>MARKET EARNINGS REVIEW (ICICI SECURITIES)

Margin revival but no earnings upgrade yet

Aggregate EBITDA and net income for the I-Sec universe in April-May-June ’09 (AMJ) quarter surprised positively. However, this was largely driven by significant cost control and higher other income/forex gains, with revenues being slightly lower than expectations. Thus, the sustainability of these positive surprises is not assured. Earnings upgrade can be a key positive trigger for the markets, but we continue to doubt that it will ensue in the short term – our Sensex earnings estimates remain broadly unchanged. We continue to reiterate our defensive stance on the market in the short term, given rich valuations (FY10E & FY11E P/E of 18x & 15x), uncertainty in the global macro-economic environment and potential risk still on the monsoon front.

■ Cost control, raw material benefits and other income led to positive surprise. EBITDA margin for the I-Sec universe expanded 150bps YoY (I-Sec: 160bps compression) and net income rose marginally (I-Sec: 10% decline). This was largely driven by cost control, raw material benefits and high-than-expected other income. Aggregate revenues declined 7% YoY (as against our estimates of a 3% decline).

■ Auto, IT, real estate surprise positively; banks & telecom negatively. Volume growth and raw material cost benefits aided the first YoY net income growth for auto in four quarters. IT surprised positively on volumes and margins. Real estate revenues were significantly higher than expected, but they tend to be lumpy. Banks’ margins were under pressure and asset quality was mixed. Telecom stocks faced pressure on ARPUs and MoUs. Based on AMJ ’09 results and our bottom-up view on stocks, we maintain BUY on Axis Bank, Bajaj Auto, Bharti Airtel, Glenmark, GSK Consumer, Gujarat State Petronet, HDFC, Lanco, Marico, Tata Steel, Tata Consultancy Services (TCS) and Texmaco and reiterate SELL on Bharat Petroleum Corporation (BPCL), Chambal Fertilizer, Colgate, Divi’s, DLF, Entertainment
Network India, Idea and Unitech.

■ Earnings upgrade insignificant. AMJ ’09 results have not triggered any significant revision in our Sensex EPS estimates – FY10E & FY11E estimates (unadjusted for free float) are Rs893 and Rs1,075 respectively, not even 1% higher than our estimates a month ago.

To see full report: MARKET EARNINGS REVIEW