The first earnings season of 2008 is upon us and we are entering it at all-time highs. Over the last two months the market has focused on various triggers: P notes, global liquidity, local liquidity, politics, Fed policy and global markets and now we have arrived at the most fundamental of them all. The market is approaching this reporting season with a quiet confidence.
The expectation is that the boat will not be rocked; it will be another quarter of steady, robust earnings growth.
Strangely, nowadays earnings do not seem to be such an obvious price setter. Liquidity and overall global sentiment seem to be more powerful drivers as long as no major shock comes in from the earnings front.
To be sure, earnings growth has been ahead of expectations even in the last two quarters. Yes, there has been some deceleration along expected lines, but the overall picture for FY08 will be better than what most analysts had pencilled in at the start of the year. The current quarter should only reinforce this view. The first few numbers are encouraging. Axis Bank just turned in a terrific set and most other banks should also report better than expected results. Results of iGate and Mastek indicate that there should not be any shockers from large-cap IT either. The future maybe cloudy but this quarter should be fine. There maybe positive surprises from FMCG this quarter, led by the biggies ITC and HUL.
Reliance and ONGC should both surprise, in turn pulling up overall Sensex EPS estimates. In metals, steel should be good, but non-ferrous companies may struggle on account of lower commodity prices and TC/RC margins. Capital goods and infrastructure companies have lost some momentum in recent months, so they need to come in with a sparkling set to wake investors up. Telecom results should be okay, but the market is more focused on the sector environment there. Real estate stocks have had a strong quarter and while the valuation debate remains, this quarter should see strong delivery on topline and bottomline.
Earnings from mid-caps will be absolutely crucial as the valuation gap between mid-caps and large-caps have closed substantially. For these stocks to remain at current price levels, a strong earnings momentum needs to be demonstrated.
Any earnings slippage could be punished with sharp selldowns.
The gut feeling is that this earnings season too will pass without too many accidents and by the fag end of it, the market's attention would have turned to the Januray Fed meet and thereafter the Union budget. As they say: innocent till proven guilty; earnings too are assumed to be okay unless proven otherwise.
Executive Editor, CNBC-TV18