Sensex remains expensive against world market

The average price-to-earnings ratio of the 30-scrip Bombay Stock Exchange benchmark, the Sensex, though currently just above the historical average of 15, has been at the higher side as compared to key world indices.

Analysts estimate aggregate net profit at Rs 194,853 crore for 2011-12, which brings down the Sensex P/E marginally to 14.81 from the current 15.62.

For 2012-13, domestic and foreign brokerages expect the net profit of Sensex companies to grow around 14 per cent, to Rs 222,512 crore.

So, at the current market capitalisation of Sensex companies, the one-year forward P/E is just around 13.

The European and US markets are comparatively cheap, trading at a P/E of 12-13 times earnings for calendar year 2011 and eight to 13 times for CY11.

However, the earnings growth for US and European markets are likely to be double-digit, marginally below ours.

According to a Bloomberg estimate, the earnings of Dow Jones companies are likely to be up 11.1 per cent in CY12, compared to 14 per cent for the 30-scrip Sensex.

The index-based companies in England, Germany and France are expected to show earnings growth of 11-12 per cent in CY12.

ESTIMATES FOR SENSEX COMPANIES
Name	Sales (Rs  crore)		Net profit (Rs  crore)
	FY 11-12	FY 12-13	FY 11-12	FY 12-13
Bajaj Auto	19751.47	22600.63	3152.8	3531.44
Bharti Airtel	71775.22	82483.76	4896.74	8133.2
BHEL	48481.66	49315.76	6462.33	6280.83
Cipla	7009.30	8022.72	1109.38	1339.09
Coal India	61743.62	67715.11	14658.40	16816.03
DLF	9545.13	10571.78	1438.23	1784.83
GAIL	39447.87	43662.90	3889.68	4107.76
HDFC	6060.90	7355.77	4020.37	4879.77
HDFC Bank	17448.92	21268.72	5157.95	6439.60
Hero MotoCorp	23187.23	26138.30	2386.11	2757.95
Hindalco	77579.57	80539.18	3100.16	3164.93
HUL	22752.47	25795.13	2698.59	3172.92
ICICI Bank	18078.79	21486.25	6365.50	7545.86
Infosys	34316.94	40234.47	8416.17	9843.22
ITC	24869.43	28735.17	5966.41	6808.99
JSPL	17257.85	19546.34	3989.73	4427.85
L & T	54040.38	61259.44	4240.50	4696.38
M & M	29891.70	34657.53	2666.44	2987.25
Maruti Suzuki	34821.80	42593.50	1508.28	2346.90
NTPC	61621.70	70797.24	8902.23	9724.55
ONGC	146602.30	162867.94	26887.29	28469.74
Reliance Ind	330858.54	327658.09	20712.11	21756.01
SBI	55552.24	62490.73	11437.92	14303.16
Sterlite Ind	39653.98	44617.93	5420.71	6153.16
Sun Pharma	7686.95	9015.70	2346.34	2706.71
Tata Motors	160261.79	181179.33	10600.79	11969.43
Tata Power	23556.35	27941.30	1769.88	1749.78
Tata Steel	126405.48	128024.88	4213.68	5068.76
TCS	49199.13	58118.31	10779.15	12779.71
Wipro	37705.51	44048.08	5650.25	6634.33

Only five Sensex companies - Hindalco, ONGC, Sterlite, Tata Motors and Tata Steel, from the automobile, metals and oil/gas sectors-are trading at a P/E multiple below 10 now and also for estimated net profit for FY13.

Information technology and pharmaceutical stocks, which are trading above an average Sensex P/E of 15.6, will continue to be most expensive stocks in the Indian market, on account of their status as foreign exchange earners and a strong investor base, mostly foreign institutional investors.

So, Infosys, TCS, Wipro and Sun Pharmaceuticals will remain expensive, even on the basis of FY13 net profit.

Expectation
Equity analysts expect substantially moderate earnings growth in FY13.

Citigroup estimates for FY12/FY13 have moved up modestly after the third-quarter earnings season.

According to Citigroup analysts, while earnings have likely bottomed, the upward revision cycle is likely to be more staggered than the market mood now suggests.

The Citigroup guidance revision tracker (seven per cent raise, 15 per cent reduce and 78 per cent unchanged) points to more cautious corporate sentiment.

Analysts at Kotak Securities expect earnings downgrades to continue and it is too early to focus on upgrades.

In fact, analysts fear downgrades for FY13 on account of slippages and non-performing loans in the banking sector, imposition of mining tax on profits of metals and mining companies, and lower-than-expected global GDP growth.

An estimated third of 2012-13 net profits of the BSE-30 Index are linked to global factors such as global GDP growth and global supply balance of commodities.

The 2011-12 free-float earnings per share estimate for the BSE-30 Index stands at Rs 1,090 against Rs 1,110 at the start of the the third quarter results season.

On a full-float basis, analysts expect the FY12 EPS to grow 12.1 per cent and the FY13 estimated EPS to grow 16.6 per cent, against 13.8 per cent and 17.2 per cent, respectively, at the start of the results season.

"We have seen consistent downgrades through the year, which do not inspire much confidence that we are at the end of the downgrade cycle," Kotak analysts indicated in the strategy report.

The direction of the market, according to equity analysts, would depend on three critical factors, governance in India, global liquidity and earnings. Improved governance and continued strong global liquidity may propel stocks to above their fair valuations.

On the other hand, continued weak governance and earnings disappointments may lead to some of the high-beta names, which have seen a strong rally over the past few weeks, retracing their recent gains.

In the latest run of bi-annual update on the consensus ratings, the sell-side conviction level on Morgan Stanley coverage stocks has fallen to 0.3 – a 22-month low from 0.42 in August 2011.

A score greater than 0.3 implies a "buy" or equivalent rating, while a score of less than -0.1 implies a sell or an equivalent rating. Across market cap segments, it was noticed that consensus views are highly dispersed – with no particular market cap segment standing out as the most bullish or bearish call for consensus.

Going ahead, analysts at Emkay Global Research see sales growth slowing to 10-15 per cent, compared to the robust 20-23 per cent delivered over FY11-12.

This will put pressure on net profit growth and margins.

Emkay indicated the earnings downgrade cycle is not yet over and would continue with a similar velocity over the next four quarters, led primarily by sharply slower sales growth and partly through an elevated cost structure.

Motilal Oswal Research expects FY13 aggregate net profit growth of 17 per cent and sales growth of 10 per cent.

The operating margin is expected to expand 110 basis points, after having shrunk 190 bps so far in FY12.

All sectors are expected to deliver positive growth, with huge positive growth swings in pharma, telecom, infrastructure, real estate, metals and auto.

The expected FY13 Sensex EPS of Rs 1,258 is up 13 per cent over FY12, despite a 15.7 per cent downgrade from Rs 1,492 expected a year before.

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