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SSKI: Earnings preview - India Inc set to deliver

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Our Web Bureau Mumbai
SSKI: Earnings preview - India Inc set to deliver
Our Web Bureau / Mumbai July 07, 2006
Q1FY07 looks quite promising for Corporate India and we anticipate a strong earnings season ahead. We expect Sensex earnings across sectors to register a sharp 31.8% yoy rise (24.6% excluding RCVL) and SSKI Universe to grow 45.2% in the quarter.

Most sectors, except financials where bond losses play the spoilsport, would likely see good earnings growth on the back of healthy topline growth. Going forward, we see a robust earnings momentum (20.1% CAGR over FY06-08E) with growth largely driven by non-commodity stocks while earnings growth of commodity sectors tapers off.

In the medium term, the earnings growth would be offset by northbound interest rates, which would remain key risk to equities.

We maintain our 12-month Sensex target of 11000-11800 (15-16x FY08E earnings). In view of the increased market volatility, we are diversifying our model portfolio in favour sectors like pharma, consumer goods and media, which are not sensitive to interest rates. We are also increasing weight on mid-cap stocks as they offer strong earnings growth and trade at inexpensive valuations.

Our key result picks include ACC, BoB, BHEL, Bajaj Auto, Reliance, Tata Motors, Ashapura and EMCO.

A strong quarter ahead: An exceptionally sharp upturn in earnings of
commodity stocks in the quarter (74.4%yoy on the back of substantial price hikes and positive impact of oil bonds on earnings of oil marketing companies) and robust earnings growth of 39.9% for non-commodity stocks would support the Q1FY07 earnings momentum.

Earnings growth will be strong across sectors except for banks, where bond losses will dent earnings. We expect Sensex earnings to grow 20.1% and SSKI Universe earnings to grow 17.8% over FY06-08E.
The momentum in earnings of non-commodity stocks would peter out as commodity prices soften and we expect commodity stocks to post an earnings decline by FY08. Over the next two years, the earnings momentum will be driven by non-commodity stocks (28.8% earnings CAGR over FY06-08E).

Rising interest rates and increased volatility will impact multiples:
Despite robust earnings, we see the hardening domestic interest rates and increased market volatility impacting multiple expansion. We maintain our 12-month Sensex target range at 11000-11800, which corresponds to 15-16x FY08E earnings.

Key risk to our forecasts lies in the form of an outsized interest rate hike, which can pose a risk to growth.

Diversifying model portfolio; increasing weight on mid caps: We suggest changes in our 'model portfolio'. At a sector level, though we maintain Overweight on banks, capital goods, cement/ construction, we are reducing the extent of overweight positions given the sectors' high sensitivity to interest rates.

We are adding weight to pharma, consumer goods and media to hedge against the risk of rising rates. While mid caps entail a higher level of risk, we believe their underperformance vis-

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First Published: Jul 07 2006 | 9:33 AM IST

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