Earnings season is upon us once again. The macro data for the June quarter have been very good, whether one looks at the Index of Industrial Production (IIP) or the Purchasing Managers’ Index (PMI) numbers. The fiscal situation has improved due to a windfall from the telecom spectrum auctions. As a consequence, the yield on the benchmark 10-year government bond is well below what it was a few months ago. The Reserve Bank of India’s tightening measures have been entirely on expected lines. Investment demand has recovered strongly. The monsoon promises to be a good one. The net impact of all this has been that the Indian stock market has beaten its peers in the last quarter. In local currency terms, MSCI India is down only 1.78% in the three months ended 5 June, while MSCI Emerging Markets is down 6.94% and the MSCI World index lower by 13.94%. The Indian market is valued at a premium and its much better relative performance during the last quarter has increased that premium. That indicates the scope for P-E (price-earnings multiple) expansion is limited, which is also true because of the new free-float rule and high disinvestment target. The burden of driving the market, therefore, rests on better-than-expected earnings growth.
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Unfortunately, the positives on the macro front appear to have been priced in. It’s not just revenue growth that is expected to be robust—estimates of earnings growth for the Sensex companies for fiscal 2011 are well above 25%. Earnings growth during the June quarter will, therefore, have to be strong enough to meet those high expectations for the full year.
Several brokerages have, however, come out with earnings previews that suggest flagging momentum in the June quarter. Lower margins are expected to affect profits. Earning upgrades have been losing steam and, in fact, there have been some downward revisions. Edelweiss Securities Ltd points out that the consensus earnings per share for the Sensex for fiscal 2011 has declined by around 4% from November.
So the odds of upward revisions to earnings are low, particularly as the external environment has deteriorated significantly. In short, the high earnings growth targets for fiscal 2011 may be at risk.
Graphic by Yogesh Kumar/Mint
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