India Results Season So Far – Valuations + Earnings

We are in a situation where earnings risk and valuation risk seem to be prevailing simultaneously. Large cap stocks in most sectors appear fully valued and the market is trading close to top of its trading range. Simultaneously, Sensex EPS estimates have declined 2-3% during the recent quarterly result season.

The narrow market (i.e., BSE Sensex) is lagging the broad market on profit growth. Slightly more than half of the reported companies beat MS analysts’ expectations (37 out of 69). Aggregate earnings growth is behind estimates due to misses by some large companies, notably in the Energy sector. Healthcare and Materials are leading the charge on earnings growth whereas Banks and Consumer Staples are ahead in terms of positive surprise breadth. Energy and Technology are the key laggards.

11 out of the 15 companies in the Financials sector beat expectations while 6 out of 9 Tech companies lag expectations. Margin expansion in 5 out of 10 sectors led by Materials. Broad Market: outperforms Sensex earnings growth with 18% YoY profit growth.
There are some stocks, however, with recovering fundamentals, whose longer term earnings potential is not captured by near term valuation measures. For such stocks, valuation measures that capture longer term earnings potential need to be considered.

BNP Paribas now brings in a new yardstick – Implied Earnings Growth [IEG] to discover long term earnings growth and which can be bought on the basis of this theory. Bajaj Auto, Bank of Baroda, Punjab National Bank, and Shiv Vani figure in the list. What say ?