjust by shifting focus from growth to profitability through cost rationalisation.
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Earnings growth likely to be lackluster, once 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. Apart from the bleak growth, equally disconcerting is the breadth of negative earnings revision as almost a quarter of companies may post an earnings decline of more than 20%. The rupee has also depreciated 8% against the USD in Q1FY13 and this could potentially suppress reported profit growth on top of weak core earnings outlook. For Sensex universe this implies an almost 19.0% YoY growth for balance three quarters to meet FY13 year-end profit expectations.
Revenue pain, but margin gain
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. Among major sectors, IT, auto, pharma and utilities may post healthy top line growth while growth for metals, construction and real estate could be relatively lower. 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. This reflects the adjustment process wherein businesses (not confident of sustainable demand) shift focus to profitability via cost rationalisation.
Downgrades continue to singe earnings outlook
EPS estimates continue to be downgraded, with FY13 estimates being cut 2% during Q1FY13 alone. Consensus FY13 and FY14 EPS estimates for Sensex now stand at INR1,275 and INR1,450, respectively (Edelweiss: INR1,280 and INR1,430). Based on our macro assessment, we believe there are further risks to the earnings trajectory, but we do not foresee FY13 Sensex earnings falling below INR1,220.
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