>INDIA EQUITY STRATEGY (CITI)

1QFY10 Earnings Preview—Negative Again, Third Quarter Running

■ Sensex profits to dip -7% yoy, and -6% qoq; metals the primary strain — The pain should continue – we expect India’s Sensex companies (ex-oil) to fall 7% yoy – this would be the third straight quarter of negative growth (-5%, -4% in 3Q09 and 4Q09). It’s a similar story with a wider universe—CIRA universe (138 companies.) would also see profits dip by 4.5% (-10% in Mar'09). If we include oil companies, which we exclude because of inconsistent/varying accounting treatment, it would look even weaker: -14% growth for Sensex and -11% for CIRA universe. Metals are a primary contributor to profit pressure (ex metals, profit growth at -2% for Sensex and +3.8% for CIRA universe).

■ The primary problem is sales growth (demand?), margins only a partial offset — 12 months ago, Sensex companies were generating sales growth of 35%yoy – this has slipped consistently but will now likely touch a pace of 2.8% (CIRA universe a slightly healthier 8%) and flat to negative qoq. Margins provide some support; rising qoq (falling yoy), on the back of some commodity and cost-cutting support, but not enough. Ex-metals, sales growth at 4.2%, and margins up 81bps yoy.

■ Leaders and Laggards — Banks (34%+) and Cement (23%) lead the pack with strong profit expectations while the long tail comprises Real estate (-87%), Metals (-39%) and Auto’s (-8.7%). More sectors will see earnings fall (10) than rise (6), reflecting broad-based pressures rather than concentrated ones.

■ Is this the earnings bottom? — The relative robust Sensex suggests so. And our revised FY10 expectations, +1.7% growth, would also suggest a nadir with backended growth in the current year. Let's wait for the results – an acceleration in earnings de-growth over three quarters is usually fairly challenging to reverse.

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