Street sees pick-up in earnings momentum

The macroeconomic headwinds still persist, but equity strategists believe 2013 will see select sectors and companies recover ahead of the broader economy. The reasons are varied — ranging from balancesheet turnaround to recovery in demand to lower interest rates.

“We expect equity funding issues will ease out, and more reforms. Additionally, we expect the Reserve Bank of India to cut repo rates by 50 basis points in January. These will make 2013 a turnaround year for Indian companies,” says Saurabh Mukherjea, head of equities, Ambit Capital.

With market sentiment improving, companies are focused on balancesheet repair. Be it asset sales or equity dilution, some companies are able to raise funds to bring down debt. Though it will take some more time before most companies return to the boom times of high double-digit growth, the green shoots are apparent, say analysts. For example, even smaller companies like Sintex are able to raise funds — the company raised Rs 176 crore through the qualified institutional placement route to lower its debt. It expects sales and Ebitda to grow at least 10-15 per cent in FY13 and FY14.

GREEN SIGNALS

• Easy fund raising: Balancesheet repair underw ay as fund raising becomes easy through equity (FPO) route, PE funding and QIP
• Reform boost: Possibility of a rate cut and reforms would aid recovery for the capex-led sectors
• Return of demand: Revival in the economy in 2013 would also mean recovery in demand
• Earning revival: Likelihood of re-rating as earnings are slated to pick up
• Currency comfort: A stable rupee rate against the dollar could mean less worry on the forex earnings and debt

Given last year’s low base and abysmal performance, some companies are expected to report higher profits in FY14. In the second quarter of FY13, the net profit of Sensex companies grew by three per cent and the largest erosion in the profits was on account of companies like Tata Steel, Tata Power, ONGC, Bharti Airtel, Hero Honda, Hindalco, Maruti, Reliance Industries and BHEL. The broad consensus is that all of them will see a revival in earnings from FY14.

Analysts say the downward pressure on earnings has eased and many of the capex-led intensive companies have already started seeing a turnaround. Some of the behemoths expected to turn the corner are Tata Steel, Maruti Suzuki, Infosys and Bharti Airtel. For instance, led by lower volumes and prices in Europe, Tata Steel’s net profit dropped from Rs 5,972 crore to Rs 1,805.4 crore in FY12, but analysts expect a recovery to the 2011 levels in FY14, as volumes and prices are expected to rebound. Tata Steel’s domestic business, which had been producing about 1.5-1.6 mt in the past few quarters, is expected to hit 2.35 mt by March 2013.

The market is also betting on Maruti. The auto major’s volumes in FY13 were hit due to a labour unrest at its Manesar facility. In the second quarter of FY13, Maruti sold about 230,000 cars, which, analysts say, could go up to 345,000 by the end of the March 2013 quarter.

Operationally, too, the environment is easing for capital expenditure-intensive companies. “There are possibilities of a turnaround, particularly in the capex-led sectors, as policy issues and interest rates could play a positive trigger,” says Mehraboon Irani, principal and head (private client group business), Nirmal Bang Securities.