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India strategy
3Q in-line but skewed
Event
Strong results; in line with expectation: 3Q11 results for our coverage
universe (ex oil & gas) were broadly in line with our expectation, with 25%
YoY growth in both revenues and profit. EBITDA margins reduced marginally
by 40bp and we expect further compression in 4Q. While on an aggregate
level results were in line, the majority of companies surprised negatively on
our analysts’ expectations. We believe that metals and IT should continue
their robust trend in 4Q, with banks, autos and consumer stocks to decline.
Impact
Strong quarter for autos, metals and infra; banks surprise positively:
The third quarter, which included the long festive season, saw strong sales for
consumer discretionary sectors like autos. Banks surprised with better-thanexpected net interest margins (NIMs) that helped profits to grow by 25% YoY,
700bp better than our expectation. Cement, pharma and power showed
declines in profits, thereby dragging down aggregate growth figures.
As expected, earnings see downward revisions: The 3mma trend in FY11
and FY12 earnings estimates had been indicating downside risks since
September, which have now materialised (Figs 3-10). While on an aggregate
basis, ex ONGC Sensex FY12E is now down just 1% but sectors like cement,
real estate and consumer have seen the most downgrades.
But still Sensex FY11 earnings estimates are at risk: The first nine months
of FY11 have achieved around 66% of the full-year consensus estimate,
leaving the remaining 34% for the last quarter. Historically, the last quarter
typically contributes around 27–28% of full-year earnings which puts a large
part of 4Q11 earnings at risk.
Earnings analyser – downside risk to margins and interest expense: As
per Macquarie’s regional Microstrategy report, Here there be monsters…and
treasure, dated 21 February 2011, consensus FY12 EPS growth forecast for
MSCI India has muted from 20.49% a month ago to 18.77% post results (Figs
1 and 2). This has been driven by now lower assumption of EBITDA margins
and higher interest cost. However, we believe that analysts are yet to factor in
the rapid rise in raw material costs and interest costs fully.
Outlook
Valuations look reasonable, but be selective: Earnings downgrades, along
with dented market sentiment, have brought about a good correction in the
market post which valuations look a lot more reasonable at 14.5x PER on
FY12E. We think markets will consolidate at these levels before making an
upward move in the second half of the year, aided by better clarity on the
investment cycle, visible steps by the government on controlling inflation and
outcomes of upcoming state elections.
Focus on top 10 stocks: We recommend selected exposure to our top 10
stocks, which are leaders in their space and have much better earnings
growth visibility. They have outperformed MSCI India by 400bp and Sensex
by 170bp since inception in August 2010
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India strategy
3Q in-line but skewed
Event
Strong results; in line with expectation: 3Q11 results for our coverage
universe (ex oil & gas) were broadly in line with our expectation, with 25%
YoY growth in both revenues and profit. EBITDA margins reduced marginally
by 40bp and we expect further compression in 4Q. While on an aggregate
level results were in line, the majority of companies surprised negatively on
our analysts’ expectations. We believe that metals and IT should continue
their robust trend in 4Q, with banks, autos and consumer stocks to decline.
Impact
Strong quarter for autos, metals and infra; banks surprise positively:
The third quarter, which included the long festive season, saw strong sales for
consumer discretionary sectors like autos. Banks surprised with better-thanexpected net interest margins (NIMs) that helped profits to grow by 25% YoY,
700bp better than our expectation. Cement, pharma and power showed
declines in profits, thereby dragging down aggregate growth figures.
As expected, earnings see downward revisions: The 3mma trend in FY11
and FY12 earnings estimates had been indicating downside risks since
September, which have now materialised (Figs 3-10). While on an aggregate
basis, ex ONGC Sensex FY12E is now down just 1% but sectors like cement,
real estate and consumer have seen the most downgrades.
But still Sensex FY11 earnings estimates are at risk: The first nine months
of FY11 have achieved around 66% of the full-year consensus estimate,
leaving the remaining 34% for the last quarter. Historically, the last quarter
typically contributes around 27–28% of full-year earnings which puts a large
part of 4Q11 earnings at risk.
Earnings analyser – downside risk to margins and interest expense: As
per Macquarie’s regional Microstrategy report, Here there be monsters…and
treasure, dated 21 February 2011, consensus FY12 EPS growth forecast for
MSCI India has muted from 20.49% a month ago to 18.77% post results (Figs
1 and 2). This has been driven by now lower assumption of EBITDA margins
and higher interest cost. However, we believe that analysts are yet to factor in
the rapid rise in raw material costs and interest costs fully.
Outlook
Valuations look reasonable, but be selective: Earnings downgrades, along
with dented market sentiment, have brought about a good correction in the
market post which valuations look a lot more reasonable at 14.5x PER on
FY12E. We think markets will consolidate at these levels before making an
upward move in the second half of the year, aided by better clarity on the
investment cycle, visible steps by the government on controlling inflation and
outcomes of upcoming state elections.
Focus on top 10 stocks: We recommend selected exposure to our top 10
stocks, which are leaders in their space and have much better earnings
growth visibility. They have outperformed MSCI India by 400bp and Sensex
by 170bp since inception in August 2010
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