Q3FY13 Result Preview - Another round of weak growth - Edelweiss

Q3FY13 is expected to be another quarter of weak growth, with Sensex companies expected to post ~4.2% YoY growth and our coverage universe's (ex-OMCs) earnings growth coming in at ~3.9%. Overall revenue growth for the coverage universe (ex-OMCs) is expected to be 9.9% YoY and 8.9% for Sensex companies. However, after posting a declining trend over the past few quarters, EBITDA margins are expected to stabilise in Q3FY13. We believe the reforms initiated by the government and the likely monetary easing will support margins in the coming quarters. Meanwhile, the earnings downgrades cycle is looking mature with only ~1% downgrades during the quarter.

Earnings to stay weak, but trend upbeat

Q3FY13 earnings of Edelweiss coverage universe (ex-OMCs) are expected to grow 3.9% YoY and 6.4% QoQ. Meanwhile, growth for Sensex companies is expected to be ~4.2% compared to 3.0% in Q2FY13. BFSI, consumer goods and pharma remain drivers of growth. However, the pace of growth is slowing. Earnings of interest rate-sensitive sectors, viz., capital goods and real estate, that had been hit the most by the slowdown, should now improve, both QoQ and YoY.

Revenue growth slowing, but margins stabilising

The revenue trajectory continues to be weak with top line growth expected to be ~9.9% for our coverage universe (ex-OMCs) compared to 14.7% in Q2FY13. The revenue growth for Sensex companies is estimated to be 8.9%, predominantly driven by select auto players (Mahindra & Mahindra, Maruti Suzuki), pharma (Sun Pharma, Cipla) and BFSI (HDFC, HDFC Bank, ICICI Bank). However, EBDITA margins of Sensex companies, which had been dipping over the past few quarters, seem to be stabilising with real state, capital goods and auto likely to post QoQ improvement. This implies that companies are now focusing on profitability rather than growth.

Earnings outlook: Downgrades to be muted

After two years of rigorous downgrades, the earnings cycle now looks mature with limited downside to the current Sensex EPS forecast. In Q3FY13, the downgrades were ~1%. Sensex EPS estimate for FY13 is at INR1,230 (both Edelweiss and Consensus). FY14E Sensex EPS stands at ~INR1,430 for Edelweiss and ~INR1,412 for consensus, implying ~13-14% growth. Lower interest costs and stabilisation of EBITDA margins should support these forecasts.

Source : Equity Bulls

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