March 2011 earnings preview: Another solid quarter
(The views expressed in this column are the author’s own and do not represent those of Reuters)
March 2011 retrospective in summary
- MSCI India outperformed the global indices for the first time in March 2011. In March, India emerged as the second best-performing market (after Korea) in the world. Although, year-to-date and on a six-month basis, India’s ranking is still among the bottom five (at 17th position) in emerging markets.
- Mid-caps and small-caps underperformed the Sensex for the fifth month in a row.
- Telecoms and consumer staples were the best- and worst-performing sectors, respectively.
- FIIs turned buyers of stocks. Domestic mutual funds remained buyers for the fourth consecutive month even as insurances companies turned sellers of stocks.
- Breadth gained 20 percent during the month.
- Volatility reached its highest level since Nov 2009.
FY 2011 thus far: key highlights
- For the first three quarters of FY2011, Sensex and broad market (for 1,717 companies) earnings grew at 23 percent and 22 percent year-on-year respectively.
- Industrials and telecom have reported the strongest and weakest earnings growth so far, respectively.
- More than one-half of the companies have beaten expectations during the last two quarters.
- The global earnings of Sensex companies in FY2011 grew by 48 percent year-on-year, while the domestic earnings for the index companies grew by 8 percent year-on-year during the period.
Quarter ended March 2011 earnings expectations
- Sensex companies are likely to grow 17 percent year-on-year during the quarter ended Mar 2011.
- Excluding the telecom sector, Sensex growth is likely to be 26 percent year-on-year.
- The biggest contributors to Sensex earnings growth are expected to be ONGC, Tata Motors, Reliance Industries, and Tata Steel (in that order).
- The largest negative contributors to Sensex earnings growth are expected to be Bharti and RCOM.
- Industrials and telecom are likely to continue to report the strongest and weakest earnings growth, respectively.
- The narrow market beat the broad market earnings growth in the previous quarter, and this should continue for the quarter-ended March 2011.
Sensex earnings growth is unlikely to be at risk due to GDP growth downgrades, as global earnings account for almost half the Sensex earnings. In FY 2011, the share of global earnings for the Sensex companies is at the highest level (of 45 percent) in history and likely to remain at those levels through FY 2012. This is almost double the share of exports in GDP.
Margin compression in seven of ten sectors
We expect aggregate (ex-government-owned oil companies) revenue to grow 21 percent year-on-year with an expansion of 69bps year-on-year in EBITDA margins. Telecoms likely to see the most margin expansion, while Healthcare followed by Consumer Discretionary is likely to see the most contraction in margins.
We expect the strongest earnings growth for Industrials at 37 percent year-on-year (for the third straight quarter, 22 percent ex-Tata Motors) followed by financials (at 29 percent year-on-year), whereas telecoms earnings (down 40 percent year-on-year) are likely to be the weakest for the sixth quarter in a row.