Q2FY11 Preview - A push and pull leads nowhere - Elara Capital

Q2FY11 Preview - A push and pull leads nowhere

Autos, oil and gas, pharma and metals to lead earnings growth

Earnings growth within our coverage universe is being led by automobiles, metals and oil and gas this quarter. Among other index heavy weights, banking (with robust NII growth and flat NIMs) and industrials are likely to contribute to earnings growth. While almost all sectors will deliver a healthy topline growth, margin compression will be seen across almost all sectors barring oil and gas, metals, financials and industrials. Hospitality, media and mid-caps within our coverage will also see a strong expansion, both in sales growth as well on margins driven by their own specific set of dynamics.

Broader markets – How will the earnings tell on them?

A glance at the world markets is enough to peg us among leading performers (top performer year to date barring Indonesia in Asia Pac). Consensus valuations also indicate that India is clearly the most expensive market globally by almost all parameters. Our analysts tend to believe that the near term upside for all major index heavyweights within our coverage is already in the price, and the (even) better performers in this quarter (in terms of sales growth and margin expansion) like automobiles, oil and gas, pharma and metals are unlikely to see quarter led stock price performance. This is being reflected in our “picks for the quarter” (our picks for quarter play) where none of the large caps in our coverage universe features. Over the longer term, our house picks continue to be Patni, HCC, Madhucon Projects, Shiv-Vani, Tata Motors, Glenmark and Orient Paper.

Our picks for the quarter

From this quarter, we introduce our picks for fund managers on the quarter numbers (refer page 2). Here, we have matched our analysts' expectations of numbers for the quarter against the stock price performance of the last few days. The companies which feature in this list are the ones where we believe that the market does not quite price in the numbers that are going to come in. We would also attempt to list stocks where we think there is a disappointment in the offing (admittedly a more challenging job in the current euphoric times).

Our sectoral stance

Autos: Strong earnings momentum; CV earnings to peak out
Metals: Muted quarter but next quarter's fundamentals in place
Cement: Cement prices bottom out; it's the darkness before dawn
IT: Robust quarter priced in; use post quarter performance to reduce
Oil and Gas: Better quarter for PSU Oils; Neutral on RIL, Cairn
Infra: Execution to remain weak; monsoons are a further headwind
Media: Numbers are unlikely to justify recent rally
Hospitality: Wait for the second half pick up
Pharma: Stretched valuations in view of the moderation of growth
Telecom: Declining trend in ARPMs will take an interlude this quarter.

Source : Equity Bulls

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