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India
Equity Research
Across the Board: 4QFY11E preview
4QFY11E earnings preview: India coverage
In this note, we aggregate data for our coverage
in India to quantify expectations for 4QFY11E.
4QFY11 sales growth of 20%, 10 out of 15
sectors to report margin contraction
We continue to see healthy revenue growth (ex.
Energy) in 4QFY11E: 20% vs. 21% in 3Q, with EBIT
growth to accelerate to 19% in the seasonally
strong 4Q (vs. 12% in 3Q). On a qoq basis, we
estimate sales/EBIT to rise by 4%/16%, largely
driven by Industrials, Healthcare, Metals and
Cement.
We expect 10 out of 15 sectors to report yoy
margin contraction, with a decline in Healthcare
(lack of high margin product launches), Materials
(cost pressures) and Telecom (competitive
pressures). However, Utilities, Consumer Staples
and Financials would witness modest margin
recovery, driven by execution, price increases and
higher interest rates respectively.
Robust valuations, focus on FY12 margins,
GS 8% below consensus
With Indian valuations reflecting robust growth
expectations – second most expensive in Asia -
India Inc’s outlook on FY12 earnings would be in
focus. With consensus building in margin
expansion (GS expecting largely flat margins) in
FY12E, there are potential downside risks to
estimates, amid inflationary pressures. Note that
GS is 8% below IBES consensus for FY12E.
Against this backdrop, we highlight our top picks,
which we expect would deliver strong sales
growth and margin expansion.
Our top ‘Buys’ to deliver 31% EBIT growth in
FY2012E, buying opportunity on valuation
, dated Feb 15, 2011, we India Handbook In our
highlighted our best ideas for superior growth,
improving returns and compelling relative
valuations. We believe our top ‘Buys’ will
outperform our coverage in FY12E and deliver
15% yoy top-line growth and 31% growth in EBIT.
Our top picks are trading in line with MSCI India’s
12-m fwd P/E, and given their growth potential, we
believe this is a good buying opportunity.
4QFY11 expectations for sectors under coverage Exhibit 11:
Source: Goldman Sachs Research
Sector 4QFY11 expectations
Automobiles
We expect 39% yoy growth in net income for the sector (21% ex-Tata Motors), driven by 13% aggregate >
yoy revenue growth. Sequentially, we expect net income to grow by 3% qoq, driven by 1% qoq revenue
growth.
We believe that in FY2012 the sector is likely to see twin headwinds of commodity cost inflation and >
moderation in demand. We believe market will focus on the management commentary on earnings outlook
and margins for 1Q and FY2012.
Consumer Staples
Looking for updates on raw material price inflation and impact on margins. Also looking for news on price >
increases to offset rising costs.
More updates on consolidation in the industry following news articles of acquisitions in India and abroad. >
Fertilizers
We expect earnings growth for United phosphorus on the back of seasonally strong quarter, with volume >
growth primarily from the US and Europe markets.
Financials
We expect strong set of operating numbers for the quarter with 38% PAT growth for the sector driven by >
strong NII growth (30% yoy growth)
Margins could come under pressure starting this quarter with retail lenders, likely to see relatively more >
pressure v/s wholesale lenders given lack of pricing power as retail deposit rates have caught up with
wholesale rates
Healthcare
We expect average revenue growth of 11% yoy in 4QFY11 for our coverage universe. Revenue growth will >
remain stable compared to the previous year's quarter. Ranbaxy (for Aricpet) and Sun (for Taro integration)
will be the most focused earnings releases.
We expect EBIT growth to slow down at 5% yoy for the Indian healthcare sector in 4QFY11 due the lack >
of high margin one-off product launches in the quarter.
Industrials
Overall order inflows have been weak for the sector, given delays in project awards. Guidance on order >
inflows for FY12E will be a key metric to watch
Impact of higher commodity prices on margin performance during the quarter and for FY12E >
Infrastructure
Weak order inflows have been a key feature of the infrastructure segment in Q4. Updates on order inflow >
visibility for FY12E would be key
We expect steady toll collections on operational projects and strong execution on existing order backlog in >
es ni pa m co er uctu r ast f infr o snoi s ivi d n oi uct r st n co eht
IT Services
We expect a strong quarter for the IT services sector led by the large caps. We expect a 6.9% qoq >
revenue growth on the back of sustained volumes and currency tailwinds.
Among the major fundamental drivers to watch out for this quarter are (1) Outlook for FY2012 and >
management, labor dynamics to ease off, hiring guidance to remain robust, (3) BFSI / Retail may contniue to
grow, telecom may recover, (4) Japan crisis may pose a one-time marginal impact.
Materials: Cement
We expect cement companies to report improved performance this quarter, with realizations up 5-7% qoq. >
line of the companies are likely to witness 7-10% yoy growth. ‐ Top
While we expect margin contraction of 6% yoy, on a sequential basis, all companies will see margin >
pressures would continue to weigh on the sector, expansion (+500 bps), led by higher realizations. Cost
leading to subdued margin recovery, in spite of near-all time high realizations.
Materials: Metals
For steel companies, we expect significant margin expansion (on a sequential basis), on higher realizations >
(Steel prices up 12% qoq). Volumes would be strong qoq.
For Base Metals, we expect cost pressures to weigh on alumnium results. Base metal realizations and >
volumes will be strong on a sequential basis.
Media
Advertsing revenues are likely to be negatively impacted in Q4FY11, given big ticket sporting events >
the last couple of months. The impact of this on The DTH space has seen strong subscriber additions over >
ARPUs would be the key thing to watch for DTH companies.
Oil & Gas
Losses will continue for oil marketing companies as government subsidy sharing regime remains unclear, >
in our view
net realisations. GAIL is likely to report strong ONGC, OIL earnings is expected to be boosted by higher >
ngs. RIL 4QFY11 earnings likely to be better from operational numbers but subsidy burden may impact earni
higher refining margins, in our view.
Real estate
Expect higher margins for DLF as higher proportion of sales from plotted developments >
HDIL margins to contract on a qoq basis as TDR realisations have dropped >
Expect revenues to be driven by increased execution of projects >
Telecom
For 4Q, we expect Bharti to show better qoq revenue/EBITDA growth as compared to Idea (we estimate >
for Idea). This is because we expect Idea to have 3%/4% qoq revenue/EBITDA growth for Bharti and 2%/1%
higher impact from MNP, based on management commentary, as Idea appears to have renegotiated tariffs
for postpaid operators.
Although we also expect Bharti to have renegotiated tariffs downwards, we do not expect as high impact >
on overall revenues for Bharti given it is not a pure wireless operator like Idea.
Utilities
to weak SEB finances sed on suppressed demand due We expect decline in earnings (YoY and QoQ) ba >
and inter-state transmission constraints. Average thermal PLF has declined 300 bps YoY in 4QFY11
Short-term rates were lower 16% QoQ (bilateral and UI average) due to lower demand. We expect >
companies to report merchant rates at ~Rs 3.30/- per unit.
Capacity addition of 1.4 GW in the quarter would partially offset the decline in generation due to lower >
demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India
Equity Research
Across the Board: 4QFY11E preview
4QFY11E earnings preview: India coverage
In this note, we aggregate data for our coverage
in India to quantify expectations for 4QFY11E.
4QFY11 sales growth of 20%, 10 out of 15
sectors to report margin contraction
We continue to see healthy revenue growth (ex.
Energy) in 4QFY11E: 20% vs. 21% in 3Q, with EBIT
growth to accelerate to 19% in the seasonally
strong 4Q (vs. 12% in 3Q). On a qoq basis, we
estimate sales/EBIT to rise by 4%/16%, largely
driven by Industrials, Healthcare, Metals and
Cement.
We expect 10 out of 15 sectors to report yoy
margin contraction, with a decline in Healthcare
(lack of high margin product launches), Materials
(cost pressures) and Telecom (competitive
pressures). However, Utilities, Consumer Staples
and Financials would witness modest margin
recovery, driven by execution, price increases and
higher interest rates respectively.
Robust valuations, focus on FY12 margins,
GS 8% below consensus
With Indian valuations reflecting robust growth
expectations – second most expensive in Asia -
India Inc’s outlook on FY12 earnings would be in
focus. With consensus building in margin
expansion (GS expecting largely flat margins) in
FY12E, there are potential downside risks to
estimates, amid inflationary pressures. Note that
GS is 8% below IBES consensus for FY12E.
Against this backdrop, we highlight our top picks,
which we expect would deliver strong sales
growth and margin expansion.
Our top ‘Buys’ to deliver 31% EBIT growth in
FY2012E, buying opportunity on valuation
, dated Feb 15, 2011, we India Handbook In our
highlighted our best ideas for superior growth,
improving returns and compelling relative
valuations. We believe our top ‘Buys’ will
outperform our coverage in FY12E and deliver
15% yoy top-line growth and 31% growth in EBIT.
Our top picks are trading in line with MSCI India’s
12-m fwd P/E, and given their growth potential, we
believe this is a good buying opportunity.
4QFY11 expectations for sectors under coverage Exhibit 11:
Source: Goldman Sachs Research
Sector 4QFY11 expectations
Automobiles
We expect 39% yoy growth in net income for the sector (21% ex-Tata Motors), driven by 13% aggregate >
yoy revenue growth. Sequentially, we expect net income to grow by 3% qoq, driven by 1% qoq revenue
growth.
We believe that in FY2012 the sector is likely to see twin headwinds of commodity cost inflation and >
moderation in demand. We believe market will focus on the management commentary on earnings outlook
and margins for 1Q and FY2012.
Consumer Staples
Looking for updates on raw material price inflation and impact on margins. Also looking for news on price >
increases to offset rising costs.
More updates on consolidation in the industry following news articles of acquisitions in India and abroad. >
Fertilizers
We expect earnings growth for United phosphorus on the back of seasonally strong quarter, with volume >
growth primarily from the US and Europe markets.
Financials
We expect strong set of operating numbers for the quarter with 38% PAT growth for the sector driven by >
strong NII growth (30% yoy growth)
Margins could come under pressure starting this quarter with retail lenders, likely to see relatively more >
pressure v/s wholesale lenders given lack of pricing power as retail deposit rates have caught up with
wholesale rates
Healthcare
We expect average revenue growth of 11% yoy in 4QFY11 for our coverage universe. Revenue growth will >
remain stable compared to the previous year's quarter. Ranbaxy (for Aricpet) and Sun (for Taro integration)
will be the most focused earnings releases.
We expect EBIT growth to slow down at 5% yoy for the Indian healthcare sector in 4QFY11 due the lack >
of high margin one-off product launches in the quarter.
Industrials
Overall order inflows have been weak for the sector, given delays in project awards. Guidance on order >
inflows for FY12E will be a key metric to watch
Impact of higher commodity prices on margin performance during the quarter and for FY12E >
Infrastructure
Weak order inflows have been a key feature of the infrastructure segment in Q4. Updates on order inflow >
visibility for FY12E would be key
We expect steady toll collections on operational projects and strong execution on existing order backlog in >
es ni pa m co er uctu r ast f infr o snoi s ivi d n oi uct r st n co eht
IT Services
We expect a strong quarter for the IT services sector led by the large caps. We expect a 6.9% qoq >
revenue growth on the back of sustained volumes and currency tailwinds.
Among the major fundamental drivers to watch out for this quarter are (1) Outlook for FY2012 and >
management, labor dynamics to ease off, hiring guidance to remain robust, (3) BFSI / Retail may contniue to
grow, telecom may recover, (4) Japan crisis may pose a one-time marginal impact.
Materials: Cement
We expect cement companies to report improved performance this quarter, with realizations up 5-7% qoq. >
line of the companies are likely to witness 7-10% yoy growth. ‐ Top
While we expect margin contraction of 6% yoy, on a sequential basis, all companies will see margin >
pressures would continue to weigh on the sector, expansion (+500 bps), led by higher realizations. Cost
leading to subdued margin recovery, in spite of near-all time high realizations.
Materials: Metals
For steel companies, we expect significant margin expansion (on a sequential basis), on higher realizations >
(Steel prices up 12% qoq). Volumes would be strong qoq.
For Base Metals, we expect cost pressures to weigh on alumnium results. Base metal realizations and >
volumes will be strong on a sequential basis.
Media
Advertsing revenues are likely to be negatively impacted in Q4FY11, given big ticket sporting events >
the last couple of months. The impact of this on The DTH space has seen strong subscriber additions over >
ARPUs would be the key thing to watch for DTH companies.
Oil & Gas
Losses will continue for oil marketing companies as government subsidy sharing regime remains unclear, >
in our view
net realisations. GAIL is likely to report strong ONGC, OIL earnings is expected to be boosted by higher >
ngs. RIL 4QFY11 earnings likely to be better from operational numbers but subsidy burden may impact earni
higher refining margins, in our view.
Real estate
Expect higher margins for DLF as higher proportion of sales from plotted developments >
HDIL margins to contract on a qoq basis as TDR realisations have dropped >
Expect revenues to be driven by increased execution of projects >
Telecom
For 4Q, we expect Bharti to show better qoq revenue/EBITDA growth as compared to Idea (we estimate >
for Idea). This is because we expect Idea to have 3%/4% qoq revenue/EBITDA growth for Bharti and 2%/1%
higher impact from MNP, based on management commentary, as Idea appears to have renegotiated tariffs
for postpaid operators.
Although we also expect Bharti to have renegotiated tariffs downwards, we do not expect as high impact >
on overall revenues for Bharti given it is not a pure wireless operator like Idea.
Utilities
to weak SEB finances sed on suppressed demand due We expect decline in earnings (YoY and QoQ) ba >
and inter-state transmission constraints. Average thermal PLF has declined 300 bps YoY in 4QFY11
Short-term rates were lower 16% QoQ (bilateral and UI average) due to lower demand. We expect >
companies to report merchant rates at ~Rs 3.30/- per unit.
Capacity addition of 1.4 GW in the quarter would partially offset the decline in generation due to lower >
demand.
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