Q2FY2007 Earnings Review: Sharekhan Special

Q2FY2007 Earnings Review

• The Q2FY2007 earnings of the Sensex companies grew by 22.7% year on year (yoy) and 8.4% quarter on quarter (qoq) compared with the consensus expectations of 20.0% growth yoy and 6.0% growth qoq. Capital goods, cement, and information and technology (IT) companies led the growth in the earnings.
• The quarter was a celebration of sort as of the total thirty companies in the Sensex twenty five companies reported results above or in line with expectations.
• While the sales of the non-banking companies in the Sensex grew by 29.3% yoy, the operating profit of these companies grew by a slower 24.4% as their operating profit margin (OPM) contracted by 120 basis points yoy to 23.5%.
• The earnings of the BSE200 companies grew by 35.0% yoy. The sales of the non-banking companies reported a revenue growth of 34.1% whereas their operating profit grew faster at 40.6% driven by an 80-basis-point expansion in the margins.
• The consensus estimates for the earnings growth of the Sensex companies has been upgraded to 22.6% for FY2007E and FY2008E. The earnings growth estimate for FY2007 has been upgraded to 22.6% from the earlier 21% whereas the FY2008 consensus estimate has seen a sharper upgrade from 11% to 14.6%. At the current level of 13,091, the Sensex is trading at 16.2x its one-year forward earnings which is towards the higher end of its valuation range.
• Many of the companies in our universe have seen upgrades in their earnings, led by cement and banking sectors. The IT sector is not far behind with almost all the IT companies also witnessing upgrades in their FY2007 and FY2008 estimates. The ratio of upgrades to downgrades in full year's earnings after Q2FY2007 stands at a stupendous 28:5.
  


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Anagram Earnings Preview

IT Earnings Preview

Cement Earnings Preview

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Q2FY07 Earnings Preview

# We also expect the information technology (IT) companies to report a strong earnings growth on the back of a robust volume growth and the depreciation of the rupee vis-à-vis the dollar.

# We expect the earnings of the Sensex companies to grow by a strong 22.6% year on year (yoy) led by a strong growth in the above-mentioned sectors.

#The implied growth for H2FY2007 works out 21% yoy. Further upmove in the Sensex could come only from further upgrades in the Sensex' earnings.

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Auto Earnings Preview

*Q2FY2007 has been a good quarter for the automobile sector despite being a lean season due to the monsoons and the Shradh Paksha. Though the floods and heavy rains in some parts of the country affected automobile sales, the two wheeler segment (except the market leader Hero Honda) has grown well; the commercial vehicle segment has also grown albeit at a lower rate as compared to Q1FY2007 and ditto for the passenger car segment. Bajaj Auto's sales grew by 27%, while Hero Honda reported a marginal rise of 1.3% in its motorcycle sales. Maruti's car sales grew by 12%, M&M's tractor sales were up by 29.7%and Tata Motors' commercial vehicle sales (including exports) grew by 39%.

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Earnings Upgrade required

* In our last Market Outlook report dated August 02, 2006, we had said that going ahead there would be two key positive triggers for the Indian equity market, viz a pause in the rate hikes by the US Federal Reserve (Fed) and better-than-expected earnings for Q1FY2007.

*The two triggers have played out as per our expectations and at the current level of 12,404 the Sensex has swiftly discounted both these positives, leaving very marginal upside.

* The Fed futures are indicating that any rate cut by the Fed can come in the first quarter of CY2007 at the earliest. This leaves us exposed to global economic risks in the interim six months.

* Corporate earnings haven't seen any significant upgrades over the last few months. Any upside from hereon would depend on the upgrades in the index' earnings driven by the better-than-expected Q2FY2007 earnings, especially in the banking and oil sectors.

*However, upgrades in the Sensex' earnings will have to be significant—in the range of 10%—to bring the market's valuations back to attractive levels. The Sensex is currently trading at 16.1x its one-year forward earnings, which is towards the higher end of the band in which it has usually traded, ie 12-16x.

* We continue to prefer domestic demand-driven stories like automobiles, banking, capital goods and cement.

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Banking Earnings Preview

Key points

• We expect Indian public sector banks (PSBs) excluding State Bank of India (SBI), to report a healthy year-on-year (y-o-y) growth of 20% in their net interest income (NII) and a strong growth of 32.5% in their earnings for Q2FY2007. SBI, an exception, is likely to report a decline in its earnings due to high loan recoveries in the same quarter last year.
• The private sector banks are likely to continue their strong performance, as their earnings are likely to grow at 27.4% year on year (yoy) for the same period.
• We expect the loan book of the PSBs to grow at a healthy rate of 18-20% and that of the private sector banks at 40-50%.
• The net interest margins (NIMs) are expected to remain stable as most of the banks have raised their prime lending rates over the last two quarters. The same should help them to mitigate the loss of income on account off non-payment of interest on cash reserve ratio (CRR) balances with the Reserve Bank of India.
• The strong performance at the operating level is likely to be aided by the declining 10-year government bond yield, which should help the PSBs to reduce their mark-to-market losses to nil or a negligible level.
  

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