>INDIA STRATEGY: 4QFY12 Earnings Preview: V are in a U

■ V Market, U Earnings — India’s market recovery was fairly V shaped in the quarter (+12.6% in 4Q): but you should expect a more U shaped recovery in earnings: +7% yoy (Sensex-ex Oil), 7.5% (CIRA ex-energy), and largely in sync with the earnings performance over the first 3 quarters of the year. We do not believe there are big bottom up expectations for the quarter, but it should have greater skews, bigger surprises and an elevated focus on management guidances. We also believe you should expect only modest earnings revisions post the results, with FY13 earnings growth estimates remaining in the 14-15% level.


■ Margins over sales should continue — Sales should continue to moderate (17% yoy, CIRA ex-Reliance) while margins should continue their qoq rise (after reversing a falling trend in 1HFY12). This trend, we believe, is a reflection of slowing demand, and a combination of easing cost pressures/rising profit focus of corporates. This trend (profit over growth – almost alien to corporate India over the last decade) will need a catalyst – mix of lower rates, higher confidence in government and strong global markets, to reverse. This quarter’s results are unlikely to be that change/catalyst.


■ Bigger sector and stock skews — Over 50% of CIRA coverage companies will report a +/- 20% growth in the quarter; there will be a high share of one-offs (in this qtr or in the base), and big sectors (Banks/Mining) and big stocks (SBI/Coal India/Reliance) will drive these swings. The Banks, Automobiles, Consumer and Pharma sectors should lead while Metals, Media, Telecom and Real Estate should lag.


■ Quarters' question, Stock Selection — Will the quarter meaningfully alter market direction? We think not (the Credit policy with rising rate cut expectations probably more decisive, and will have a bearing on management commentary). We maintain our 18,400 Sensex Target for December 2012. We see potential upside surprises for SBI, Bharti and HCL Tech, and downside ones for Coal India, TCS and Grasim.


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