Road to Recovery: Cement and financial services firms to drive BSE 100 companies' earnings
Cement & financial services companies are likely to drive earnings growth of BSE 100 index over next 2 financial yrs given expectations of a pick-up in investment in H2 of FY14.
A study by ET Intelligence Group shows analysts foresee 19-20 per cent growth in earnings of cement and financial services companies, compared with 13-16 per cent growth for companies from other sectors in the index.
Earnings of cement companies in the index declined 6 per cent over 2012-13 and 2013-14 owing to economic slowdown, while companies engaged in financial services posted a modest growth of 9 per cent. In the financial services sector, state-run banks are expected to record higher growth than private sector banks. Most analysts believe a pick-up in investment will ease the pressure on stressed assets of the banks.
The reduction in non-performing assets (NPAs) will lead to lower slippages and result in higher earnings growth. Goldman Sachs, in a report on March 27, said, "Macro-recovery and potential for post-election reforms should see a gradual reduction in stressed loans on lower slippages and higher recoveries. Non-performing loans (NPLs) are likely to fall sharply to 4.7 per cent by FY18 from 9.3 per cent in FY13 and returns on assets (ROA) are expected to recover to 1 per cent from 0.57 per cent currently."
The optimism hinges on analysts making lesser provisioning for banks as investments rise and visibility of earnings increase with the next government playing an active role in facilitating clearing of various projects across sectors. So, if analysts provisioned Rs 30 for a loan of Rs 100 earlier, they could provision Rs 20 if they expect higher earnings. This will increase earnings forecast of banks.
The largest public sector bank by assets, State bank of India (SBI), is expected to report 25 per cent growth in earnings in 2014-15 and 17 per cent in 2015-16. Other state-run banks such as Canara Bank, PNB and Union Bank are likely to post 25 per cent growth in the current fiscal.
Despite the current rally, in which most public sector banks have gained 20-30 per cent compared with the year-ago prices, stocks are still trading 0.7-0.8 times on a one-year forward book value compared with the 10-year historical average of 1.2 times.
As for the cement sector, analysts believe fall in demand has bottomed out and larger companies in particular will be able to influence cement prices and report higher growth once investments start coming in across sectors. Cement demand has fallen sharply over the past three years. According to a study by research firm Nirmal Bang, demand for cement has fallen below the GDP growth for the first time in 25 years.
While the GDP is at 5 per cent, cement demand is around 3 per cent. In good market conditions, cement demand in India is expected to be 1.28 times GDP growth. Analysts say once the new government ushers in infrastructure investments, cement demand will revive.
Besides, the valuations of cement companies are also attractive due to low growth in the past two years. Most analysts feel valuations of large cement companies do not reflect the growth in cement demand expected in the next two years.