June quarter to cement uptrend

The coming earnings season is expected to cement the upward trend in corporate numbers, as the growth momentum continues to improve for the structurally high-potential sectors of the Indian economy. This, despite heavyweight oil & gas laggards like ONGC and Reliance Industries, which suffer from higher subsidy burden and flat refining margins, respectively. The growth mantle is expected to be shouldered by sectors like infrastructure, capital goods, auto, banking and information technology (IT).

Project execution in frontline capital goods and infrastructure companies continues to pick up appreciably. BHEL is expected to see 20 per cent year-on-year growth, even as other engineering companies report strong order books and execution rates. Execution delays, which plagued several infrastructure companies last year, are also a thing of the past due to faster financial closures. Power companies saw large capacity additions coming onboard during the quarter, with an increase in tariffs expected to add a further boost.

Auto companies continue to witness stellar growth, with a 36 per cent spurt in volumes, on the back of continued buoyancy in economic activity and healthy consumer and business sentiment. Banks are also seeing a sharp revival in credit demand, with the growth rate doubling to 19 per cent in a short span of seven months. Asset quality is also improving rapidly for private banks, though public sector banks may see a few more quarters of non-performing assets from loans restructured last year.

Several commodities are going through pricing pressures. Steel sector suffered during the quarter due to large-scale cheap Chinese imports. Base metal players also saw price erosion as the euro crisis precipitated falling London Metal Exchange (LME) prices. Cement companies witnessed substantial decline in prices, especially in the south where maximum capacity additions are happening.

Notwithstanding six per cent rupee appreciation, export sectors continue to show an improving trend due to global revival. IT companies are seeing accelerating growth since the second quarter of 2009-10; by this quarter, annualised growth is expected to improve to 20 per cent levels. Pharma companies are expected to deliver 10 per cent topline growth driven by US product approvals and strong domestic growth.

In all, it is expected to be a healthy earnings season, which should provide direction to the markets in the coming year. Valuations look fair at present, but investors should bear in mind that with the earnings per share of the Sensex companies rising 26 per cent to Rs 1,061 in 2010-11, coupled with an even stronger outlook for 2011-12, markets will soon be discounting a much higher base of earnings. Consequently, it makes sense to invest in the high-growth sectors like banking, infrastructure, capital goods and IT, where several companies are still trading at reasonable valuations in the context of the high growth expected over the forthcoming years.

The author is CMD, Angel Broking