Macquarie - India Earnings

Macquarie in their India Earnings report,

Event
The 4Q FY3/07 GDP growth of 9.1% has obviously fed into corporate earnings for Indian companies. Our coverage universe continues to post strong profit growth, above expectations.

Impact
Most sectors were very strong. Most sectors showed very strong growth.Profit growth rates varied between 23% and 107%, barring a few outliers. Not surprisingly, sectors with close linkage to the economy – banks, cement, construction, metals and telecoms – turned in exceptional numbers.

We were surprised. Most of the high-growth sectors surprised us. The average extent of earnings surprise was 13%. The largest upsides to our forecasts came from pharmaceuticals, banks and construction. Suzlon, the only company we cover in utilities, also posted results significantly above expectations.

Margins the key driver. The earnings surprise came primarily from margins. Sales growth was almost exactly in line for the high-growth sectors. Margin improvements were the strongest in pharma, cement, metals and telecom.

Top sectors: pharma, telecom, cement. Pharma, telecom and cement were the top sectors in terms of YoY profit growth. While pharma was boosted by one-off income in Dr Reddy’s Labs, telecom continued to ride the strong wave of subscriber additions, which also drives operating leverage. Cement was boosted by a strong pricing environment.

Laggards: oil and gas, textiles, retail. The laggards from 3Q continue to disappoint. All three sectors showed declining profits. Oil and gas suffered from a lack of pricing freedom and from being forced to absorb high global oil prices. Textiles, on the other hand, continue to be affected by soft global prices. Retail was affected by dramatic margin pressures.

Outlook
We think that the India growth story is still very much intact. There may be near-term pressures from rising rates, especially if the Reserve Bank of India pushes through with the next rate hike, as we expect it to do. But we do not think that longer-term growth is at risk, and we maintain our bullish view of the markets. The recent run-up has increased the risk of a correction, but that is likely to be temporary.

Our top picks are Reliance Communications (RCOM IN, Outperform, Rs506, TP: Rs650), HDFC Bank (HDFCB IN, Outperform, Rs1153, TP: Rs1270), Tata Steel (TATA IN, Outperform, Rs635, TP: Rs800), Dr Reddy’s Labs (DRRD IN, Outperform, Rs649, TP: Rs838), Reliance Industries (RIL IN, Outperform, Rs1750, TP: Rs1775) and Tata Consultancy Services (TCS IN, Outperform, Rs1219, TP: Rs1654). Our key Underperform calls are Bank of Baroda (BOB IN, Underperform, Rs271, TP: Rs250) and ONGC (ONGC IN, Underperform, Rs910, TP: Rs695).