As the earnings season kicks off a day from now, the big question on everyone?s mind is whether the Sensex would reach 22k by the end of March 2011. Forthcoming quarterly results of Sensex companies are crucial barometers ? giving a peek into future growth trajectory of Sensex for the year ahead. If one were to keep aside the macro factors (we will discuss that later), there are strong reasons why Sensex could touch 22k levels by the end of the current financial year. For one, the earnings momentum among Sensex companies have caught up and there is a strong case for Sensex to be given a higher price-to-earnings multiple than what warrants based on its historical multiple.

Multiple Expansion

Historically, Sensex has quoted at a PE multiple of 17. By that logic, Sensex is fully priced at the current value of 17,941; the forward FY ?11 multiple of 17 is equal to its historical PE average. But then Sensex companies have also grown their earnings in different paces over the past two decades. For the period FY ?93 to 96, it grew its earnings by 45% CAGR, 1% CAGR for the period between FY ?96-2003 and at a rapid clip of 25% CAGR over the period FY ?03-08. When the global economy slipped into recession, Sensex earnings hit a speed breaker during the period FY ?08-10 as it clocked a negative annual growth of 2%.

But, now the earnings momentum could bounce back. As per various broker estimates, the period between FY 10-14 could see an earnings growth of Sensex companies to the tune of 24-28% p.a. This makes a case for giving a higher multiple to Sensex. Even globally, a rerating of emerging markets (including India) is on the cards, according to fund managers?with its robust economy and higher risk elsewhere. Whenever that rerating happens, Sensex should shoot to 22k levels. As the above table indicates, touching 22k by

March ?11 is all about getting a multiple above 20 (from current 17) ? backed by strong earnings growth for FY ?11 ? upwards of 25%. This might not be difficult, given that many of the Sensex companies are expected to record strong profit growth for March ?10 quarter (over a lower base of last year).

Five stocks to watch

FE Investor averaged earnings estimates of four major broking houses ? Motilal Oswal, Morgan Stanley, IDFC-SSKI and Angel?to find that there are five companies whose quarterly results you need to watch out for. While Sensex as a whole is expected to grow its earnings for march ?10 quarter (y-o-y) by 33%, Tata Motors itself is expected to give it a 7% impetus, Reliance Ind another 4.6%, DLF 3.06%, Sterlite Ind 2.7% and Maruti Suzuki 1.93. Any disappointments in results in these counters and the 22k target might look difficult.

Tata Motors is expected to grow its earnings by 416% in march ?10 quarter, on the expectations of strong volumes growth in M&HCVs, LCVs and cars as well as improved JLR performance. Metal stocks like Sterlite and Hindalco are expected to show earnings growth upwards of 90%?on the back of fast run up in copper and aluminium prices. The copper prices averaged $7,243 per tonne on the London metal exchange during the March ?10 quarter, a 110% rise over that of the previous year, while aluminium prices were up 60% to $ 2165 per tonne in March ?10 quarter.

Oil prices climbing to $84 per barrel has positive implications for refining, petchem and E&P business of Reliance Industries. Analysts are already pricing a gross refining margin of around $ 8 per barrel. On an overall basis, the Sensex earnings in March ?10 quarter are expected to bounce back on the back of improved margins as well as improvement in realisation for commodity based stocks. While telecom and banks are expected to remain a dampener, 25 of the 30 sensex stocks are also expected to show positive earnings growth. Bharti will likely have its first y-o-y decline in earnings, while Sun Pharma and Hindustan Unilever will report double-digit earnings decline, according to a broker estimate. While companies like Tata Motors, Sterlite, and Hindalco will be amongst the best growing Sensex companies, DLF and Maruti are also expected to report very high earnings growth, aided by low base of 4QFY09. DLF, for instance, is expected to show strong earnings growth on the back of increase in residential sales volumes while Maruti Suzuki, is expected to show strong volumes growth (around 25%) in 4QFY10, driven by 20% growth in domestic sales and 51% YoY growth in exports.

The year ahead

In short, Sensex movement?a year ahead?is all about how the results pan out a year from now and much more. If all go as expected by analysts, mounting the previous all time highs is not impossible. But then, could one ignore the external macro factors of rising interest rates, inflation, monsoons, oil prices and last but not the least the Foreign Institutional Investor (FII) inflows. Post Budget, in fact, it?s the FIIs that have been taking the Sensex to its newer high.