>1QFY10 EARNINGS PREVIEW (CLSA)

Set to ‘report’ profit growth

■ In 1Q FY10, we see 5% YoY growth in reported Sensex earnings, after two quarters of de-growth; 4QFY09 earnings decline (7%), was, however, 10ppt below our estimate as autos, banks, metals, petchem and telecoms surprised positively.

■ However, 1Q profits will benefit from a Rs30bn swing in FX related income/expense due to 6% rupee appreciation and change in accounting norm.

■ Adjusting for this and other exceptionals (including Rs10bn capital gains booked by L&T), profits will actually decline 10%YoY.

■ For the CLSA Universe as a whole, inventory gains for oil companies will support overall profit growth of 7%YoY; ex oil & gas, profits will fall 1%YoY.

■ At the company level, we see significant volatility; while 16/74 companies will report >40% growth, 17/74 will see >40% decline.

■ 10/14 sectors will report growth, led by Capital goods (+145%), Oil & gas (+55%), Banks (+28%) and Power (+21%). On the other hand, Property (-66%), Metals (-56%) and autos (-2%) are expected to report YoY decline in profit.

■ At the company level, we see a marginal rise in the number of profit increases – to 68% of coverage universe, from 61% in 4Q.

■ Overall sales growth will continue to slide (-6%YoY, vs -0.2% in 4Q) reflecting weak commodity prices and low sales for property companies.

■ Ebitda margin for the CLSA Univ. ex-oil & gas will fall 187bps YoY, 38bps QoQ, although domestic cyclicals like autos (+141bps), cement (+242bps) and the consumer sector (+184bps) will report margin expansion.

■ However, the extent of ebitda margin squeeze (302bps in 4Q) is clearly reducing.

■ Other income growth is likely to remain steady, but interest costs could see some pick-up, especially in the petchem and autos sectors.

■ We see a meaningful pick-up in earnings from 3Q, as the domestic recovery gathers momentum and the low base too comes into effect.

■ A ‘normal’ budget could trigger a market correction, given high expectations. We would see this as entry opportunities in plays on a 2H investment cycle upturn – banks, capital goods - as well as consumer staples.

To see full report: 1QFY10 EARNINGS PREVIEW