Q4 earnings a mixed show with higher positive surprises

Written by fe Bureau | Mumbai | Updated: May 27 2014, 10:04am hrs
The earnings trajectory of India Inc appears to have turned the corner with the March quarter numbers offering noteworthy positive surprises. A compilation by Bloomberg shows that a sample of 169 listed companies collectively posted a positive earnings surprise of 16% compared to consensus estimates.

While the list included companies from IT, pharma and consumer space that have been leading the corporate earnings for the last couple of quarters, some companies from the cyclical space have also managed to beat the Street estimates for the quarter ended March 2014.

These include HDIL, Indiabulls Real Estate, ACC, IRB Infra,Reliance Infra and Gujarat Pipavav Ports. Their quarterly earnings outdid analyst estimates by 22% to 65%.

While Adani Enterprises and Ashok Leyland also reported better-than-expected earnings, they were attributed to exception gain by sale of property and compensatory tariff assigned to earnings of Adani Power, respectively.

The earnings surprises were also driven by HCL Tech, Infosys, Wipro, TCS and pharma and consumer players, Lupin, Godrej Consumer Products and Dabur India that surpassed the Street expectations by 2% to 12%.

The Q4 earnings season also looked healthy in terms of a number of companies reporting positive top line and bottom line growths. As much as 64% of a sample of 758 companies reported a y-o-y increase in net sales; nearly half of another universe of 850-odd companies reported an increase in y-o-y earnings during the March quarter.

Even the list of laggards that failed to live up to the Street estimates remained a mixed lot in terms of sectoral representation. Glenmark Pharma, Jindal Steel & Power, Dr Reddy's lab, Nestle India and Reliance Communications were some of the BSE 100 companies that fell behind consensus expectations by 78% to 16%, show Bloomberg data.

Such a mixed earnings performance notwithstanding, analysts now expect upward revisions in FY16 earnings outlook on the back of key expected policy announcements from the BJP government.

According to Morgan Stanley, on an absolute basis, the market may bear an upside. However, for it to make further progress, earnings estimates need to increase substantially, or the market would get overvalued. It also noted that the next earnings growth cycle is likely to start in FY16 as the acceleration in GDP growth supports the earnings outlook. During the last one decade, the Sensex earnings grew nearly 2.5 times India's annual GDP growth. However, since the last five fiscals, valuations of Indian companies were largely driven by a weakening trajectory of India's GDP growth and moderating profits of corporate India.

During the five years ended fiscal 2007-08, when India's economy, on an average, grew at 8.7% per annum, the earnings growth turned particularly strong at nearly 24% per year. However, in the subsequent five years ended FY13 when the mean GDP rate came down to 7.2%, average earnings growth stood at about 9%.