Lower Exports and Commodity Prices to Dent Earnings - Result Preview Q3FY15 :: Edelweiss

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->

Our coverage universe’s (ex OMC) earnings are expected to continue to march to the moderation tune in Q3FY15. The ~25% QoQ decline in oil prices in INR terms (average basis), moderation in other commodities in conjunction with INR appreciation (relative to EUR, EM currencies) are likely to yield just ~2% top line growth for our coverage universe (ex OMC). Though the lower commodity prices are a tailwind for India Inc., inventory losses and lackluster domestic demand are not enough to tame the negative forces. While EBITDA margin of our coverage universe (ex OMC) is likely to jump 54bps QoQ, PAT growth is expected to be nil.

On the sectoral front, the sharp correction in commodities is likely to take a toll on oil & gas and metals sectors’ earnings. On the exports front, the INR appreciation is expected to slower top line growth for IT and pharma sectors. While earnings momentum is anticipated to be subdued but stable in domestic-oriented sectors (consumption and investment), lower bond yields may spur banking sector’s earnings. Given the ~14-15% FY15 Sensex EPS growth forecast (Edelweiss and consensus), earnings downgrades are likely.

Earnings to march to moderation tune

Earnings momentum is expected to moderate further in Q3FY15. The moderation is likely to be predominantly concentrated in commodity sectors (oil & gas, metals) given the sharp correction in commodity prices and export-oriented sectors (IT, pharma) due to INR appreciation relative to EUR and EM currencies. Though the moderation in commodities is expected to boost EBITDA margins of our coverage universe (ex OMC) by ~54bps QoQ, it is unlikely to compensate for the subdued domestic demand. Overall, for our coverage universe (ex OMC), we estimate top line growth of ~2% and near flat earnings growth.  

Exports and commodity-oriented sectors play spoilsports

On the sectoral front, earnings of commodity-oriented and export sectors are likely to moderate the maximum. Ideally, this should have been compensated by domestic- oriented sectors. But, given the weak domestic demand and probably inventory losses, domestic consumption as well as investment-oriented sectors are expected to report stable, but subdued earnings growth. On the bright side, softening of bond yields is likely to spur earnings of the banking sector.

Earnings outlook: Downgrades to FY15 estimates likely

FY15 consensus and Edelweiss Sensex EPS forecast stand at INR1,550 and INR1,540, respectively, implying 14-15% growth. However, given the poor earnings expectations in Q3FY15, earnings downgrades are likely in the quarter.

LINK

https://www.edelweiss.in/research/Lower-Exports-and-Commodity-Prices-to-Dent-Earnings--Result-Preview-Q3FY15/27964.html