>Time for earnings to catch up…... (ICICI DIRECT)

■ Earnings expected to continue sequential improvement
After showing some signs of recovery in the preceding quarter, the Q2FY10E results on a cumulative basis are set to show further improvement sequentially. This is reflecting in the ICICIdirect.com research earning estimates. There has been more evidence of global economic recovery during the quarter. The market has also factored in all such positives by recouping most of the losses of the previous year. Most of the sectors during the past three months have significantly outperformed both the Sensex and the Nifty. Auto remained on the top of the list, followed by IT, realty and metals. We call this a classic case of a liquidity driven market. FIIs remained net buyers to the tune of Rs 60500 crore in the equity market YTD with Rs 35600 crore infused during Q2FY10 itself.

■ Sectors showing improvement on QoQ, YoY basis
Sectors like metals, media, hotels, shipping and telecom, which are more relevant on a QoQ basis, are expected to show decent growth. On the profit front also, most of these sectors are expected to grow on a QoQ basis. When comparing the estimates YoY, except pharma, sectors like auto, BFSI, cement, power and sugar that are mainly viewed on a YoY basis are still likely to show modest growth in all parameters.

■ Positive/negative surprises to weigh on markets in the near term
The markets at 17000 levels are fairly valued and India is trading at 20x and 16x its FY10E and FY11E consensus earnings, respectively. On the brighter side, better than expected earnings followed by earnings upgrades will justify the current market multiples. On the other hand, any shortfall in earnings can dampen sentiments and may open downside risks for the indices in the near term.

To see full report: RESULT PREVIEW