IT, telecom earnings may slow down

The robust earnings, shown by corporate India in the first half of this year, may not sustain the momentum due to slowdown in performance of IT and telecom sectors, making it difficult to match the forecasted growth for the entire fiscal.

"The street expectation for corporate India of 34 per cent growth for the financial year 2007 seems stretched as incremental risks are emerging for key sectors, including IT services and telecom," says global equity research firm J P Morgan.

The risk to earnings disappointment is building up, because the base effect would be more challenging in the second half with key sectors like IT and telecom facing some hurdles on their way, J P Morgan said in its latest Asia Pacific Equity Research report.

"The current street expectation of 34 per cent growth for financial year 2007 seems stretched in the backdrop of 31 per cent growth reported in the first half, particularly as the base effect would be more challenging in the second half," JP Morgan analysts Bharat Iyer and Bijay Kumar said in the report.

The major contributors towards the 31 per cent growth, witnessed in the first half of the current fiscal, were -- IT, telecom and building materials. The earnings growth momentum in building materials is expected to continue unabated into the second half, however, risks are emerging for IT and telecom sectors.

IT sector could face challenge from the strengthening of Rupee over the US dollar. INR has appreciated 2.6 per cent against US dollar over the current quarter and a rough approximation suggests around 70-80 basis points of margin compression quarter-on-quarter for the IT sector.

In telecom services, the Telecom Regulatory Authority of India has recently proposed cut in roaming tariffs that is likely to amount 200 basis points compression in wireless EBIDTA margin and is expected to be implemented from January 1, 2007.

However, the stock market and MCSI index have shown good performance in the past month. The consensus earnings estimates for the MSCI India have seen marginal revision of 0.3 per cent and the stock market re-rated a robust 7.9 per cent over the last month.

The surge seen in the equity market was very much driven by strong foreign flows and lower bond yields where, financial, telecom and IT sector stocks have outperformed, while consumer staples and materials lagged behind.

In the MCSI India index, healthcare, IT, telecom and energy sectors have seen upward revisions, while estimates for industrials and consumer were reduced, the report said.

An analysis of last six year's trend of sectoral performance during the December-January period, suggest relative better performance by industrial, energy and financial, whereas IT and healthcare have underperformed.

This trend is not surprising says J P Morgan, as activity levels in the Indian economy pick up into second half after the monsoon, rising to a pick in early summer.

Likewise the relative under performance of IT services can be explained due to the onset of the year end festive season, wherein flow of new orders dries down.