Earnings momentum expected to stay in Q3

Commodities to be main driver of growth

A sustained uptrend in commodity prices, stable interest rates and strong pick-up in domestic demand will result in corporate earnings continuing with their strong momentum in the third quarter (October-December) of the year, results of which should start trickling in next week.

"Commodities will be the main driver of growth, with increase in global prices and pick-up in (domestic) demand. Metals will be the fastest growing, and we expect the sector to post sales growth of 30 per cent, driven by higher demand and better realisations in steel and aluminum," says domestic brokerage Motilal Oswal Securities in a recent research report on expected corporate earnings.

While the ongoing upswing in the global commodity cycle has helped boost margins, the trend of improving volumes, resulting in operating leverage and cost efficiencies has also contributed positively.

Metals will continue their dream run with increasing realisations resulting in a 300 basis points margin expansion in earnings before interest, taxes, depreciation and adjustments (operating margins).

Closely following metals will be information technology (IT) and auto, with growth rates of 29 per cent and 28 per cent, respectively.

Volumes in IT services are on the rise with increased outsourcing and higher confidence of the top companies to execute large contracts.

Overall economic recovery coupled with lower interest rates, and easier and wider availability of finance (through tie-up with large banks) is driving up auto sales.

Among the other top fast growing sectors are telecom and banks, where growth of 22 per cent and 18 per cent is very much on the cards.

Wireless subscriber growth is the main driver for the sharp growth in telecom revenues. There will be a significant margin increase in telecom, most of it owing to Bharti Tele-Ventures, which has seen substantial margin expansion following better revenues and cost control.

In case of banks, the revenues, net of interest income, are expected to be positively impacted by strong growth in the loan book.

But operating margins will go down by 620 basis points on back of lower gains in the bond portfolio. Cement has also been included in the high growth sectors with expected sales growth projected at 16 per cent.