Cost pressure to become imminent despite revenue growth 􀂃 ICICI Securities

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Cost pressure to become imminent despite revenue growth
􀂃 Q4FY11 already in price, all eyes on FY12E guidance
Expectation of 20% YoY revenue growth for the I-Direct coverage
universe (ex-financials) looks commendable prima facie, implying
the strong demand scenario on the ground and revenue growing on
a high base of Q4FY10. Unlike the revenue growth, we expect
EBIDTA to grow by 6% YoY and PAT to decline 7.7% YoY for the
coverage universe. This is mainly due to the rise in input prices and
increasing manpower costs, which will moderate EBITDA growth.
Similarly, rising borrowing costs, mainly for midcaps, will dent the
profitability of the companies under our coverage. We expect the
large cap stocks to perform relatively better than midcaps, as the
former commands pricing power, better operational efficiency and
better access to funds at relatively better rates. Going ahead, into
FY12E, we expect demand drivers to be strong. However, at the
same time, we are wary of high crude prices, input prices and high
borrowing costs, which will pose challenges for corporate
profitability especially for the medium and small enterprises.
Sectoral leaders and sectoral laggards
In terms of leaders (good revenue growth, stable margins and high
PAT growth), we expect capital goods (high execution), banking
(robust credit growth and relatively lesser credit costs) and
automobiles (consistency in demand) to produce robust results. In
terms of sector laggards (tepid execution, high input costs, high
working capital and high borrowing costs), we expect the
construction (tepid execution and high working capital
requirement), metals and oil & gas (high coking coal prices and
crude prices), telecom (declining ARPUs amid high operating
leverage) to report a decline on a YoY basis.