After the much-coveted reforms push, which took the equities to a 15-month high, the Street seems to be waiting for the next trigger in terms of the September quarter earnings season, which kicks off this week with large caps, such as HDFC and Infosys, announcing their numbers.
Even as traders rejoiced over a number of policy initiatives taking the 30-share Sensex above the 19,000 mark, analysts predict the September quarter results to reflect the actual macro picture of the Indian economy and its impending impact on corporate India.
Most brokerage houses expect the second quarter of fiscal 2012-13 to be another quarter of muted earnings growth, which could act as a drag on the market. A compilation of the earnings expectations of brokerages indicates that y-o-y earnings growth of Sensex companies could range between 0.4% and 6.5%.
?The continued trend of slowing growth and elevated inflation is expected to impede the earnings performance to an extent even in the September quarter,? says Angel broking in a report.
Bank Of America Merrill Lynch expects Sensex companies to mirror the weak results of the previous few quarters, with a third of the constituents (10 out of 30) expected to show a decline in profits.
The biggest pull is expected to come from ONGC, which is likely to see a steep decline in earnings growth, owing to lower crude oil realisations.
On the other hand, Morgan Stanley expects TCS and Coal India to be the biggest positive contributors to the Sensex earnings growth in the three months to September.
Sector-wise, Banking and financials, IT, consumer goods, pharma and cement spaces are likely to see increase in net earnings, while oil & gas, telecom, metals and real estate are seen lagging in earnings growth.
Brokerages also expect the Sensex companies’ September quarter top-line growth to be their lowest y-o-y growth in the last 12 quarters (three years), which, according to IDFC, is due to the weak growth in commodities-driven companies, muted end-use demand and seasonal factors.
Deutsche Bank believes that falling top-line growth and continuing margin pressure in the period is in line with ?little improvement in the macro indicators in the quarter?.
On the margins front, while an improvement is predicted on the sequential basis (q-o-q),the y-o-y decline is anticipated to sustain. Earnings before interest tax depreciation and amortization (Ebitda) margins of the Sensex companies ? expected to be in the range of 16.7% to 20.5% ? may, on an average, see a contraction of 150 basis points compared to the same quarter last year due to a fall in energy and telecom companies.
The silver lining comes in the form of expectations of a rebound in the earnings growth of the next fiscal. For example, Motilal Oswal sees FY14 Sensex Earnings Per Share growth of about 14%, close to its long-period average of 15%. This estimate is based on assumptions that the earnings downgrades cycle has bottomed out and that more stocks have a bias for an earnings upgrade than downgrade.
According to Citi, the market trajectory suggests the Street’s willingness to upgrade the future earnings and there could be some normalisation of the bearish forecasts. However, it believes that fairly steady earnings of the September quarter and only a moderately changing business outlook could keep the earnings upgrade in check. BofAML sees limited downside to the the current fiscal earnings estimates of R1,210 even as it does not rule out some EPS downgrades for FY14 that stands at about R1,410 currently.
