Earnings Expectations - Q4FY12

Q4FY12 earnings, up 3.0% YoY (Edelweiss expectation: -4.0%), have neither been prolific nor despairing. However, what casts a shadow of disappointment is that a part of this earnings beat may have been driven by higher other income, implying a weakening core outlook. Even if the balance earnings season were to be on track, earnings growth for our coverage universe would be 3.0-3.5% YoY, implying yet another sub-10% quarter. Topline grew 17.4% YoY, ahead of our 15.0% expectation but was largely driven by few companies only. EBITDA margins, meanwhile, continues to remain depressed and have contracted ~320bps YoY. Worryingly, the Sensex earnings trajectory, which had shown signs of bottoming out, has been downgraded 1.1% since March. Results surpass expectations, but on other income crutch For companies within our coverage universe which have declared results so far, YoY earnings growth came in at 3.0% (Edelweiss expectation: -4.0%). The disappointment is on the core earnings front as some part of the earnings surge may have been driven by higher other income (e.g. PSU banks, RIL and Maruti Suzuki). For companies that have declared results so far, we estimate that other income as a proportion of sales is at 2.7%, which is a multi-quarter high. Meanwhile, revenues came in above expectation at 17.4% of 15.0%, YoY, but was largely driven by few companies only. Margins continued to disappoint, contracting 320bps YoY. Even if balance earnings were to come in line, earnings growth for our coverage universe would be 3.0-3.5% YoY, implying a fifth consecutive quarter of sub-10% earnings growth. Our Q4FY12 projection is for 0.8% YoY earnings growth. Earnings for the Sensex companies have been flat on YoY basis (higher than expectations of 5.0% contraction) but have been helped to a large extent by private banks, excluding which earnings growth show a dip. Overall, as we had highlighted in our preview note, the majority of growth in Sensex earnings for Q4FY12 is expected to be driven by SBI alone. Thus, if SBI numbers come in line we do not see much risks to our FY12 Sensex earnings estimate per se. PSUs, tech disappoint; private banks, consumers shine The divergence between PSU banks and their private sector counterparts continued in Q4FY12 as well. PSU banks’ results were characterised by weak asset quality with slippages coming in higher by 150-200bps than average delinquencies in 9mFY12. Their PAT was higher than expected, but was driven by lower tax rate and investment write-back depreciation. Private banks, meanwhile, have shown little stress on asset quality. Tech sector results were mixed and a QoQ decline in the key BFSI vertical was seen for the top 4 players. Consumer sector continues to post robust volume growth although there was some slowdown in the foods category. Within the telecom sector, both Bharti Airtel and Idea reported healthy volume growth (5% QoQ and 9% QoQ) although the former’s Africa business disappointed. Earnings outlook: Downgrades in FY13 earnings Meanwhile, the FY13 earnings trajectory for Sensex, which had shown signs of bottoming out in March, is once again exhibiting some weakness. Since the results season began, there have been downgrades of 1.2% with heavyweights RIL, Infosys, Bharti Airtel and Wipro being downgraded 3-7%. As per consensus, Sensex EPS for FY13E stands at INR1,287 (Edelweiss: INR1,280).