Q2FY11 Result Review-Right on track-in line with expectations: Edelweiss

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n  Results in line with expectations

Q2FY11 earnings for our coverage universe and Sensex, at 24.2% and 21.4%, came in broadly in line with expectations of 25.2% and 20.9% Y-o-Y, respectively.

Top line growth, however, continued to surprise on the upside. Top line of Sensex companies too surprised on the upside, at 21.3% Y-o-Y, versus expectation of 18.1%. Our coverage universe’s (ex OMCs) earnings, at 20.3% Y-o-Y, were above expectations (17.8%). However, margins came in below expectations, with 64bps EBITDA margin expansion (versus 104bps expected) for Sensex companies and 27bps (versus 66bps expected) for coverage universe (ex OMCs). 

n  Cap goods: Healthy execution drives profitability; order pipeline strong

Revenue grew a strong 16.0% and PAT 22.8%, Y-o-Y owing to large value execution in the sector. Also, strong order book of INR 3,200 bn, offers healthy revenue visibility. Further, EBITDA margins expanded ~42bps Y-o-Y, led by a mix of strong execution, lower commodity prices, and better product mix.

n  IT: Healthy revenue traction

IT sector results reflected the strength of demand recovery, particularly with the double digit quarterly revenue surge for top companies. Growth was broad based (across verticals and geographies) and indicates sustained recovery in discretionary spending as well. Attrition, however, continues to remain high in a tight supply environment. While tier-2 companies continue to feel the heat of attrition reflected in low margins, tier-1 companies have managed their margins exceedingly well. Further, next year’s (CY11) IT budgets indicate higher spending, which could result in sustained revenue growth momentum going into FY12.

n  Stellar performance of consumption-driven sectors continues

Consumption-driven sectors (auto, FMCG, media) continued their strong march. Autos, buoyed by strong volume growth, posted healthy 33.5% revenue growth and 15.6% PAT growth Y-o-Y. FMCG too registered a strong 17.0% Y-o-Y top line growth and 19.2% Y-o-Y PAT growth on the back of buoyancy in volume, led by recovery in domestic consumption. Q2FY11 also witnessed return of pricing power to a certain extent, which could be the sector’s key driver in the next 12 months.

n  Outlook: Positive; FY11 EPS target looks on track

FY11 and FY12 earnings estimates for the Sensex have remained broadly stable at INR 1,076 and INR 1,286, respectively. With the second half of the year traditionally being a busy season, we expect increased execution in H2FY11, especially in construction, infrastructure, and real estate sectors. For Sensex earnings to meet its FY11E estimate, the implied earnings growth for the second half stands at 30%. We are not downgrading our EPS estimate for the full year but given such a high growth rate their could be risks as well.