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Sell SENSEX on Better Earnings – BofA Merrill

October 6, 2009

BOFA- Merrill Lynch says that the earnings season for quarter ended Sept 30, 2009 will be good despite headline Sensex net profit showing a drop of 18%. Firstly, the metals companies distort growth. Ex-metals, the EBIDTA growth is near 20% and net profit growth 9.4%.

Earnings will surprise estimates and will see some upgrades. However, current stock prices seem to factor in lot of the positive surprises with valuations at 18x 1-year forward. Don’ be surprised if stocks sell on good news.

After five quarters of margin contraction, aggregate Sensex EBITDA margins are expected to expand marginally by 25bp led by Cement and Autos.

Banks (SBI, HDFC Bank, ICICI Bank) and Autos (Maruti, Hero Honda) are the expected pockets of growth. Global commodities (Metals & Energy) are expected to report a drop in profits. Telecom should also report with weak results. Expect software to disappoint as high expectations seem to be built into share prices.

Potential Result Outperformers – Bajaj Auto, M&M, SBI, UBI, Asian Paints, Nestle Colgate, Godrej, Biocon, Dr. Reddy’s, Patni, Educomp, Mphasis

Potential Result Underperformers – Canara Bank, Bank of Baroda, Hindustan Unilever, Titan, United Spirits, Suzlon, Glenmark, Sesa Goa, Infosys Technologies, HCL Tech, Idea Cellular.

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