According to a Nomura Financial Advisory and Securities (India), FY10 would be a year of one of the biggest earnings surprises. The correlation between economic activity, as provide by the Index of Industrial Production (IIP), and corporate profit growth has been very strong in the past. The acceleration in IIP is a major positive for earnings. A very conservative scenario of no growth in industrial output from June this year to March next year takes it to 4.5% y-y in FY10. This contrasts with an average rise of 19% in the IIP index from March to June since 1992.

The report states further evidence to support bullish call on earnings from corporate tax collections data, which, as of July, indicate about 30% rise in corporate earnings in FY10. The brokerage has made a case for a strong rebound in Sensex earnings in FY10 of up to 30% based on a top-down and bottom-up analysis of earnings. In 1Q FY10, adjusted net earnings of Sensex companies rose by 13.6% y-y, an exceptional growth considering that the base for these earnings was the pre-Lehman Brothers crisis Jun-08 quarter.

Most of the earnings surprises have come through owing to strong gains in operating margins across sectors. Therefore, earnings growth should accelerate in the remaining three quarters of FY10 as the base effect of the crisis period comes into play. A top-down analysis by Namura suggests that a base-case earnings growth of Sensex of around 33% y-y in FY10.