Nomura research: India: 2Q FY11 earnings preview

2Q FY11 earnings preview
􀁣 Summary
Not expecting earnings acceleration
We do not expect the earnings cycle to go into an upgrade mode following 2Q FY11
results. While domestic demand has been reasonably strong, and may have indeed
got a boost from a very good monsoon, there are headwinds, which on an overall
basis would keep earnings cycle from accelerating.
The first of these issues relates to some impact of a slow pick up in the capital
expenditure cycle. This would likely mean that results of capex-related plays would
remain subdued. Specifically, we would likely see subdued results from construction
and cement companies. Secondly, corporates would feel some headwind from
appreciating currency and tight monetary policy. Therefore for exporters, earnings
could be a bit weaker. Rising 10-year yields are generally not great for banks, even
though we note that selective banks could show margin surprises on the positive side.
Amongst the sector laggards, telecoms’ earnings base effect still continues to drag
earnings down (the effect of competition started to show only in 3Q last year and
stabilised only post 4Q FY10). Cement companies could suffer from a pricing collapse
in the quarter.
Sectors which continue to do much better than average include autos and consumers,
which continue to exhibit strong growth on strong demand growth and help from better
monsoons. We note that overall consumer sector numbers would be depressed on
account of Hindustan Unilever, which we forecast will show a drop in earnings.
We have built in a 50% subsidy compensation from the government for oil marketing
companies and that coupled with Cairn’s earnings has lifted the overall sector earnings
growth considerably. In case the subsidy compensation does not come through,
quarterly earnings would be much weaker.
Net profit: Manufacturing companies +14.9% y-y / 47.2% q-q (vs. -22.3% y-y / -41.2%
q-q actual in 1Q FY11); Manufacturing ex-oil and gas +3.7 % y-y / +6.8% q-q
(vs. -+13.0% y-y / -20.0% q-q actual in 1Q FY11); Banks +25.7% y-y / +4.9% q-q
(vs. 26.2% y-y / 13.6% q-q actual in 1Q FY11).
Net sales: Manufacturing companies +22.0% y-y / 7.8% q-q (vs. +24.1% y-y / -5.1%
q-q actual in 1Q FY11); Manufacturing ex-oil and gas +18.2% y-y / 9.3% q-q
(vs. +15.1% y-y / -10.3% q-q actual in 1Q FY11).
Core EBITDA: Manufacturing companies +25.4% y-y / 31.7% q-q
(vs. -6.5% y-y / -27.4% q-q actual in 1Q FY11); Manufacturing ex-oil and gas +11.7%
y-y / 9.1% q-q (vs. 14.3% y-y / -13.1% q-q actual in 1Q FY11).
EBITDA margin: Manufacturing companies 17.0% (vs. 13.9% actual in 1Q FY11);
Manufacturing ex-oil and gas 22.2% (vs. 22.3% actual in 1Q FY11).