| Summary of Contents SHAREKHAN SPECIAL Q2FY2008 earnings preview Earnings of Sensex companies to grow by 20% yoy Key points - The earnings of the Sensex' companies excluding oil companies and adjusted for one-time items are likely to grow by 20% year on year (yoy) and remain stable quarter on quarter in Q2FY2008.
- In Q1FY2008 we had seen that around 10% of the reported earnings had come from foreign exchange (forex) gains. Keeping the current strong uptrend of the rupee in mind, we may see companies reporting another 3-5% of one-time forex gains during the quarter. This would be in contrast to the initial expectations of forex losses in Q2FY2008, as the rupee had started to decline when our markets were facing the threat of large-scale withdrawal from foreign institutional investors (FIIs). After the political turmoil and global subprime saga unfolded in end July and most part of August 2007 there were fears that the FIIs would pull out serious money from the market.
- The Q2FY2008 earnings of the Sensex are going to be driven by companies from the telecom, information technology (IT) and banking sectors.
- The backdrop of Q2FY2008 performance is not very encouraging with a lower export growth in rupee terms, a decline in the industrial output, deceleration in manufacturing revenues and a drop in automobile sales. All these leading indicators have been discussed in detail later.
- Latest corporate tax collection growth rate for the period April to September 15, 2007 has slowed down to 25% from 49% reported for the period April to August 2007 (the first five months in FY2008). This translates into a 11% yoy growth in corporate tax collections for the first fortnight of September which includes the second installment of advance tax payments for corporates. We need to look at full tax collections for the month as the collections could have been influenced by the banking holiday falling on September 15, 2007 and the period of advance tax payment being extended to September 17, 2007.
- Considering that all the leading indicators are pointing towards a slowdown, would the Reserve Bank of India (RBI) take cognisance of the matter and make the interest rate environment more conducive for growth? We feel the RBI is more likely to adopt a neutral stance in its next quarterly policy review meet (October end) before it starts easing its monetary stance. However the interest rates may start to come down slowly if the credit growth doesn't pick up and deposits continue to grow ahead of advances. This should set the stage for a recovery in key sectors like housing and automobiles with the onset of the festive season in the second half of the current fiscal.
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