India Jun-Q review: Not a weak quarter after all

- After a weak start, Jun-quarter ended on a positive note for Sensex "While Jun-qtr earnings season began on a disappointing note it ended with strong positive surprises from few large cap companies. Initial earnings disappointments from NTPC (-21% vs. DB est), Hero Honda (-18%), Maruti (-19%) and Sterlite (-9%) were neutralized by positive surprises from large caps - Tata Motors (+43% vs. DB est), ITC (+18%), BHEL (+12%), Tata Steel and SBI (both +8%), leading to overall Sensex’ yoy EBITDA & PAT growth of 22% & 16% respectively. On free float basis, the corresponding growth numbers were 29% & 31% - largely driven by
strong growth and comparatively higher free float of Tata Steel. Sensex numbers (ex-Oil PSUs) were above our estimates at all levels i.e. Sales (+1.1% vs. DB est), EBITDA (+4.5%) and PAT (+0.6%). Tata Steel (strong turnaround at Corus) helped shore up yoy growth, while Oil PSUs posted negative surprise driven by under recoveries and volatility over subsidy sharing."
- Metals, Cap Goods, Financials lead, Telecom and Cement drag "Metals posted strongest PAT growth (+1.4% vs. of DB est) due to low base and robust turnaround at Corus. Capital Goods followed with 27% yoy PAT growth (+6% vs. DB est), as BHEL, despite a difficult environment, recorded strong numbers on the back of output improvement, indigenization and favorable RM/Sales ratio. Strong NII growth and lower than expected credit costs led to robust growth in Financials (+24% yoy and +4.6% vs. DB est). Unsurprisingly, Telecom witnessed weakest yoy PAT growth at -41% (-29% qoq) – although at revenue and EBITDA level, our Telecom analyst noticed improving competitive position for incumbents on qoq basis. Cement & construction followed with a -28% yoy PAT growth, which was 7% below our already lower estimates."
- We do not see any meaningful risk to our full year Sensex earnings estimate "We believe that street concerns over FY11 Sensex’ earnings growth are overdone. Despite a largely mixed quarter and soft growth (ex- Tata Steel), overall revision to FY11 Sensex EPS was marginal. During the earnings season, there were earning revision to 10 Sensex stocks with four upward and six downward revision - but the overall impact on Sensex PAT was only marginally negative at -1.6%. Earnings upgrade in Tata Motors (+57%) largely neutralized downgrades in Sterlite (-25%), NTPC (-13%) and DLF (-9%)."
- Better than expected monsoon to further stimulate aggregate demand, reiterate Sensex target of 22000 "We reiterate our year-end Sensex target of 22,000 driven by expectation of earning CAGR of ~25% over FY11-12, strong macro economic momentum and robust FII inflows - which have aggregated US$12bn YTD, and hold potential to exceed the annual peak levels of ~US$18bn. Besides, the ongoing monsoon season appears to be one of the best in almost five years and will help further stimulate - already elevated - aggregate domestic demand. We are therefore reiterating our overweight on the consumer discretionary sector."

DeutscheBank India Equity Strategy 20100822

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