Usually fundamentals take a backseat in the eyes of extreme market conditions. Sentiment led by fear and greed factors come on fore during pessimistic and optimistic times, respectively.
However, when market enters a phase of normalcy and calm consolidation, fundamentals led by earnings performance and guidance gain more significance.
As we approach second week of April 2010, its time to kick start the earnings season for the fourth quarter of FY 2009-10. And as per the ritual, the Q4 seasons chugs on with the earnings performance by none other than IT bellwether Infosys Technologies.
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Infosys Delivers a Promising Performance
The IT biggie reported a consolidated net profit of Rs.1600 crore and revenues of Rs.5944 crore for the quarter ended March 31, 2010, summing up to a quarter-on-quarter profit growth of 2.6% and revenue growth of 3.5% sequentially. The quarterly results were as per street expectations.
But, as usual, the street seems always more interested in the future guidance forked out by the company rather than current performance. The Infosys management guided for a dollar-denominated revenue growth of 16-18% for the fiscal 2010-11, which came as a positive surprise for the markets.
Rebounding US Markets – A Cheer for IT Companies
IT spends in the US and other major economies of the world have witnessed a strong rebound, benefiting relatively low-cost outsourcing firms like Infosys and TCS. According to Forrester, the growth in 2010 would be little faster at 7.7% and will mainly be driven by a strong 8.4% growth in the US demand and another 8.3% jump in the Asia Pacific region.
This may lead to top IT companies to report 3 to 5% volume growth for the March 2010 quarter, a view well-verified by the revenue growth of 3.5% for Infosys Technology’s March 2010 quarter performance.
However, going ahead, Infosys is factoring a 6% rupee appreciation in 2010-11. In conjunction with wage inflation, this may pressurize margins in future. The rupee’s appreciation by 1.6 per cent in the quarter affected margins by about 70 basis points.
According to Infosys CEO S Gopalakrishnan, We have been able to take advantage of the opportunities in the market and grow faster because of our investments in capacity and capability building even during the economic downturn.”
Growth led by Domestic Industry
Coming more nearer to the domestic economy, India Inc is expected to wrap-up fourth quarter on a positive note what with the over-all improvement and rebound in the domestic economy.
The net profits of leading large-cap companies are likely to grow in the region of 24-28% year-on-year in the quarter ended March 2010. A re-pricing of deposits should boost margins for PSU banks.
Companies from tariff-war hit telecom sector and pharma companies are likely to post decline in profits. The financial sector would record a measly 2% growth.
Auto and Metals Stocks to Shine
Capacity utilization is approaching pre-crisis levels in sectors buzzing with domestic demand led dynamics. Automobiles, metals and infrastructure companies are expected to log-in strong growth in profit and revenues.
Metals stocks should see margin expansion this quarter on the back of lower base last year due to global crisis. However, the same cannot be told with conviction for non-ferrous metals companies which are hit by higher input costs. Operating margins of ferrous companies is estimated to expand by 2-4% sequentially.
Robust Earnings for Next few Quarters
The Sensex companies are expected to post earnings growth of 33-36% for the fourth quarter of fiscal 2009-10. While the markets are looking to consolidate currently, the focus would revolve back to earnings performance of the companies.
The sharp rise in commodity prices on the back of steep rise in inflation is likely to benefit companies dealing in respective sectors. Steep rise in Crude prices is likely to benefit companies like Reliance Industries and ONGC. At the same time, higher oil prices are likely to hit Oil Marketing Companies such as HPCL, BPCL and IOC.
With return of global recovery and demand for good and services to pre-crisis levels, the earnings are expected to register stronger gains, not only in this quarter, but even in next few quarters to come. However, investors need to keep an eye as to how much of this optimism is already discounted in current stock prices.
Will India Inc post Strong Q4 Earnings this season?
I think the markets will consider the following for coming to a conclusion about growth :
1. Q4 results of biggies in general (it gives a feel of where we are going)
2. Global recovery from recession (neutral)
2. Industrial output growth (positive)
3. Inflation control (negetive)
4. Upcoming mansoon (wait and see)
Another positive is the abnormal growth of domestic gas production. I read some where that though our oil imports are growing, gas imports are coming down as a result of KG Basin gas output. It is also bringing down naphta imports (as many industries in fertilizer and power) are shifting to gas to bring down costs. The import substitution on behalf of KG Basin gas is a direct addition to national output which is abig big positive for India.
However extraction at a rate of 80 mmscd per day gas will consume all recoverable reserves in KG basin in 8-10 years unless RIL and ONGC find other reserves. So a lot depends on adding proven reserves at KG Basin (to keep the momentum going forward)