The recent earnings season resonated of the healthy growth momentum in sales, order pipelines and earnings in the structurally high-potential sectors of our economy.
Positive domestic investment and consumption themes were prominent, with the banking sector delivering strong operating performance, FMCG and auto companies witnessing above-expectation top line growth and infrastructure companies declaring healthy order book accretion.
Banks benefited from a sharp revival in credit demand, with the growth rate doubling to more than 20 per cent in eight months.
Asset quality is also improving rapidly for private banks (and should improve for PSU peers, too, in a couple of quarters).
I expect earnings growth momentum to be strong, especially for the large private sector banks.
Thus, we are overweight on banks, followed by infrastructure and capital goods companies, where order book growth is already quite high and in the coming quarters, execution is also expected to ramp up substantially.
The quarter also saw some of the largest acquisitions by Indian companies, with both Jaguar and Novelis delivering a good set of numbers.
Ironically, Bharti saw the first quarter of negative impact due to interest costs of the Zain acquisition, though eventual wealth creation from the deal due to its leveraged buyout is likely to be substantial.
Domestic volume growth in terms of minutes of usage was as high as expected.
We were bullish prior to the results on export sectors due to global revival and the results did not disappoint.
Top line growth in IT companies came in higher than expected, with annualised growth crossing 20 per cent levels in dollar terms.
Pharma also delivered healthy 13 per cent top line growth, almost twice as high as expected.
Sectors such as pharma, auto and FMCG and steel are seeing margin pressures.
The steel sector also suffered during the quarter, due to large-scale cheap Chinese imports and, as expected, cement companies witnessed substantial decline in prices, especially in the south.
However, in supply-constrained industries such as tyres and steel, over the next couple of years, we see improving profitability driving substantial upsides in several stocks.
All in all, a healthy earnings season that should provide direction to the markets in the coming year.
Valuations look fair, but with 26 per cent growth in 2010-11 in Sensex EPS to 1,061 and equally strong outlook for 2011-12, the markets will soon be discounting a much higher base of earnings.
So, it makes sense to invest in high-growth sectors such as banking, infrastructure, capital goods and pharma, where several companies are still available at reasonable valuations in the context of the high growth expected over the coming years.
The writer is MD - Institution, Angel Broking
