Goldman Sachs: Across the Board: 3QFY11E preview

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Goldman Sachs: Across the Board: 3QFY11E preview


3QFY11E earnings preview: India coverage
In this note, we aggregate data for our coverage
in India (121 stocks across 15 sectors) to quantify
expectations for 3QFY11E.
Further deceleration in growth in 3QFY11E –
19% sales growth; 14% EBIT growth
While we expect a modest deceleration in revenue
growth (ex. Energy) in 3QFY11E at 19% vs. 20% in
2Q, escalating input cost pressures coupled with
higher interest expense, would lead to net income
growth of 16% (vs. 23%/26% in 2Q/1Q). We estimate
EBIT margins to contract 100 bp yoy and EBIT
growth to moderate to 14% (vs. 18%/36% in 2Q/1Q).
On a qoq basis, we estimate sales/EBIT to rise by
6%/11%, largely driven by Cement, Metals, Infra.

Cost pressures hit margins across sectors
We expect 11 out of 15 sectors to witness yoy
margin contraction in 3Q, led by Cement, Telecom
and Autos. While most sectors would witness an
EBIT growth in 3Q led by topline growth, we
expect Cement and Telecom to report a yoy EBIT
decline as cost pressures weigh on profits.
Indian valuations reflect robust growth
expectations; focus to shift to FY12 outlook
Despite the recent pullback, India continues to be the
second most expensive market in Asia (25% prem to
AEJ), reflecting robust growth expectations. Against
the backdrop of inflationary and policy headwinds,
we believe India Inc’s FY12 earnings outlook would
be in focus—key risk being rising input /interest
costs. GS Global ECS Research team is underweight
India on stretched valuations, inflation pressures and
earnings downgrades. For our coverage, we forecast
17%/25% growth in sales/EBIT in FY12E.
Our top Buys to deliver 32% sales growth
and 37% net income growth this quarter
In our India Handbook, dated Dec 3, 2010, we
highlighted our best ideas for superior growth,
improving returns, compelling relative valuations.
We believe our top ‘Buys’ will outperform our
broader coverage in FY11E and deliver aggregate
23% topline growth and 47% growth in EBIT. For
3QFY11E, we expect our top picks to deliver an avg.
32% sales growth and 27% EBIT growth. Our top
picks which offer an avg. 3-yr EBITDA CAGR of 28%
are at a 15% disc to MSCI India’s 12-m fwd P/E.



Sector 3QFY11 expectations
Automobiles
> We expect margins and EPS to be sequentially flat on average for the sector. Stocks likely to be under focus
include: - 1) Hero Honda – expect sequential earnings growth due to robust sales volumes reported for the
quarter. 2) Ashok Leyland - likely to see sequential and yoy earnings decline due to seasonal demand weakness,
particularly post the expiry of Sept 30 2010 new emission norms deadline.
> We also believe that the market is likely to focus on FY2012E outlook, amid concerns on the macro front,
mainly inflation and potential monetary tightening
Consumer Staples
> We are looking for improvement in sector gross margins following 1. Reduction in raw material prices
following a robust monsoon; 2. Relative easing of price war, particularly in HPC, allowing companies to increase
prices.
> More updates on consolidation in the industry following news articles of acquisitions in India and abroad.
Fertilizers
> We expect weaker volumes due to unseasonal rainfall in 3Q.
> We expect Soda ash margins to narrow due to higher costs.
Financials
> We expect another strong set of operating numbers for the quarter with 30% PAT growth for the sector driven
by strong NII growth (20% yoy growth)
> Margins to remain stable/improve for the retail borrowers, and a peak in NPL cycle implying improving asset
quality going forward.
Healthcare
> We expect average revenue growth of 16% yoy in 3QFY11 for our coverage universe. Revenue growth is
normalized in this quarter due to lack of major one-off opportunities (except Ranbaxy).
> We expect margins to remain stable, however, grow at a lower pace than the revenue growth as high margin
one-off revenues are replaced by core revenues from base products.
Industrials
> The heavy equipment supply space in India is reaching a critical mass and various domestic companies will
now compete to grow market share and presence. This, coupled with the continuing competitive pressure from
China ($15bn worth power equipment orders announced on Chinese players in the last 3 m) will likely affect
order inflows for incumbents, margins and returns in the interim
> We expect execution to pick up post monsoons, in-line with the stronger execution seen in 2H historically for
these companies. However, margins are likely to decline from 1HFY11 levels as the impact of increase in raw
material costs kicks in
Infrastructure
> We expect execution to pick up in the seasonally strong 2H. However, margins could be under pressure due to
increase in raw material costs.
> We expect order inflows to be stronger for these companies in Q4, given that roads segment is a key driver of
order inflow growth for these companies - 14,000 Kms of road projects are in various stages of award, which
we expect to be awarded in 4QFY11E


Sector 3QFY11 expectations
IT Services
> We expect another strong quarter, primarily led by the large cap names. We expect 4.8% sequential revenue
growth despite this quarter being seasonally weak. A 3.5% appreciation in INR should be mitigated by supportive
cross currency movements and robust volume growth.
> We would look out for the indications of attrition easing out as we believe that it has peaked out in the
previous quarter. Hence, we do not see significant downside risks to the margins as most of the wage hikes for
the year are behind us. We would also watch out for the outlook on 2011 budgets and pipeline and initial
indications of the size of budgets finalized by the corporates.
Materials: Cement
> While Cement companies will witness a sequential growth in EBIT, led by higher realizations, cost pressures
continue to weigh on profits. As highlighted earlier, the recovery in cement companies' profits would be gradual,
amid competitive pressures.
> On a YoY basis, we expect EBIT to decline by 26%, with a 600bps contraction in EBIT margin for our coverage
group.
Materials: Metals
> For steel companies, we expect a modest improvement in margins on a qoq basis, amid flat realizations and
lower coking coal costs. Volume growth would be muted on a qoq basis.
> Inspite of increase in base metal prices (up 10%-20% qoq), we expect profitability to remain muted, on higher
input costs.
Media
> We foresee strong advertising growth for the broadcasting companies to continue in 3QFY11E, as seen in
1HFY11.
> The DTH companies have seen extremely strong subscriber additions over Q3FY11 – the impact of this on
ARPUs and profitability would be the key thing to watch out for
Oil & Gas
> Losses will continue for oil marketing companies as government subsidy sharing regime remains unclear, in
our view
> We expect ONGC, OIL earnings to be boosted by high other income but should remain below the required
FY11E run rate. GAIL is likely to report strong numbers again on improved petchem performance. RIL 3QFY11
earnings will remain sluggish but 4QFY11 is likely to be better from higher refining and petchem margins, in our
view.
Real Estate
> We are expecting a healthy topline growth of 33% yoy as area under execution increases for various
developers and revenue booking for Indiabulls real estate becomes significant. We look for improvement in
operating cash flows on a qoq basis.
> DLF will likely show a sharp jump in margins on a qoq basis on account of higher proportion of revenues from
plot sales.
Telecom
> We expect the cellular revenue growth in 3QFY11 for Bharti/Idea to be strong led by steady net adds, growth
in MOU and stable tariffs. EBITDA margins, however are likely to decline qoq for Bharti (partially driven by higher
operating costs from African operations) and RCOM (due to higher opex), while we expect Idea to report a slight
improvement in 3QFY11 driven by scale benefits.
> As the procurement issues were resolved, we expect capex spending for the operators to pick-up after couple
of quarters of weak spending.
Utilities
> We expect the companies to report short term rates in the range of Rs3.50/kwh for this quarter, much below
the consensus expectations. Further, companies are likely to guide the short term rates of Rs4/kwh for FY12E
due to 1) supply exceeding the demand 2) Weak finances of SEBs, versus the consensus estimates of Rs5/kwh.
> Though the commissioning of new capacities will result in volume growth, we expect the utilization levels to
be lower in 3QFY11 than the street estimates due to low offtake by states on account of better than expected
monsoons and the weak finances of state SEB’s.