2Q Earnings Preview - IDFC Sec

We expect Q2FY13 Sensex earnings growth of 15% yoy (ex-Oil & Gas) as against 19% yoy in Q1FY13. Including Oil & Gas, earnings growth is likely to be muted at 6.4% vs14.5% in Q1FY13, mainly due to assumption of NIL oil subsidy from government in Q2FY13 (lower earnings for ONGC due to higher share of contribution). While non-commodities are expected to report strong earnings growth (18%yoy) led by Financials and IT, earnings of commodities would likely contract by 15.4% yoy. Our Sensex EPS stands at Rs1,196 (9% yoy) for FY13 and Rs1,349 (13% yoy) for FY14. Notably, continued cost pressures are likely to compress margins of Sensex companies by ~110bp yoy to 19%. Top-line growth of Sensex companies is expected to moderate to 13.4% yoy from 17% in the previous quarter. Earnings of the broader IDFC universe (ex-Oil & Gas) are likely to be at 16.5% yoy.

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Triggered by a series of bold announcements on the reforms front, capital markets have revived with Sensex gaining >8% in September. Although the macro environment remains challenging (Q1FY13 GDP growth at 5.5%, August WPI still high at 7.55% yoy, July IIP growth at a meagre 0.1%yoy), stability in recent levels of indicators like PMI and late recovery of monsoon (only 8% below average till Sept’12 end) have increased hopes of arresting the weakness in growth. Further, with visible action being demonstrated by the government, expectations of interest rate cut by the RBI have resurfaced. However, we maintain that the magnitude and timing of rate cuts would be governed by the inflation trajectory and growth-inflation dynamic, as stated by the RBI.

Sectors expected to exhibit strong performance for Q2FY13

·         IT services: Revenue growth would be volume-driven, aided by rupee depreciation on yoy basis

·         Financials: Pace of NPA accretion and incremental restructuring to remain low for private banks

·         Pharmaceuticals: Currency tailwind to lead revenue growth, while earnings growth to be aided by translation gains on forex liabilities

·         FMCG: Broad-based growth led by price hikes and a largely benign input cost environment

Sectors likely to witness weak earnings for Q2FY13

·         Metals: Muted end-use demand, seasonal factors and declining global prices have resulted in decline in domestic flat and long product prices

·         Oil & Gas: A weak quarter expected due to continuing losses for OMCs

·         Infra developers: Weak earnings due to little improvement in execution

·         Telecom: Seasonal weakness to be a drag on revenues

·         Automobiles: Slowdown in demand coupled with a record festive base of last year (this year, festival season commences in October)

IDFC Securities Research