>MICROSTRATEGY (MACQUARIE RESEARCH)

Fundamental support for valuations

Event
■ Emerging market equities, including India, have been a big beneficiary of the improving global macro environment and continued easy money policy of central banks around the world. The recent India June 1Q10 quarterly reporting season highlights some recovery in company fundamentals.

Impact
■ The June 1Q10 quarterly reporting season has provided some relief to stretched valuations for the Indian market. Our analysis shows quarterly earnings of large-cap companies in India grew YoY and sequentially by 33% and 17%, respectively. More important, over 50% of the companies had better earnings on a sequential QoQ basis.

■ EBITDA margin recovery remains the key driver of this earnings growth, as sales revenue only barely registered positive sequential quarterly growth, although more than 50% of companies still had better sales than in the March 2009 quarter.

■ Higher operating leverage due to higher margins could lead to even better earnings growth once the top-line growth also picks up, particularly for capital goods, telecoms, software and banks.

■ At the stock level we find the improved macro environment is driving earnings upgrades across all sectors, except property. Companies with the worst EPSg forecast for FY10/11 performed the best last month, while those stocks with the highest FY10/11 PER performed the worst.

Outlook
■ In the short term, we favour stocks with the lowest forecast EPS growth, in the hope of subsequent positive earnings revisions driving performance. We would avoid stocks with extremely high forward PERs, as positive earnings revisions seem to have already been factored in for such stocks.

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