Thursday, April 2, 2009


Q4FY09 Earnings Preview: Time for bottom fishing, Re-rating to take place

Sensex sales to increase 4.8% y-o-y and profits to increase ~4.2% y-o-y in Q4FY09 We expect Sensex sales and profits to increase ~4.8% and ~4.2% y-o-y, respectively, in Q4FY09. In Q4FY09, our Universe of Stocks (representing ~58% of overall BSE market cap) is estimated to report a y-o-y growth of ~3.7% in sales and a decline of 8.7% y-o-y in net profit.

Top line growth to decline significantly, margins expected to face the heat
In Q4FY09, our universe is expected to see 3.7% growth in sales, significantly lower as compared to 11.0% witnessed in Q3FY09. The decline in growth has been mainly due to fall in realizations owing to the overall fall in prices due to slowdown in demand. We expect the PAT margins to take further hit in this quarter. PAT margins in Q4FY09 are expected to be 14.8% as compared to 15.8% in Q4FY08. However, with indications of easing commodity costs and macro pressures, margins may just pick in coming quarters in selective commodity-intensive sectors like metals, autos, cements and semi-finished goods.

The Macro factors
S&P’s downgrade of outlook for India due to ballooning fiscal deficit of above 11% acted as key trigger for FIIs to pull out as the dollar kept on gaining against rupee. Rising fiscal deficit will lead the government to borrow heavily in the coming quarters. The huge borrowing of ~ Rs 3,29,000 crore (of which Rs 2,40,000 crore will be borrowed in H1FY10) will have a crowding out effect on the economy. Pressure on rupee will ease due to contracting trade deficit and weakening of dollar due to problems in US. Dollar depreciation would lead to rise in commodities which augur well for domestic players which are the lowest cost producers. Ample liquidity will ensure availability of credit at much cheaper cost to the borrowers. We may see deflation till Sept 09 levels at WPI. Upcoming productions from KG D-6 and Cairn facility in Rajasthan have potential to increase GDP by ~1.1%. In near term market will focus on G20 meeting and upcoming general election. Stable government at the center may bring some cheers to the market players.

Attractive Valuations
Recent strong ~25% bounce in the market could be attributed to a mix of positive global cues, pre-election rally and Government stimulus initiatives. Indian markets are trading at attractive valuations and offer substantial opportunities for the long term player. We expect market to be in a range of 9,000-10,500 till the election and it will consolidate at this level for few quarters. We are overweight in Metals, Power & Capital Goods, Telecom sectors and selective financials.

Top Picks from KRC Universe

Reliance Industries, SBI, BHEL, Reliance Infra, IVRCL, Bharat Forge, Sterlite Industries, Mundra Port, Bharti Airtel, Hindustan Zinc.

To see full report: Q4FY09 PREVIEW