Earnings Momentum to Moderate - Result Preview Q2FY15 :: Edelweiss PDF link

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Earnings momentum for our coverage universe (ex OMC) is expected to moderate in Q2FY15, mainly owing to lower top-line growth on account of fading impact of INR depreciation and higher commodity prices (average) during the quarter. Top line and bottom line estimates for our coverage universe (ex OMC) for Q2FY15 are 6.7% and 7.9% YoY (Q1FY15: 13.5% and 13.6%), respectively.

Sector wise, some domestic-oriented sectors (autos, cement, etc) are expected to witness improvement. However, export-oriented sectors (IT and pharma) are expected to post lower growth as effects of INR depreciation fade from this quarter. The banking sector is expected to report benign top line, while asset quality remains a concern for the PSU banks. FY15 EPS growth forecast (Edelweiss and consensus) is pegged at ~15-16% for the Sensex versus 11% in FY14. We believe this is achievable given the recent correction in commodities and improvement in household real incomes (as inflation declines). However, uncertain global environment poses a risk.

Earnings momentum to temper

Earnings momentum is expected to moderate in Q2FY15. Since Q2FY14, earnings have been steady registering near double-digit growth, mainly aided by global demand and INR depreciation (which is counter intuitive) and improvement in operational efficiency of corporates. However, base effect of INR depreciation will diminish from Q2FY15 and is expected to negatively impact top line and bottom line of India Inc. While domestic demand has improved, it is still fragile and inadequate to compensate for lower exports earnings growth. Further, the commodity prices in INR terms have risen this quarter (on an average), exerting pressure on bottom line. Given such dynamics, top line and bottom line estimates for our coverage universe (ex OMC) are 6.7% and 7.9% YoY (Q1FY15: 13.5% and 13.6%), respectively. EBITDA margin is also expected to dip by 68bps QoQ.

Some signs of recovery visible in domestic-oriented sectors

Certain domestic oriented sectors (autos and cement) are exhibiting signs of improvement, while some others (infra related and the PSU banks) are expected to extend their soft performance. Further, given fading impact of INR depreciation, the export-oriented sectors (IT and pharma) are expected to post lower earnings growth.

Earnings outlook: FY15E Sensex EPS growth at 15-16% achievable

Consensus and Edelweiss FY15E Sensex EPS forecast stand at INR1,575 and INR1,580 respectively, implying 15-16% growth. We believe our forecast is achievable, led by better household real incomes, soft commodity prices and improvement in operating leverage of corporates.  However, slowing rural demand (owing to poor monsoon and lower prices) and global growth downturn pose risks.

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https://www.edelweiss.in/research/Earnings-Momentum-to-Moderate--Result-Preview-Q2FY15/27211.html