>STRATEGY: Global worries remain, domestic environment to improve going ahead

4QFY2012 and FY2012 earnings snapshot: Sensex companies reported adjusted earnings growth of 19.2% yoy for 4QFY2012, against our expectation of 13.8%, aided by unexpected earnings surprise by ONGC. Excluding the ONGC’s suprise, earnings grew by 13.7% yoy, compared to our expectation of 15.1%, as lower-than-expected earnings of metal and telecom companies (sectoral earnings declined for both) largely offset better-than-expected performance of auto companies (primarily Tata Motors), Sun Pharma, SBI and ICICI Bank. Overall for FY2012, the earnings performance story was directionally similar to that witnessed in 4QFY2012, with lower-than-expected sectoral earnings of cyclical and structurally stressed sectors largely offseting better-than-expected yearly performance of few sectors like Private banks, auto, pharma, FMCG and IT. In fact, excluding Tata Motors (which was aided more by its foreign subsidiary) and SBI (which had a low base of earnings in FY2011), overall earnings growth for Sensex companies came in at just 9.6%.


Global worries remain, but domestic environment to improve going ahead:
Concerns about a crisis in Eurozone, which had earlier abated somewhat, have risen again on the back of recent developments in Europe (particularly regarding elections in Greece and the intensifying banking crisis in Spain), which coupled with series of lower-than-estimated economic data have led Indian markets to fall in April-May 2012. However, going ahead we expect the domestic macro environment to improve on the back of easing commodity prices, moderating inflation, further monetary easing in the form of repo rate cuts and narrowing current account deficit. Weak demand outlook have led to a significant decline in commodity prices including crude oil. The decline in global commodity prices, which generally gets reflected in inflation levels domestically with a lag, is expected to lead to a further decline in manufacturing inflation, while current forecasts suggest good monsoon levels which is expected to keep food inflation under control.


CAD to narrow going ahead: Indian exporters are expected to benefit significantly from INR depreciation, as it has improved their competitive edge vis-a-vis global competitors such as China. Also, imports are expected to decline on 1) lower domestic demand on account of slowing capex activities; 2) moderating global commodity prices including crude oil prices; and 3) reduction in gold imports (~10% of total imports) as gold is unlikely to generate similar supernormal returns as it did in last few years. Hence, we expect the trade deficit (in USD terms) also to narrow from here on, leading to a reduction of 50-100bp in current account deficit.


Outlook and valuation: Overall, for FY2013, we expect corporate earnings to be aided at the revenue level by better growth prospects than in FY2012, at the earnings level due to directionally better inflation scenario and lower interest costs. We expect Sensex companies to deliver EPS growth of 11.4% in FY2013E (12.2% CAGR over FY2012-14E). We continue to prefer rate sensitives like financials, infra and auto sectors, which are likely to benefit the most from the expected correction in interest rates and also select export-oriented IT and Pharma companies. We arrive at our 12-18 months Sensex target of 19,800, maintaining our conservative multiple of 14x FY2014E earnings. Our target implies an upside of ~19% from current levels.



Sensex earnings performance aided by ONGC surprise; Ex. ONGC performance remain mixed
For 4QFY2012, on a yoy basis, Sensex companies' adjusted earnings grew by 19.2% yoy as against our expectation of 13.8%, aided by the unexpected earnings surprise by ONGC. Excluding the positive surprise from ONGC, earnings grew by 13.7% yoy, compared to our expectation of 15.1%, as lower-than-expected earnings of metal and telecom companies (sectoral earnings declined for both) nearly offset better-than-expected performance of auto companies (primarily Tata Motors), Sun Pharma, SBI and ICICI Bank. Sector wise, on a yoy basis, Sensex earnings growth was primarily contributed by BFSI stocks, followed by auto, oil and gas and IT stocks. Excluding SBI (which had a low base in 4QFY2011 due to exceptional pension-related expenses) and ONGC (on unexpected earnings surprise), overall earnings growth for Sensex companies came in at just 4.1% yoy, as against our anticipation of 6.7% yoy.


To read report in detail: INDIA STRATEGY

RISH TRADER