Q1 earnings may turn broad-based, but concrete policy seen as bigger catalyst

Written by fe Bureau | Mumbai | Updated: Jul 15 2014, 07:49am hrs
With the momentum generated by expectations from the Budget fading, the Street is likely to focus on the recently commenced earnings season for next directive move in the equity market. Analysts expect the first quarter numbers of the fiscal 2014-15 to be broad-based with even domestic consumption dependent sectors witnessing moderate improvement in earnings.

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Various analyst estimates peg the earnings of the top-30 companies to grow 15-18% y-o-y in three months to June 2014, while the top line could report revenue growth in the range of 14-16%. Export-oriented sectors, namely IT and auto (Tata Motors), are again seen dominating the contribution to the Sensex earnings, even as energy giant ONGC and telecom major Bharti are also likely to report strong profit numbers.

According to Edelweiss Securities, as the impact of INR depreciation starts fading, earnings growth in export-oriented IT and pharma sectors may slow down from the June quarter. During the June quarter, the rupee appreciated against the dollar with its average value rising 6.8% q-o-q to 61.87. Amongst the IT pack, TCS and Wipro are seen driving the earnings growth even as sectorwide margins are expected to come down sequentially on the back of wage hikes.

Analysts are also anticipating a recovery in sectors that are driven by domestic consumption and investments. While Edelweiss expects cement, capital goods and consumer space to clock mild improvement in operating metrics, BNP Paribas also thinks that the earnings growth of domestic cyclical sectors is showing tentative signs of recovery. BNP is forecasting the net profits of its capital goods universe under coverage to grow 16% y-o-y in the quarter and the engineering and construction (E&C) pack to report an 11% growth.

Among PSU banks, with the exception of Punjab National Bank... we believe that the worst of the provisioning cycle is over, added a note by the foreign brokerage.

For the banking sector, the Street is broadly expecting a normalisation of loan growth and flat net interest income (NII) sequentially. However, treasury income, along with the base effect, could provide a thrust to the earnings even as credit cost stemming from NPA slippages and provisions for unhedged foreign currency exposure could add to the overall provisioning.

Consumer goods companies are seen facing volume growth challenges for another quarter while higher raw material cost and advertising spends could continue to weigh on margins. As per Barclays Capital, which thinks that continued rural spend moderation with a weak monsoon, could be a near-term headwind for the sector, Dabur could still deliver a 9% volume growth although HUL and Nestle are likely to report both volume and margin pressures.

While most analysts believe that ITC volume growth would not be deterred by a 15% price hike in cigarettes, the recently announced tax hike in the Budget remains a headwind.

Overall, experts see June quarter numbers to be an early indicator of a bottoming of earnings cycle even as they are gauging the the trend in FY16 earnings for valuing the market. After the earnings revision picked up pace since the second half of 2013, currently, the consensus estimates peg the Sensex earnings (earnings per share) to grow by 15-16% to R1,570 for FY15.

Recent political change and hopes of a pick-up in growth have led analysts to increase FY15 and FY16 earnings estimates. Our current estimate for Sensex EPS stands at R1,611 for FY15 and R1,908 for FY16, up from R1,557 and R1,830, respectively, in April, Noted BNP Paribas. On the back of such revisions, the valuations of the equity market has expanded the Sensex is trading at 15.3 times one-year forward earnings compared to long-term average of 14.5 times. However, due to a mixed reactions to the Union Budget, the 30-share index has come down 438 points to 25006.98 and the Street now expects further expansion to come through only after concrete policy action.