Earnings surprise breadth last quarter most in 8

The last quarter was the best in at least eight for local companies, a comparison of actual earnings growth vis-a-vis brokerage estimates reveals.

Earnings surprise breadth, or the number of companies beating analyst expectations, was the highest in two years.

As many as 71 out of 116 companies covered by Morgan Stanley reported earnings in excess of expectations, clocking an earnings surprise breadth of 61% — an eight-quarter high. In fact, more than half of the coverage universe beat expectations by 5% or more.

For Motilal Oswal Securities, 71 out of 138 companies beat estimates, making it the best quarter in 10 with a surprise breadth of 51%.

Similarly for Enam Securities, at 63%, the surprise breadth was the highest in last seven quarters.

Strong performance by select large-cap public and private sector companies, coupled with analysts’ bearish expectations and higher contribution of other income aided the performance.

Rajat Rajgarhia, director - research at Motilal Oswal Securities, said the strong performance by large PSUs like ONGC, Coal India, Bhel and State Bank of India, along with steady performance by leading private companies such as TCS, L&T, Mahindra & Mahindra, Tata Motors, ITC and ICICI, helped corporate India deliver better numbers.

“Though the expectations were not much, the corporate performance was also good this quarter,” he said.

Sensex companies reported a net profit growth of around 22% year on year (yoy) and revenue growth of 19% in the March quarter.
For the broader universe, too, earnings growth was in double-digits.

“For the 3,175-odd companies that we track during the earnings season, revenues and profits grew 18% and 15% yoy, respectively. Ex-oil PSUs, revenues grew 15% yoy while profits were flat,” Ridham Desai, Sheela Rathi, Amruta Pabalkar and Utkarsh Khandelwal, analysts at Morgan Stanley India wrote in their markets strategy report dated June 5, 2012.

However, analysts seem to be worried about a fall in sales growth and operating margins.

Operating margins for Sensex companies continued to be under pressure from high input costs and dropped more than 120 basis points to 21%.

“Adjusted for the PSU oil companies (BPCL, ONGC), SBI and Tata Motors, sales growth was 16% yoy, the lowest in ten quarters. With commodity prices falling and GDP growth slowing as well, topline growth is likely to continue to fall. Also, on the operating profit front, though it was the first quarter of double-digit growth in a year, almost 60% of this came from BPCL, ONGC and SBI. The first two were a reflection of changing government subsidies, and the third (SBI) due to very large provision in the base quarter. Adjusted for these and Tata Motors, operating profit growth was an anaemic 2% yoy, the lowest since the crisis,” Neelkanth Mishra, head of equity strategy at Credit Suisse India, wrote in a note dated June 5.

Experts also continue to be cautious on the fiscal 2013 earnings outlook.

“We are not particularly enthused by the pace of earnings as there are still enough pain points which warrant a more guarded view. Worryingly, the downgrade cycle seems to have been revived with the fiscal 2013 estimates coming in lower by 1.7% since the beginning of the earnings season. Though the consensus Sensex EPS for this fiscal stands at around `1,280, implying over 14% growth, in the background of worsening macros, there are clear downside risks to this growth,” Dipojjal Saha, analyst at Edelweiss Securities, wrote in a quarterly earnings review note dated June 4.

Mishra of Credit Suisse concurred. “With marginal upgrades in fiscal 2012 earnings and marginal downgrades in fiscal 2013 estimates, yoy growth for consensus has now come down to the lowest levels in a year. However, we continue to believe that when the dust settles, this growth is likely to be in low single-digits.”
The results season saw fiscal 2013 earnings estimates getting pruned by almost 2% even as the fiscal 2012 earnings were raised 3%.

However, changes in macros with respect to interest rates and inflation are seen offering a positive surprise.

If oil and commodity prices continue their weakening trend, bringing down inflation with them, then there is more chance of an upside surprise on earnings than a downside, said Saibal Ghosh, chief investment officer, Aegon Religare Life Insurance.

Better-than-expected domestic growth may also provide a fillip to earnings growth given the scenario where expectations are already muted, said Rajgarhia.