Q3FY2007 earnings preview
Key points
- The domestic demand-driven story is likely to continue, as is evident from the growth in the Sensex' earnings led by cement, capital goods, automobile and fast moving consumer goods (FMCG) companies.
- The Indian pharmaceutical sector is expected to report strong earnings growth for Q3FY2007, driven by continued domestic growth, steady contributions from exports and synergies arising out of integration of acquisitions.
- The performance of the front-line information technology (IT) companies is expected to be affected in Q3FY2007 by the dual impact of a lower number of working days and a steep appreciation in the rupee. Based on our Q3FY2007 estimates, the implied earnings growth in Q4FY2007 for Tata Consultancy Services, HCL Technologies and Wipro are 1.1%, 1.6% and 0.2% respectively. This leaves sufficient room for an earnings upgrade. We would make the required changes in the result updates of the respective companies.
- We expect the earnings of the Sensex companies to grow by a strong 27% year on year (yoy) led by a strong growth in the above-mentioned sectors on the back of a lower base in Q3FY2006 influenced mainly by the numbers of Reliance Industries Ltd (RIL).
- Strong earnings growth are expected from pharma majors Dr Reddy's and Ranbaxy, cement majors Gujarat Ambuja, ACC, Grasim and from Hindalco on the metals front.
- Low growth or decline in profits is expected from ONGC, Reliance Energy, Hero Honda and NTPC.
- The implied year-on-year (y-o-y) estimated growth in the profit after tax (PAT) for Q4FY2007 works out to 60%. That is due mainly to the high earnings expected in the last quarter from the financial sector, especially the State Bank of India (SBI) whose Q4FY2006 earnings were comparatively lower. Major upgrades are not expected in the FY2007 earnings in most sectors barring FMCG, which shows a low implied growth rate.
Q3FY2007 capital goods earnings preview
Key points
- High industrial activity coupled with the massive investments underway for capacity creation across sectors has been driving the demand for capital goods and other engineering products. As a result, the order books of engineering companies are bursting at the seams. During the quarter under review the order inflows for some companies like BHEL, Thermax etc will provide the key trigger for their performances.
- In spite of the prices of copper being down in the current quarter, we expect the margins squeeze to continue. On the back of the robust order inflows, strong order booking and operating leverage being played out we expect the margins to recover in Q4FY2007.
- We believe that theindustrial capital expenditure (capex) and the sustained investment in power generating units puts the players in this sector in a sweet spot. Thus, we remain bullish on capital goods companies like BHEL, Thermax, Genus Overseas and Indo Tech Transformers.