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SHAREKHAN SPECIAL
Q1FY2007
earnings preview
Key points
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The domestic demand driven story is
likely to continue with the growth in the Sensex
earnings led by the automobile, cement, capital goods
and fast moving consumer goods (FMCG) companies. We
expect the pharmaceuticals sector to report a strong
growth on the back of the latest acquisitions done by
the companies (Dr Reddy's acquired Betapharm) and new
product approvals.
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We also expect the information
technology sector companies to report a strong
earnings growth on the back of a robust volume growth
and the depreciation of the rupee vis-à-vis the
dollar.
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We expect the earnings of the
Sensex companies to grow by a strong 19.1% year on
year (yoy) led by a strong growth in the
above-mentioned sectors.
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For FY2007 the earnings of the
Sensex companies are expected to grow at 21.0% and
excluding Oil and Natural Gas Corporation the growth
is likely to be 22.6%. The earnings growth for the
banking sector for Q1FY2007 is likely to be much lower
than the full year growth as a major portion of the
mark-to-market losses on the bond portfolios will be
booked in Q1FY2007.
Cement
earnings preview
We expect the cement sector as a whole
to report an impressive performance for Q1FY2007 due to
a 7-8% growth in the volume and a 19-20% rise in the
realisation. We expect cement companies in the northern
and southern regions, eg Shree Cement (north) and Madras
Cement (south), to deliver a superlative performance.
Amongst the cement companies in our coverage, JK Cement
is expected to top the chart of earnings growth with a
273% growth in its net earnings. The contenders for the
second and third slots would be Shree Cement, whose net
earnings are expected to grow by 182%, and Madras
Cement, whose net earnings are expected to grow by 77%,
respectively. We expect the operating profit margin
(OPM) of UltraTech Cement Company and ACC to expand
because of cost savings and higher leverage to firm
cement prices.
Following the sharp
correction in the broader indices recently and the news
of the government's intervention to control the cement
prices, the stocks of the cement companies have
witnessed a sharp correction in the last few trading
sessions. The fears of an earnings downgrade as well as
the overall lower valuations of the broader indices are
now acting as an overhang on these stocks. However we
believe the strong April-June quarter numbers and the
new valuation benchmarks set by Holcim's recent
acquisitions in India shall act as positive triggers for
the cement stocks. We maintain our positive view on the
sector with UltraTech Cement, ACC and Madras Cement as
our top picks. We also like Orient Paper and JK Cement
on account of their compelling valuations, which are
much lower than the sector average.
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