Corporate results for the quarter ended March will reaffirm that the new cycle of earnings growth is gaining momentum and is moving from the government-driven consumption to capital-driven private consumption and investment.
Advance tax figures for the last quarter has been encouraging and global credit rating agency Standard & Poor?s revised outlook on India to stable from negative on account of improved government finances has boosted investors? sentiment, especially foreign institutional investors. Analysts say earnings growth in Q4FY10 will be the strongest in several quarters, taking absolute profits to a new high. Brokerage house Prabhudas Lilladher in its Q4FY10 preview note says that Nifty companies, excluding oil and gas, are expected to grow their revenue and profit after tax (PAT) by 14% and 21.8% year on year (y-o-y), respectively. To put it in perspective, in Q1FY10 revenue of Nifty companies grew 3.2% y-o-y and PAT saw degrowth of 0.2% y-o-y.
Similarly, brokerage house Motilal Oswal expects 25 of the 30 Sensex companies to report positive earnings growth in the quarter ended March this year and expects the momentum to sustain in FY11. In fact, the firm in its Indian strategy report last year had projected that Sensex earnings is expected to grow at 23% CAGR over FY10-14, as compared with -1.8% over FY08-10 estimated and 25.1% over FY03-08.
Sarabjit Kour Nangra, vice-president, research, Angel Broking says Q4FY10 is expected to be one of the strongest quarters both on a yearly basis as well as sequentially. ?For the Sensex companies in Q4FY2010, we expect a 35.6% growth in the net sales and 26.4% growth in net profits,? she says. Sector-wise, except telecom, all others are likely to report healthy growth in both topline and bottom line. Auto, metals, cement, capital goods and construction are likely to lead the pack with strongest growth.
The ongoing economic recovery helped the auto industry as most companies reported a sequential spurt in volumes in Q4FY10. Improved credit availability and lower interest rates helped consumer discretionary autos like cars and two wheelers. Moreover, consumers did advance buying on fears of price increase because of excise duty hike, change in emission norms and rise in steel prices. The uptick in the commodity prices over the last six months could exert pressure on margins. Angel Broking estimates that sales growth of its auto universe in Q4FY10 would be 53.4% y-o-y and 20.9% quarter-on-quarter (q-o-q). Company-wise, Tata Motors will be the biggest swing factor in superior earnings growth.
In the capital goods industry, visibility is gradually improving with foreign investment continuing their momentum and broader economic scenario showing signs of improvement. Similarly, all cement companies are expected to report stellar results because of strong demand from Commonwealth Games-related spending in north India and high government infrastructure spending in central and eastern India. Prices across the country on an average increased 11% quarter-on-quarter and cement dispatches in the quarter ended March this year grew 8.3% year-on-year.
For banks, the core business growth improved with non-food credit growth touching the 17% mark for 2009-10 till March 26. It surpassed the central bank?s revised credit growth target of 16% for 2009-10. With credit growth gaining momentum and deposit growth remaining steady, the incremental credit-deposit ratio improved substantially in the past two quarters. However, the 10-year benchmark yield has climbed up 24bps to 7.83% over the quarter after touching a high of 8.01% during the quarter. Hardening of the yields would lead to lower treasury gains during the quarter and also some investment depreciation on bank?s bond portfolio. Motital Oswal?s research note says that most-state owned banks will have low earnings growth despite very strong net interest income. ?Lower treasury gains and higher non performing assets provisions will impact the performance of several banks,? the note underlines.
In telecom, through companies have been able to add new subscribers, it is facing intense competition and price war, which is becoming unfeasible for new players. Analysts say the telecom sector is likely to report earnings de-growth of 30% y-o-y. Going ahead, interest rate cycle, uncertain monsoons, and spiralling oil & commodity prices may dent operating margins of companies.