2QFY2013 Results Preview - Strategy - Angel Broking

Reforms fuel market sentiments

The risk-on trade rally in Indian markets following an increase in global liquidity gained further momentum after the government shook off its policy inertia and announced a flurry of big-ticket reform measures. The government has so far remained resolute on no rollback of reforms in the backdrop of political opposition and also maintained the thrust on driving further reforms.

The reform measures taken by the government are expected to have a positive impact on investor sentiments and business confidence. We believe that a resultant improvement in the growth outlook for the economy is likely to be experienced in the medium term. However growth concerns emanating from stubborn inflation and slowing capex activity continue to persist in the near-term.

2QFY2013 earnings performance

The continued trend of slowing growth and elevated inflation is expected to impede corporate earnings performance to some extent in 2QFY2013 as well. Owing to the steep de-growth in earnings for ONGC, Sensex companies are expected to report moderate earnings growth of 7.7% yoy during 2QFY2013 compared to growth of 15.5% yoy in earnings registered during 1QFY2013. For our coverage companies, we expect earnings to grow at 13.3% yoy as against 16.1% yoy growth in earnings witnessed in the previous quarter.

Excluding ONGC, to remove distortions, earnings for Sensex as well as coverage companies are expected to improve during 2QFY2013 at 17.7% yoy and 20.3% yoy vis-a-vis 12% yoy and 14% yoy during 1QFY2013 respectively (aided by low base for some of the large companies such as SBI and Tata Steel).

On the revenue front, we expect Sensex companies to report reasonable growth of 14.3% yoy during 2QFY2013 as against growth of 17.9% yoy registered in 1QFY2013. Our coverage companies are expected to report revenue growth of 14.0% yoy as against growth of 17.2% yoy witnessed in 1QFY2013.

Margins for Sensex companies are expected to be lower by 180bp yoy during 2QFY2013 (coverage by 120bps yoy). However, on a sequential basis, pressure on margins during the quarter has eased to some extent and operating margins are expected to be flat for Sensex and lower by 30bps qoq for coverage companies.

We expect sectors such as banking, IT, mining and metals to contribute considerably towards Sensex earnings growth for the quarter while oil and gas and telecom sector are likely to weigh down on overall earnings of Sensex companies.

Currently we are factoring in an improvement in the Sensex' EPS at a CAGR of 9.8% over FY2012-14E. We arrive at our 12 month Sensex target of 20,300, maintaining our target multiple at 15x FY2014E earnings implying an upside of 8.2%.

Source : Equity Bulls

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