Sensex companies seen delivering 25% growth, the story can only get better.
The September quarter is expected to be another quarter of strong earnings growth for India Inc. Sensex companies are expected to post 25-30 per cent earnings growth year-on-year for the quarter. While there is an improvement on a sequential basis (5-8 per cent) as well, a large part of the gains for Sensex stocks is due to the two Tata group stocks, Tata Motors and Tata Steel, driven by their international subsidiaries JLR and Corus respectively.
Remove these two scrips and the earnings growth is likely to be 10 per cent for the September quarter which, though tepid, is much better than the June quarter when earnings fell by 1 per cent year-on-year.
| Q2 SENSEX EARNINGS: PERFORMERS AND... | |||
| In Rs crore | PAT | y-o-y (%) | q-o-q (%) |
| Tata Motors | 1,610 | 6,914 | -20.6 |
| Hindalco | 780 | 111.0 | 19.0 |
| Jaiprakash Asso. | 160 | 38.5 | 52.0 |
| HDFC Bank | 920 | 33.5 | 13.0 |
| Reliance Inds. | 4,990 | 29.6 | 2.9 |
| …LAGGARDS | |||
| Reliance Comm. | 300 | -63.5 | 0.4 |
| ACC | 190 | -55.7 | -46.3 |
| Bharti Airtel | 1,650 | -26.9 | -1.6 |
| Hero Honda | 560 | -5.6 | 14.7 |
| HUL | 490 | -1.9 | -5.9 |
Revenues for the quarter will grow at 18-19 per cent year-on-year. However, what is more relevant and positive for the markets is the fact that unlike the September quarter, earnings in the second half of 2010-11 are expected to be more broad-based. Excluding the two Tata group companies, Motilal Oswal estimates that Sensex stocks will grow their earnings by 20 per cent year-on-year in the second half on a high base.
If a broader coverage of stocks is taken into consideration such as IIFL’s 150 medium to large cap stocks across 13 sectors, the net profit growth looks sluggish at 5 per cent for the September quarter. However, that’s due to losses at the oil marketing companies (OMCs), excluding which the net-profit growth is pegged at 17 per cent.
While analysts have upgraded the Sensex earnings per share (EPS) numbers for 2010-11 at Rs 1,068, given the 11 per cent jump over the last month, valuations at 19 times (on 2010-11 EPS) are at a premium to long-term averages.
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We look at the key sectors and scrips that are estimated to stand out or disappoint for the September quarter as well as the second half of the year, and the investment options to look at.
Leaders & laggards
The biggest gainers in the September quarter are likely to be commodity stocks, owing to the low-base effect and weak earnings in the year-ago period. They are seen contributing over half the Sensex earnings growth in the quarter, much of it coming from Tata Steel (loss to profit) and Hindalco (over 100 per cent growth). While pharma, metals and financials are expected to report a 25 per cent growth in earnings, cement is the biggest laggard (nearly 50 per cent fall in profits) due to poor volume growth and pricing pressures brought on by excess capacity.
Interestingly, the auto and FMCG sectors could show sluggish profit growth as heavyweights such as Hero Honda, HUL and M&M struggled with supply issues (volume growth), raw-material costs and price cuts.
Consistent performers
If consistency in earnings growth over the last few quarters is taken as a yardstick, banking, engineering, FMCG, IT and media stand out on the back of the economic recovery and the demand upturn, says a Motilal Oswal report. However, severe competition and regulatory uncertainties have meant that the telecom sector will churn out its fifth straight quarter of a drop in earnings.
Margin worries may ease
Higher raw-material costs are likely to put pressure on EBITDA margins, which are likely to be down for automobiles, auto components and consumer goods, feels IDFC. While the aggregate EBITDA margin, says a Motilal Oswal report, will be down 180 basis points year-on-year for the September quarter, it is likely to moderate in the second half of 2010-11. That will reflect the price hikes undertaken during the end of the September quarter.
While the margins for commodities should surge and remain steady for the IT sector on the back of improved demand, poor realisations will see those for telecom and cement drop.
Where to invest and valuations
Considering the sound economic fundamentals and growth prospects, analysts are betting on the twin themes of the consumption and capex sectors.
In the consumption space, Edelweiss is bullish on autos, media, airlines, real estate and banking on the back of a strong monsoon, easing inflation and a rise in disposable incomes. Macquarie, too, believes that investors should focus on themes such as investment, private consumption and structural-reform plays such as OMCs on the back of the oil-price deregulation.
As most sectors are trading above the long-term averages, analysts suggest a bottom-up approach in picking companies with strong growth visibility.