>INDIA MARKETS: Flying high; Best is behind? (CLSA)

Our analysis of the 3QFY10 results of 1,600+ companies (1. However, sequentially margins have contracted by 100bps and profits declined by 1%.

In our 10th Jan note, we wrote, “We expect markets to be volatile in 1H 2010, but if earnings optimism in mid caps proves correct, then mid caps will likely yield better returns than large caps. However, given that valuations are reasonably rich, we believe that 2010 will be the year of stock picking.” Our view remains unchanged. The present correction will likely provide entry opportunities in stocks that we like for the long term – Bharat Electronics, Bosch, Exide, Thermax and Titan. Post results, we have upgraded Jet Air to BUY. Other stocks that we like: Balrampur, Bombay Dyeing, Cadilla, HCL Info, Ipca, Jagran, Petronet LNG, Shree Cement, and Sobha Dev.

3QFY10: Strong growth in profits, but…
■ 1,607 companies with market cap of

■ Sequentially revenues grew by 5.7%, and Ebitda grew by only 0.7%, as raw material and energy prices increased sequentially. Interest costs have not risen. Net profit actually declined by 0.6%. Does this mean that the best is behind us?

■ Ex-financials and oil & gas, the mid cap universe’s earnings grew by over 4x yoy and ebitda margins expanded by 549bps. But, sequentially revenues grew by 6.2%, ebitda margins declined by 50bps and profit grew by 3.4%.

■ Depreciation trends indicate that capex is yet to pick up. Broad participation; visible recovery across the board

■ We divided the universe into four buckets as per market cap. Revenues of 1,160 companies having market cap

■ 46 companies with mkt cap >US$1bn have turned in the worst performance during the quarter with revenues increasing by 6% YoY but net profits declining by 6.5% YoY. Net profits declined sharply by 31% on QoQ basis.

■ The aggregate results are consistent with what we saw in 1QFY10 and 2QFY10. We believe that the smaller companies had been the worst impacted by the downturn and credit crunch last year and thus, had to take drastic measures to cut costs and inventories. This is standing them in good stead as revenue growth recovered.

Earnings upgrades continue; Optimism remain high
■ Momentum in earnings upgrade cycle continued. Consensus FY11 earnings of CNXmid- cap Index was upgraded by 3.5% versus downgrade of 2.6% for Sensex. �� 57/90 actively covered mid-cap stocks has optimism ratio greater than 1 compared to only 12/30 stocks in Sensex.

What’s next?
■ We expect markets to remain volatile in 1H 2010 on macro concerns. However, if the current earnings optimism in mid caps proves correct, then mid caps will likely yield better returns than large caps. But given that valuations are reasonably rich, we believe that 2010 will be the year of stock picking.

■ The present correction will likely offer entry opportunities in some of the stocks that we like in the long term. Post the results, we have upgraded Jet Airways to BUY and downgraded Jain Irrigation to O-PF.

To read the full report: INDIA MARKETS