| Summary of Contents
| SHAREKHAN SPECIAL Q2FY2012 earnings review -
Earnings growth in line; margin squeeze continues: The aggregate adjusted earnings of the Sensex companies (ex energy companies) grew by 8.1% during Q2FY2012. The growth was largely in line with the expectations. The major negative surprises came from stocks like Maruti Suzuki, Bharti Airtel (Bharti), Jindal Steel & Power, Sterlite Industries and Tata Power. However, the shortfall was made up by better than expected results from Tata Motors, Hindustan Unilever Ltd (HUL), Coal India, State Bank of India (SBI) and NTPC. -
The revenue growth momentum remained quite strong with an aggregate net sales growth of 24.1% during the quarter. The revenue growth was broad-based with over 15% in all sectors except real estate and telecommunications (telecom). Apart from Reliance Industries, better than expected execution of projects in the capital goods and infrastructure sectors aided the outperformance in the revenue growth during the quarter. -
The margin pressure was visible in Q2 as well. The operating profit margin (OPM) of the Sensex companies (ex oil companies) declined by 150 basis points, marking the fourth consecutive quarter of a decline in the margins. -
Earnings estimates get downgraded further; H2 implied growth achievable but risk to FY2013 estimates: After the earnings downgrades post-Q2FY2012 results, the consensus estimate for the Sensex' earnings growth for FY2012 now stands at around 9.9% as against over 20% at the beginning of 2011. Taking into account the Sensex' earnings growth of 8.7% in the first half (H1FY2012), the implied growth in H2 works out to 11.2%, which appears to be achievable. -
Even after a downgrade of close to 12% in the FY2013 estimates over the past twelve months, the consensus estimate suggests an earnings growth of 14-15% for the next fiscal. This could be at risk if the global situation deteriorates and the policy inaction continues to impede the growth in corporate earnings. -
At the current consensus earnings estimate, the Sensex trades at around 12x one-year forward earnings, which is at the lower end of its price/earnings (PE) band, and the valuations are supportive now. However, the global turmoil and policy inaction are the key risks that could result in further downgrade of the PE multiples in the near term. FDI in retail The union government has cleared the much awaited reforms in the Indian retail sector by allowing 51% foreign direct investment (FDI) in the multi-brand retail sector. It has also raised the FDI limit in the single-brand retail sector to 100% from 51% earlier. The enforcement of these reforms, not withstanding some political risk, will open the floodgates of funds for the burgeoning Indian retail sector. Further, the bill proposing a minimum $100 million of investments by any foreign investor would entail more serious participation from foreign players in the Indian retail space. The reforms will also result in enormous opportunities to develop front-end retail and provide impetus to develop back-end infrastructure, like cold chains, warehousing, logistics and expansion of contract farming. Industry experts believe these reforms have the potential to bring $8-10 billion of foreign investments in the next five to ten years. | | "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article." | | | |
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