India: How Can A Market Fetch A PE of 15, When Earnings Growth Is A Mere 7.5% ?

Is India Growing Or Is It The Rest Of The World?

Earnings growth back to the starting line? — Do Q3 aggregates leave India where it started the earnings season? We think not. This is because domestic businesses seem to be driving top-line growth, while bottom line momentum is fuelled by commodity biased/ cyclical foreign subsidiaries. This 

 could well challenge India’s domestic growth/valuation premium. 

India’s headline 3Q11 profit growth was robust but with almost 80% of this growth being generated by its foreign subsidiaries (swinging from losses to large profits), it is actually a fairly disappointing show. ‘Domestic only’ earnings growth at 7.5% is weak, short of expectations, and in line with trends observed midway through the results season.

The negative bias in the quarter is apparent in the upside/downside surprise ratio (37/53, with 34 in line); Citi’s own earnings upgrade/downgrade ratio at 23/19. Surprisingly, the Street continues to hang onto extremely high earnings estimates for FY11 inspite of a poor show for the first three quarters of FY11.

It’s commodities, banks and swings — Commodities and banks make up almost 80% of earnings growth – commodities with help from abroad and banks due to more fundamental reasons. The telecom and energy sectors are the laggards, with median earnings growth for companies at around 20%. The quarters’ results do also stand out in the level of earnings concentration (sectors/stocks) and volatility, suggesting less predictability up ahead.

Sales and operating margins relatively balanced — While overall sales and margins have been boosted by the foreign business turnarounds, domestic margins have largely held, with sales too growing as per expectations. 

This suggests pressures are below EBIDTA levels, which could exacerbate given rising rates.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.