>India Equity Strategy (CITI)

4Q09 Earnings Tracker 1: Managing Deflation?

■ In-line, positive, with a few wide variances — It's still early days in India’s earnings season, but the first trends suggest earnings are in-line with modest expectations – +2.3% vs. 3.3% est. for the Sensex (10/30) and +1.1% vs. -1.9% for the larger CIRA India Universe (34/138 reported). There are a few outliers – banks and Cement on the upside and Ranbaxy on the downside, but trends so far suggest overall earnings growth should largely be on track to reflect our -4% 4Q09yoy growth for the Sensex, and -14% for the wider CIR set.

■ It's deflation, but corporates appear to be managing it fairly well — It’s a deflationary environment. Sales growth has plummeted to -4%yoy (+38% a year ago) against our +8% expectation, suggesting pricing and demand issues. While this in itself augurs poorly, the corporate sector appears to have adjusted fairly aggressively and well to the changed environment (with a little help from commodity prices, no doubt). EBITDA margins are up a sharp ~130%yoy and qoq, suggesting operational and cost adjustments at aggregate have been fairly sharp. While sales and margin performance allow for divergent interpretation and
extrapolation, we would wait for more results before calling either way.

■ Broader market appears more robust: A wider sample of 100 companies (BSE500) suggests a more positive bias. Profits are up 6%yoy and 12%qoq while sales growth is flat sequentially. Pertinently, over 2/3Q09, the wider set was consistently weaker than narrow Sensex companies, possibly suggesting greater stress at the top end than the broader market? Let's wait for more of the earnings season.

■ Sector Leaders and Laggards —Banks (weak asset quality, but better than expectations) and Cement lead. Autos, Utilities and Ranbaxy make up the rear.

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