>INDIA STRATEGY: FY11/12 Earnings: What do Analysts think?

Consensus downgrades moderating before Q2 season

Analysts are turning bullish for the first time in a year. Riding into the quarterly earnings season, we gauge consensus sentiment across sectors, and find that earnings revisions are no longer headed south. We aren’t seeing substantial upgrades just yet, but the trend of downward revisions is moderating. Economic growth is on track with a solid monsoon, robust consumption demand (and
perhaps, a booming market), leading analysts to take a second look at earnings. RCML’s Q2 PAT (ex-oil) estimate is 29% for the Sensex, and 21% for our broader 135-stock coverage universe.

■ Consensus signals a moderation in earnings downgrades: Earnings revisions
across the market have turned slightly positive in the last two months. The MSCI
India Earnings Revision Index*, a key measure of sentiment, which has been on a
downward trend (i.e., more downgrades than upgrades) since September ’09, has
now shown signs of a reversal before the quarterly earnings season commences.
Sentiments have been even more positive for the 600+ stock IBES India universe,
the set of all stocks under sell-side coverage. In the backdrop of prolonged global
weakness and the possibility of a double dip, analyst optimism is borne out of a
good monsoon season, strong consumption demand, and a resilient Indian
market post-crisis.

■ FY11 earnings growth at ~20%, but not on upgrades: Meanwhile, profit growth
for Sensex companies remains largely unchanged since the ‘Tata (Motors/Steel)’
spike in June, at 20% for FY11 and 18% for FY12 (Fig 2). Gross FY11 profits have
remained flat (-0.6%) during this period. In other words, analysts haven’t factored
in any rise in full-year profits post Q1FY11. Not yet anyway.

■ Autos remain the sector of choice, Telecom the least-liked: Sector-wise, Autos
(Fig 3) have seen the highest earnings growth since last year, riding on the strong
volume growth post-recovery. Telecom earnings in contrast have been pared
down by a third in this period. While the overhang of competitive intensity, 3GBWA,
and MNP (where in contrast to the costs, data-revenue estimates are still
hazy) explains the negative quarterly estimates, the latest round of downgrades is
largely due to consolidated (including Africa) figures for Bharti. High upgrades
also imply an increased risk of disappointment, with Autos, Metals, Health, and
Capital Goods seeing the highest upgrades in the last three months and remain as
sectors to watch this earnings season.

■ Earnings upgrades and market performance… may not go together: Ratings may
not always translate into performance, as we know. While Autos, Cement and
Metals outperformed the market in line with upward earnings revisions, Banks,
Telecom and Real Estate have seen outperformance despite flat or downward
earnings revisions.

■ Sectors to watch out for this earnings season: Sectors such as Real Estate and
Telecom are the ones to watch out for this earnings season as outperformance
ahead of earnings could well turn into sharp underperformance in case of any
negative earnings surprises.

To read the full report: FY 11/12 Earnings