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India Strategy
4Q FY11 Earnings Preview
Event
Consumption strong, costs rising: We expect the 4Q FY11 earnings to
show 22% YoY growth in revenues and 20% growth in PAT for our coverage
universe. This translates to full year top-line growth of 20% and bottom-line
growth of 21%. We expect flat margins YoY and QoQ, as rising input prices
offset higher sales volumes, which have so far held up due to strong
underlying demand.
Position your portfolio for FY12: Our overweight sectors – IT, Materials,
Healthcare and Energy – look well positioned to deliver strong results and
look ripe for accumulation. However, we will look to book profits in Cement,
Utilities, Autos and Financials in the upcoming strong results.
Impact
Cement and Telecom weakest sectors in 4Q and FY11; good results
expected for capital goods: Our aggregate estimates for 4Q and FY11 are
dragged down by weak results from Cement and Telecom (on a YoY basis),
both of which remained weak throughout FY11. However, we think Cement
profitability should rebound in 4Q due to higher realisations along with better
volumes. In the Infra/Capital goods sector, strong execution will likely aid in
delivering strong quarterly results; however, concerns remain about order
inflow growth.
Among other sectors, in 4Q: We expect cost pressures to eat into margins,
and we see higher volumes in Consumer and Autos. Metals appear likely to
gain on a rally in LME prices for aluminium, zinc and copper. Real Estate
should see profits and margins grow in 4Q on a YoY basis, in our view, due to
a low volume base from the previous year. In Power, companies exposed to
merchant power may report slightly higher earnings; however, increases in
coal costs could affect margins. IT should continue to deliver strong results.
FY12 EPS revisions risk on the downside; 4Q’11 to provide direction:
FY12 earnings estimates for the Sensex have continued to be downgraded
since Nov 2010 and have reached the same level they were at the beginning
of FY11. However, earnings growth for FY12 is still estimated at 19% with
revenues growth contributing 12% and margins 7%. We believe that margins
growth expectation seems daunting given the huge cost pressures. Also
consensus seems to be underestimating the impact of rising working capital.
Outlook
Market – strong rebound, but for how long? Given the sharp rally in the
past two weeks, the market, led by high FII inflows, appears to have suddenly
gotten over concerns about inflation, rising rates and political events.
However, oil prices remain a concern, investment cycle remains weak and
sustenance of consumption growth remains doubtful. Macro headwinds call
for careful stock selection. Our Top-10 Focus Stocks have continued to
outperform MSCI India by roughly 300bp since August 2010. Stocks that have
outperformed within this basket are Tata Steel (+23%), ITC (+15%), ICICI
Bank (+11%) and Infosys (+9%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
4Q FY11 Earnings Preview
Event
Consumption strong, costs rising: We expect the 4Q FY11 earnings to
show 22% YoY growth in revenues and 20% growth in PAT for our coverage
universe. This translates to full year top-line growth of 20% and bottom-line
growth of 21%. We expect flat margins YoY and QoQ, as rising input prices
offset higher sales volumes, which have so far held up due to strong
underlying demand.
Position your portfolio for FY12: Our overweight sectors – IT, Materials,
Healthcare and Energy – look well positioned to deliver strong results and
look ripe for accumulation. However, we will look to book profits in Cement,
Utilities, Autos and Financials in the upcoming strong results.
Impact
Cement and Telecom weakest sectors in 4Q and FY11; good results
expected for capital goods: Our aggregate estimates for 4Q and FY11 are
dragged down by weak results from Cement and Telecom (on a YoY basis),
both of which remained weak throughout FY11. However, we think Cement
profitability should rebound in 4Q due to higher realisations along with better
volumes. In the Infra/Capital goods sector, strong execution will likely aid in
delivering strong quarterly results; however, concerns remain about order
inflow growth.
Among other sectors, in 4Q: We expect cost pressures to eat into margins,
and we see higher volumes in Consumer and Autos. Metals appear likely to
gain on a rally in LME prices for aluminium, zinc and copper. Real Estate
should see profits and margins grow in 4Q on a YoY basis, in our view, due to
a low volume base from the previous year. In Power, companies exposed to
merchant power may report slightly higher earnings; however, increases in
coal costs could affect margins. IT should continue to deliver strong results.
FY12 EPS revisions risk on the downside; 4Q’11 to provide direction:
FY12 earnings estimates for the Sensex have continued to be downgraded
since Nov 2010 and have reached the same level they were at the beginning
of FY11. However, earnings growth for FY12 is still estimated at 19% with
revenues growth contributing 12% and margins 7%. We believe that margins
growth expectation seems daunting given the huge cost pressures. Also
consensus seems to be underestimating the impact of rising working capital.
Outlook
Market – strong rebound, but for how long? Given the sharp rally in the
past two weeks, the market, led by high FII inflows, appears to have suddenly
gotten over concerns about inflation, rising rates and political events.
However, oil prices remain a concern, investment cycle remains weak and
sustenance of consumption growth remains doubtful. Macro headwinds call
for careful stock selection. Our Top-10 Focus Stocks have continued to
outperform MSCI India by roughly 300bp since August 2010. Stocks that have
outperformed within this basket are Tata Steel (+23%), ITC (+15%), ICICI
Bank (+11%) and Infosys (+9%).
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