JPMorgan India Equity Strategy 4Q FY14 Earnings Preview: Global Lift Continues...

India Equity Strategy 4Q FY14 Earnings Preview: Global Lift Continues...

· We preview the forthcoming 4Q FY14E reporting season in the enclosed excel file (among the large caps, Infosys kicks off on Tuesday, April 15th).

· For the Sensex, we expect aggregate quarterly earnings to increase a robust 31% YoY. But the aggregate growth number is boosted significantly by a substantially supportive base effect for Tata Steel (reported a loss for the corresponding quarter last year). Excluding Tata Steel, the aggregate growth corrects to a more reasonable but still healthy 14% YoY.

· Earnings growth will likely continue to be driven by global sectors (IT services, Healthcare) and companies (Tata Steel, Tata Motors). Earnings for this pack are estimated to grow 160% (30% ex-Tata Steel). Ex these, earnings for the remaining universe are likely to increase a more sedate 9% YoY, reflecting the stresses in the local macro.

Table 1: J.P. Morgan Coverage Universe – 4Q FY 14 Sectoral earnings growth expectations

		YoY %			Change in EBIDTA Margin
	Net sales	PBDIT	PAT		QoQ - bps	OYA- bps
Auto	12	17	9		(22)	70
Building Materials & Construction	5	(5)	(19)		325	(192)
Consumer Staples	11	14	12		(41)	56
Financials	13	14	4
Capital Goods	(12)	(31)	(38)		140	(433)
Metals	20	18	247		(369)	(23)
Energy	4	(16)	(23)		573	(293)
Health Care	20	30	20		(230)	222
Real Estate	(9)	(16)	(27)		129	(259)
Retail	9	4	(3)		54	(48)
Technology	28	41	36		(22)	256
Telecom	12	23	52		(41)	302
Gas Utilities	26	60	77		(49)	210
Utilities	13	26	15		153	339
Total	9	4	3		253	(84)
Ex Energy	14	17	27		(15)	64
Ex Energy, Financials	14	18	38		(56)	69

Source: J.P. Morgan

Table 2: Sensex Companies – 4Q FY 14 Sectoral earnings growth expectations

		YoY %
	Net sales	PBDIT	PAT
Auto	12	18	9
Consumer Staples	11	17	14
Financials	15	18	10
Health Care	23	30	19
Capital Goods	(9)	(35)	(34)
Metals	20	2	119
Energy	17	2	15
Technology	27	40	35
Telecom	15	20	91
Utilities	22	30	47
Total	15	13	31
Ex Energy	14	16	39

Source: J.P. Morgan

· Aggregate Sales growth for the Sensex companies is expected to be 15% YoY.

· The trend in EBITDA margins is expected to be mixed. IT Services, Health Care, Consumer and Telecom companies are expected to report improved margin performance compared to the previous year. Margin expansion can be attributed to INR depreciation, stable global commodity prices and companies’ efforts on cost management.

· The domestic demand environment continues to remain sluggish. Investment linked sectors continue to witness margin compression.

· For the Sensex universe, Metals, Telecom, Auto, IT Services and Utilities are expected to drive growth, while Industrials, Consumer Discretionary and Financials are expected to lag.

Figure 1: Sensex companies – Net Profit growth (% yoy)

Source: J.P. Morgan

· J.P. Morgan estimates vs. Consensus: Our estimates are higher-than-consensus for Consumer Discretionary (Tata Motors, Bajaj Auto), Financials (Axis Bank, ICICI Bank) and Energy (Coal India) while it’s lower in Industrials (BHEL). It must, however, be highlighted that consensus data for quarterly results is sketchy and limited.

· The earnings cycle appears to be in the midst of a long drawn bottoming out process. Consensus earnings growth estimates for the Sensex for the current year at 10% appears realistic. But, next year’s growth expectation of 17% has a downside risk, in our view, as it is expected to be driven mainly by local sectors.

· We believe that even if there is a positive outcome in the National Elections, a decisive turn around in economic growth and corporate profitability will take some time. Note that earnings growth estimates for FY15E have been downgraded consistently over the last quarter, despite positive sentiment in the equity markets.

· Markets are going into the reporting season with relatively higher expectations compared to the last quarter. But that said, the equity markets are at this stage largely focused on the National Elections and expectations of a positive outcome herein.

· Consequently we expect the reporting season itself to have limited impact on market direction.

· Outlook and portfolio stance: Indian equities have rallied by nearly 8% over March largely on the back of opinion polls forecasting an impressive showing by the BJP led NDA coalition in the forthcoming National Elections. We would at this juncture caution against chasing beta, particularly low quality financials and investment cycle related names, given the nature and extent of challenges facing the economy.

· Our portfolio stance since the beginning of the year has been:

o biased towards Global sectors IT services (Infosys, Tech Mahindra), Healthcare (Dr. Reddy’s Lab), Metals (Tata Steel, Sesa Sterlite), Energy (Reliance Industries)

o Recommended playing a potential recovery in the economy later in the year through high quality financials (HDFC Bank, ICICI Bank), Commercial Vehicles (Tata Motors) and Cement (Grasim) rather than through sectors and stocks with high leverage which could take some time sorting out.

o We maintain our portfolio stance. Note that Metals and Energy were among the three best performing sectors even during the beta rally last month.

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