Adjusted earnings growth for Q1FY13 (7.8% for the coverage universe, ex OMCs, and 12.4% YoY for Sensex) is sluggish but the downward drift seems to be ebbing. Though sector-wise pockets of concern remain, there are some signs of an improvement- a higher beat-to-miss ratio and indication that the sharp contraction in margins may have been arrested - in line with our view that in a slowing demand environment, businesses adopt by shifting focus from growth to profitability through cost rationalization. The cycle of EPS downgrades is also losing steam with only a paltry 0.4% cut to FY13E Sensex EPS during the reporting season as compared to much sharper cuts during previous reporting seasons.
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Earnings surprise on the upside, margin contraction narrows
PAT growth at 7.8% YoY and 12.4% for the coverage universe (ex-OMCs) and Sensex was well ahead of our expectations (4.9% and 7.8% respectively). Importantly, the earnings breadth has improved a bit with a higher earnings beat to miss ratio, which is now at an eight quarter high of 60%. Although higher than expectations, revenue growth continues to remain sluggish at 18.3% for the coverage universe (ex OMCs) and 17.4% YoY for the Sensex. Despite the slowdown in the topline growth, sequentially EBITDA margins have remained stable (17.8% for Q1FY13E vs 18.0% in Q4FY12) and the sharp YoY contraction seems to have been arrested. This trend is in line with the view highlighted in our strategy note, `At the limits of realism’, wherein, based on the study of previous slowdown phases, we highlighted that profitability ratios stabilize in mid-cycle even as sales continue to remain weak. This is also reflected in the PBT level wherein margins have improved since Q4FY12.
Headwinds prevail across sectors
On the operational front, some of the sectoral concerns persist. Restructuring in the PSU banking space carried on into this quarter with the pipeline at CDR cell suggesting further increases in future quarters. The economic slowdown seems to be feeding the deceleration in discretionary demand (retail, jewelry, paints, etc) though there is little perceptible impact on the non-discretionary demand so far. BTG ordering in capital goods remains sluggish while higher interest costs continue to burden the construction sector. IT sector, meanwhile, reported a mixed set of numbers with the bellwether, Infosys slashing its annual revenue guidance. This apart, the rupee depreciation has led to forex loses which have suppressed reported PAT on the top of a weakening core.
Earnings downgrade cycle softens
The downgrade cycle which seemed to have gathered pace in the previous quarter has softened considerably. In fact, the downgrade to FY13E Sensex earnings has been 0.4% (currently at INR1,273) and FY14E Sensex earnings at 0.9% (currently at INR1,442). As per Edelweiss estimates, Sensex EPS estimates for FY13E and FY14E stand at INR1,268 and INR1,430 (mild downward revision of 0.6% and 0.5%) respectively.
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