Sensex earnings growth has been decelerating with every successive quarter since December 2006 – this quarter would be no different with earnings growth likely to decline to 18.3% yoy. We expect earnings of commodities companies to slip to 12.2% yoy on the back of an appreciating rupee, flat volumes and flat to falling prices, which vindicates our view of commodity earnings slowing down to 3.8% in FY08E. The non-commodity universe is estimated to report 22% growth in earnings for both the Sensex and our coverage universe, which is in line with our annual forecast. The meteoric rise in interest rates in FY07 and tight liquidity have had restricted retail credit expansion, which in turn has likely depressed earnings of the auto sector (decline of 14.1% within the Sensex and decline of 11.6% within SSKI universe).
Financials would be the key winners this quarter with strong NII growth, robust fee incomes and contribution from treasury-related gains (as interest rates have come off in the past quarter). The capex cycle too remains undaunted by interest rates and will likely propel earnings of construction and capital goods sectors. Telecom earnings will remain robust on strong subscriber additions. The key pockets of slowing earnings will be retail, auto components, logistics, commodities, textiles and pharmaceuticals (impacted by one-offs authorized generic revenue gains pertaining to Dr. Reddy Lab.).
Our key result picks include Union Bank of India, Bank of India, State Bank of India, BHEL, JP Associates, Infosys and Jindal Steel and Power. The key losers include IDBI, Canara Bank and Tata Motors.
The Sensex valuations, at ~16. 8x FY09E earnings (excluding the impact of valuations of non- consolidated subsidiaries at ~2400 points), appear to be within sight of our target. Our target prices on many stocks have also been reached and we will take a revised view on these stocks after the results season. Our sector strategy slant, however, remains biased towards the themes we had outlined earlier, i.e. rate sensitives, capex cycle plays and domestic growth plays like insurance and telecom.
Source: SSKI
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