Although last year’s low base makes things look nicer, the important aspect is that growth will be more broad-based and earnings quality better.
Analysts are expecting a bumper harvest this earnings season, with the BSE Sensex companies (on an aggregate basis) expected to post earnings growth in excess of 30 per cent year-on-year — the highest in many quarters — on the back of robust growth of over 25 per cent in sales and expansion in operating profits margins.
Here, while the low base of 2009 makes things nicer, a dig at the details suggests that the quality of earnings is likely to be better. First, even on a sequential basis (over December 2009 quarter), earnings are seen improving. IDFC-SSKI’s estimates Sensex earnings to grow by 24 per cent sequentially, while Motilal Oswal Securities (MOST) pegs it at a modest 12.1 per cent and Citi Research at 16.5 per cent. Second, the growth in earnings is expected to be broad-based with almost all sectors, with the exception of telecom and energy, seen reporting a growth in earnings. Notably, overall margins are seen inching up, both sequentially as well as year-on-year.
According to MOST’s estimates, the profits of 127 companies under its coverage will reach an all-time high of Rs 57,500 crore in the March 2010 quarter, breaching its previous peak of Rs 54,200 crore. In a way, the March 2010 quarter is likely to be historic in terms of earnings, and if India Inc lives up to the expectations (which most believe it will), experts say it will signal that the earnings cycle is once again gaining momentum.
Meanwhile, for the March 2010 quarter, companies from the auto, metals and property space are expected to lead the earnings table. Metal stocks should see margins expand considerably on a year-on-year basis, given the low base last year under the impact of the global slowdown and the sharp escalation in steel prices this year. Operating margins for steel companies should expand 300-400 basis points sequentially, according to Kotak Institutional Equities, but may contract marginally for non-ferrous metal companies, reflecting higher input costs.
Auto and realty are seen clocking in with highest topline sales growth year-on-year. The traction in volumes is expected across the board for auto stocks. However, Ebitda margins will be hit by rising input costs (except for two-wheeler companies), according to IDFC-SSKI. Realty stocks should also see strong earnings growth as well, over the low base in the tough times last year.
The oil and gas sector, which accounts for about a fourth of Sensex profits, should also do well. Revenue growth for Reliance Industries is expected to be strong, with increased output from its new refinery, higher gas volumes and better gross refining margins. ONGC is also seen benefiting from higher net realisations for crude oil. However, for public sector oil marketing companies, the key is the impact of policy on sharing of the subsidy burden.
A re-pricing of deposits should boost margins for PSU banks and, by and large the sector should see improving asset quality.
Even as subscriber additions will buffer revenues, expected to be flat to marginally lower, the pressure on margins and operational parameters in the telecom sector should continue, leading to a decline in profits for the quarter.
While cross-currency trends are expected to impact IT services’ revenue growth by 70-100 basis points, future guidance and commentary on market environment will be keenly watched.
The strong projected GDP growth is translating into corporate earnings according to IDFC-SSKI, which paints a bullish picture for the Sensex, with estimates of an average annual growth of 15 per cent in sales and 23 per cent in net profit over the next two years.
