Double-digit earnings growth back for India Inc

Unlike past few quarters, trajectory to be driven by auto, metals in Q1

Double-digit earnings growth is back. While earnings have improved over the past couple of quarters, most of the upside has been driven by the weakness in the currency and translation gains. With economic growth slowing at home and macro-economic imbalances exerting pressure on the currency, the earnings trajectory has been driven by export-driven sectors such as pharmaceutical and software services. Corporates had two abysmal years as far as profit growth is concerned. The profits of corporate India grew 0.3 per cent in FY13 and by six per cent in FY14.

However, the June quarter of FY15 might be different as analysts expect earnings growth to revert to the mid-teens. Contrary to the past couple of quarters, the earnings growth is expected to be driven by the manufacturing sector. After being downgraded for several quarters now, Sensex companies are expected to exit the opening quarter of FY15 with a year-on-year (y-o-y) earnings growth of 18.2 per cent. On the back of robust demand for automobiles in the June quarter, profitability of most auto companies is expected to be robust. Antique Stock Broking expects the auto sector to report 41 per cent y-o-y earnings growth, which would be led by Eicher Motors, Tata Motors and Bharat Forge.

Among Sensex companies, Bank of America Merrill Lynch expects metals (Tata Steel & Hindalco), pharma (Dr. Reddy's), Tata Motors and Bharti to show strong earnings growth. On the other hand, utilities (GAIL), Mahindra and Mahindra and Reliance Industries are expected to drag the benchmark's earnings.

Kotak Institutional Equities expects cement companies to report a spurt in profitability as well on higher prices per bag. Compared to the fourth quarter, cement prices have improved by Rs 10-15 a bag for pan-India players, with south-specific companies enjoying price increases of as much as Rs 25-30 a bag. This would have a cascading impact on earnings, say analysts.

The earnings trajectory in the June quarter might improve on the back of margin expansion. The aggregate operating margins of Sensex companies would show a 35 basis points expansion on a y-o-y basis, says Bank of America Merrill Lynch, largely led by the pharma (170 basis points), industrials (160 basis points) and metals (85 basis points). With earnings growth reverting to double digits, equity strategists believe the valuation of the Sensex at 16x its FY16 earnings is not expensive. According to Antique Stock Broking, Indian markets have traded at over 20x during times of growth acceleration in the economy.