What to expect from Q3FY11 Earnings?
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It has been more like “ho-hum, yawn, oh so boring!” kind of a market lately. There were plentiful cues like IIP numbers, inflation figures and the RBI action for the market to track, but it was all devoured and discounted like a flash in the pan. And despite so many economic factors, the markets have remained range-bound. What then could be the next big trig-ger for the markets? The answer is very simple; on an immediate basis the Q3FY11 results can be expected to provide some direction to the market. Investors will be curious to know about what to expect from the Q3FY11 results.But before that, let’s do a quick roundup of what happened in Q3FY11. If you look at the movement of the Sensex in the December quarter, a ris-ing Index came to a halt in 3QFY2011, thanks to a flurry of scams that made headlines during this period. The result was that the markets remained flat compared to the previous quarter. The Sensex did make an all-time high dur-ing the quarter, riding the positive momentum of the previous quarter. But, it eventually corrected owing to negative news flow, ending a mere 2 per cent higher on a sequential basis. Positive or negative news flow not-withstanding, the FIIs continued to pump in money through 3QFY2011 as well, rounding off the calendar year Special Report with a strong capital inflow into the markets. Overall FII inflow in equities in 3QFY2011 stood at nearly USD 10 billion, taking their total invest-ments in FY2011 thus far to USD 29.36 billion. So liquidity was not a problem in the previous quarter. But liquidity alone cannot drive the mar-kets and hence fundamental aspects are also important. As we mentioned earlier that Q3 results are expected to be the next trigger, let’s have a look at what to expect from leading sectors in Q3FY11. AutomobileIn the Automobile sector, the momen-tum in volumes continued to be strong on a YoY basis. The best part is, growth remains strong for all the segments, with two-wheelers growing by 21 per cent YoY, cars by 24.3 per cent YoY and commercial vehicles by 17 per cent YoY. Considering that realisations remain stable the topline growth for this sector is expected to be in the range of 22-24 per cent on a YoY basis. As regards the bottomline, margins are expected to get impacted by increased raw mate-rial prices. Steel and rubber prices have witnessed an upward move and this is expected to impact the margins for the quarter. But despite this the consen-sus bottomline growth for automobile companies is estimated at 35 per cent on a YoY basis. But on a sequential basis the bottomline is expected to decline by round 3 per cent.
Banking
In Banking, the credit growth sus-tained its momentum. The credit off-take remained strong at around 22.10 per cent YoY. As regards the net interest margins, the hike in the key policy rates undertaken by the RBI during the quarter led to an increase in the cost of funds for banks. But again we feel it is likely to have been offset by the hike in the prime lending rate undertaken by the banks during the quarter. The trea-sury gains are likely to remain muted for this quarter. Considering all these factors growth in net interest income is estimated at around 25 per cent and net profit growth is estimated at 16-18 per cent on YoY basis.
Cement
In the Cement sector, sluggish volumes and price cuts are expected to have a negative impact on the earnings. This impact will mainly be on the north based players as in southern part prices revived in the later part of the quarter. But overall volumes remained muted as compared to the same period last year. In October to December 2009, cement dispatches were 48.97 million tonnes. In October and November 2010, the dispatches stood at 26.98 million tonnes. Therefore, no volume growth is expected on a YoY basis. Further, the oversupply situation resulted in no improvement happening on the reali-sation front; hence we expect muted results from the cement sector. Hence, marginal de-growth is expected in the topline, while bottomline growth is expected to be negative at around 25 per cent.[PAGE BREAK]
Construction
As regards the Construction sector, in the previous quarters, the prolonged monsoon has had an impact on the construction activity. But this time the construction sector is expected to put in a better performance. Order book growth continues to be healthy in double digits, while the book to bill ratio stands at 3.4x FY10 rev-enues. The strength in the IIP num-bers and buildup in corporate capex continues to support the growth in the order books of construction com-panies. Further, their improved execu-tion capability is expected to result in around 25 per cent growth on a YoY basis. But margins are expected to be impacted on account of two factors. First, increasing commodity prices and second, the increased interest cost on working capital.
FMCG
In case of the FMCG sector, a mixed bag of bit of sales volume growth and some price hike is expected to result in a topline growth of around 18 per cent. But the price hike will not really be in proportion to the increase in raw material cost. The prices of all the key raw materials have witnessed a sharp up-tick in the last few months. Palm oil is higher by 40 per cent, while copra and coconut oil prices have also been on the uptrend during the quar-ter. It seems that sustained increase in crude price would have an impact on the packaging cost sooner or later impacting bottomline growth, which is estimated at 14-16 per cent.
Information Technology
In the Information Technology sector, on a QoQ basis, while revenue growth is expected to be around 5-6 per cent, earnings are expected to witness a mod-est growth of 3-4 per cent. While the volume growth and stable pricing (with an upward bias of 1 per cent) is expect-ed to result in revenue growth, earn-ing growth will be muted on account of rupee appreciation. The rupee has appreciated to Rs 44.6750 as compared to average of around Rs 46 per dollar dur-ing the September 2010 quarter.
Pharmaceutical
In the Pharmaceutical sector, due to the higher base of December 2009 rev-enue growth is estimated to be around 10-12 per cent and earnings growth is expected at 14 per cent. So, a moder-ate performance is expected from the pharmaceutical sector.
Real Estate
In Real Estate, strong recovery was witnessed in Q3FY10, on account of a lower base of Q3FY09. But now the performance is expected to be muted on a slower volume growth. A moder-ate growth of around 10-12 per cent is expected in topline, but the bottomline growth is expected to be almost flat or witness a marginal dip. Prices have remained almost stagnant and volumes are on a decline. Add to that the recent alleged involvement of realty com-panies in the loan scam and this will probably result in a difficulty to raise funds, drying down of cash flows and thereby leading to increased borrowing cost. The performance of realty compa-nies is expected to be poor.
Steel
In the Steel sector, the volume growth remained stable in the Q3FY11. Some price hike of around 7-8 per cent was there, but it was mainly on account of higher input costs. With a volume growth of around 7 per cent, the rev-enue growth is expected to be around 12-14 per cent. The bottomline growth is expected at more than 20 per cent.[PAGE BREAK]
Telecom
In Telecom, for 3QFY2011, we expect revenue growth to be driven by a good growth in the subscriber base, a flat ARPM and a marginal up-tick in minutes of usage. But de-growth is expected in the bottomline on account of a price war.
Textile
The Textile sector is expected to wit-ness another quarter of good perfor-mance and is likely to post a topline growth of around 20 per cent. One must remember that this will be on the back of a higher base in Q3FY10, where it posted a topline growth of 19 per cent and bottomline growth of 262 per cent. So bottomline growth is expected to be moderate in Q3FY11.
If we take a look at the overall picture, the earnings preview does not create a very rosy scenario. Even if we consider the conservative figures, the topline growth is estimated at 16-17 per cent and the bottomline growth is estimated to be around 20 per cent. In the Sensex companies, the earnings growth is estimated to be around 22 per cent. With the Sensex already trading at 23.60x, the growth in earnings will be in line with the valuations at current levels. So if the earnings growth is better then our esti-mates, the market is likely to sustain at higher levels. However, if the earn-ings growth is lower than the stated figures, some amount of correction can be expected.