Market-wary analysts look at poor Q3, Q4 results

Written by Markets Bureau | Mumbai | Updated: Jan 8 2009, 04:42am hrs
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Key indices on the Indian equity markets have remained positive since the onset of 2009 and most of the market experts are asking the question, When do we see the next bottoming out And the one answer that comes across is during the second and third week of January 2009. This is the time when there would be clarity over corporate earnings and analysts and fund managers would start reallocating their ratings and funds.

However, at the moment, analysts do not have very high expectations from the market. They expect earnings to be poor in the third quarter of FY09 and more so in the last quarter. We expect Sensex companies to deliver EBITDA growth of 1% and profit de-growth of 6%, says a Motilal Oswal preview of the third quarter earnings.

We estimate that the topline of Sensex constituents would grow by 3.8% on a year on year basis during the quarter, while net profit would decline by 4%, estimate Vinod Nair and Bandish Mehta of Religare Hichens Harrison. A BNP Paribas report sees the operating profits and net profits decline by 300 basis points.

And the fact that the earnings will be negative has been factored in the market place. The Sensex has corrected by 25% in the third quarter of FY09 and 52% year-to-date, suggesting that the negatives have largely been factored in, say Nair and Mehta. Lower earnings are in the market, the question is how low would they get, says Anup Bagchi executive director with ICICI Securities.

Bagchi reckons that if the fall is not significant and in the early single digits then the market reaction will not be sporadic. They would wait for the last quartet for a rerating, in case there would be any.

Analysts at Angel Broking reckon that the fall in earnings was largely caused by the collapse in metal commodities by 40-60% during the quarter. This has led to complete reversal in the fortunes of metal companies, and consequently our estimates. In the midst of the new developments, we expect substantial de-growth in the earnings of these companies says the report.

The downgrade in the earnings of metal companies has alone contributed to 40% of their EPS downgrade for FY2010. And then there was a huge downgrade in the earnings of Indias most valuable company Reliance Industries (RIL). The company has the single-largest weightage of more than 14% in the Sensex, has also eroded Sensex FY2010E earnings per share numbers. This is due to the pressure on GRMs and poor spreads in the petrochemical business. The RIL downgrade has cost the Sensex almost 30% of the downgrade of FY2010 estimates by Angel Broking.

Other sectors that have been responsible for the lowering of Sensex earnings growth are the automobile and IT sectors, says Angel Broking.

In the coming quarter banking and oil & gas, the two biggest contributors to earnings, would account for 42% of earnings, while they would contribute only 15.6% to earnings growth. Strongest earnings growth would be delivered by Banking, IT and Engineering, while highest earnings de-growth would be reported by metals, autos and real estate, says the Motilal Oswal Securities report.

However, even if the market tanks all is not lost. Nilesh Shah, DMD and CIO with Prudential ICICI AMC says, The fact that earnings will be lower is already in the market. In case there is any correction, it would not be steep. The current rate cuts carried out by the central bank and the fiscal stimulus would provide a support for the markets at the lower end.

Religare Hichens Harrison analysts have maintained their Sensex range of 8,00012,000 for 2009 and their Sensex EPS of Rs 864 for FY09 (2.9% growth) and Rs 952 for FY10 (10.2% growth).

As the results unfold, analysts would be watching out for the reduction in inventories closely as this will have a bearing on the earnings of the preceding quarters. Companies have built up inventories and these have been built in a high cost scenario. Now, suddenly costs have fallen and the customers demand lower prices. The low offtake also forces the companies to comply. So the manner in which these inventories are offloaded, will have a significant bearing on the earnings in the next few quarters, reasons Bagchi.