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Strategy
March 2011 quarter earnings preview. We expect earnings of KIE universe to grow
16.6% yoy led by Automobiles, Banking, Energy and Industrials, while Pharmaceuticals
and Telecom are likely to weigh down earnings. On an ex-Energy basis, we expect the
earnings of KIE universe to grow 12.6% yoy. We expect earnings of BSE-30 Index to
grow 17.6% yoy and 11.7% qoq. On an ex-Energy basis, we expect earnings of the
BSE-30 Index to grow 12% yoy. We expect upstream oil companies to report a sharp yoy
increase in revenues and net income due to (1) higher net crude price realizations and
(2) higher APM gas prices.
We expect yoy decline in profits for Pharmaceuticals and Telecom stocks
Sector-wise expectations for March 2011 quarter results
Key points Key points
Automobiles We expect strong growth in earnings (34% yoy, 15% qoq) for the sector driven by robust
volume growth. We expect EBITDA margins to remain flat qoq despite rise in input costs.
Impact of sharp rise in raw material costs will partially impact companies, in our view, due to
(1) fixed steel contracts until March 11, (2) 1-1.5% average price increase in January taken by
most companies and (3) improvement in product mix for some companies, which could
offset impact of rise in commodity costs, in our view.
Ashok Leyland, Tata Motors and Bharat Forge will be key stocks to monitor due to
strong improvement in volumes sequentially.
Banking Banking: NII growth to be impressive at 27% yoy (30% for public banks and 20% for
private banks) while overall earnings will likely grow at 30% yoy. Private banks would grow
by 37% yoy compared to 27% yoy for public sector banks. We expect overall NIMs to remain
strong, even as we expect marginal qoq compression. Staff expenses on retirement benefits
and the new regime on slippages (no manual interference) would be key items to look into in
public sector banks.
NBFCs: We expect core earnings to grow 20-30%, primarily on the back of strong loan
growth. However, NIMs will likely moderate and seasonal trend of expansion in margins
of NBFCs in 4Q may not be visible this year. We expect NIMs to shrink in the current
scenario given the delay in passing higher interest rates to customers; most NBFCs have
raised their lending rates but not fully passed on the rise in borrowings costs. We do
not expect any significant movement on asset quality performance during 4QFY11E.
Cement Cement prices saw a sharp revival in 4QFY11 with average cement prices increasing by
~Rs25-30/bag over 3QFY11 prices. All regions have seen price increases although it has been
relatively more moderate in South India and higher in North, Central and West India. A better
pricing environment will result in a significant sequential improvement in profitability for our
coverage universe.
Demand growth continues to be muted (4.6% YTD) although some sign of pick-up was
seen in February. Subdued volume growth along with high imported coal prices will
partially offset the benefits of a better pricing environment.
Chemicals Increase in global chemical prices qoq will be positive for the profitability of the chemical
segment of IOCL and GAIL. However, decline in chemical margins qoq will impact the
chemical segment for Reliance Industries.
Consumers We expect this quarter to be marked by pressure on gross margins due to input cost inflation
in key raw materials. We forecast just 1% EBITDA growth in consumer staples despite 15%
sales growth. Discretionary categories will likely outperform staples. We expect strong results
from GSK Consumer, ITC, Nestle, Titan, United Spirits and weak results from Colgate, Dabur,
HUL, Jyothy.
We expect 15% yoy sales growth in ITC's cigarette segment led by pricing; yoy volume
growth will likely be 2%. We expect HUL to report sales growth of 15% yoy, driven by
trade and consumer promotion-led volumes. HUL will likely post one of its lowest-ever
EBITDA margins. Asian Paints will likely report sales growth of ~25% led by continued
good demand conditions in Tier-II and Tier-III towns and pricing growth of 11%. We
expect strong sales growth of 60% yoy for Jubilant Foodworks aided by Cricket World
Cup.
Energy Upstream oil: ONGC and OIL will likely report a sharp yoy increase in revenues and net
income due to (1) higher net crude price realizations and (2) higher APM gas prices. We
assume that upstream companies will bear 33.3% of the overall subsidy burden. GAIL will
likely report a qoq increase in EBITDA due to higher PE prices, which will be partly mitigated
by a higher subsidy burden.
Downstream oil: Performance of R&M companies will depend on the contributions
from government and upstream companies. We estimate gross under-recoveries of
Rs282 bn for the industry for 4QFY11E. We assume compensation of Rs218 bn from
the government in 4QFY11. We estimate higher refining margins qoq.
Industrials Industrials: Order inflows and commentary on investment scenarios would be the key to
watch for. While execution is likely to be strong for bellwether stocks like L&T and BHEL,
there could be risk on margins originating from higher commodity prices, competition as well
as mix changes. We expect strong revenue growth in L&T led by a pick-up in execution of
certain large orders in the backlog. A low base effect would also aid yoy growth, especially
for companies such as ABB, Siemens etc. We are yet to witness strong positive traction in
industrial capex activity. Continued competition in the domestic T&D sector would pressure
segment margins. We expect Suzlon to report sales of 600-650 MW in this quarter but high
interest and preciation will likely lead to a net loss.
Construction: Strong order backlog to drive revenue growth of IVRCL and Nagarjuna
Construction. However, rising interest costs may impact profitability of these
companies. Execution of large BOT projects in the backlog to drive revenues of Sadbhav
Engineering. We expect some revival in execution in Punj Lloyd; however, the company
continues to face execution issues in its large Libyan orders.
Infrastructure: Pick-up in airport traffic and generation from operating power plants
will likely boost revenue growth for GMR and GVK. However, net profit would continue
to be adversely impacted by higher interest and depreciation costs. Pick-up in port
volumes to drive revenue growth for MPSEZ - expect >50 MT of port volumes in FY2011E
Media Television: We expect weak 4QFY11E across C&S TV segment given success of Indian
cricket team in ICC CWC 2011 and shift of advertising dollars away from GECs as a
consequence. Zee TV will be impacted by continued operating losses in its sports business,
resulting in yoy EBITDA decline. Sun TV would be better placed on account of one-off gains
from blockbuster movie 'Endhiraan'. Dish TV is likely to report continued positive operating
leverage (higher EBITDA margin) led by (1) strong volume growth (maturity of subscriber base
over time) and (2) modest ARPU growth.
Print: We expect robust 4QFY11 across print media (barring HT Media and subsidiary
HMVL) led by robust advertising growth supported by incremental advertising spends
from ICC CWC 2011. Cost structure would remain under some pressure on account of
yoy newsprint price inflation and higher cost of doing business across markets due to
rising competition. Rising competitive intensity in core markets and expansion in new
markets will pressure HT Media and HMVL with flat EBITDA performance, leaving
limited scope for positive surprises in the near term.
Metals Ferrous: We expect US$70-100/ton qoq increase in steel realization for the March 2011
quarter. Steel prices have increased in the March quarter primarily on the back of cost-push
factors, increase in scrap, coking coal and iron ore prices. This will reflect in US$50-60/ ton
increase in profitability sequentially.
Non-ferrous: Similar to 3QFY11, we expect a solid performance from non-ferrous
companies. Performance will be driven by higher commodity prices. On an average,
zinc, lead and aluminium prices have risen 3.5% qoq, 9% qoq and 7.1% qoq to
US$2,394/ton, US$2,602/ton and US$2,506/ton. We expect increase in power and fuel
charges primarily on the back of higher coal costs.
Pharmaceuticals Generics: We expect Ranbaxy to report sequential improvement in sales from the US due to
a pick-up in sales of exclusivity sales of Aricept launched on Nov 25. We expect the Indian
market growth rate to pick up for Cipla, Ranbaxy post the low growth reported in 2010.
CMO/CROs: We expect CMOs/CROs such as Dishman, Divis to report sequential
improvement in sales growth in 4QFY11. However, yoy comparisons for Jubilant are
meaningless due to a demerger of business. We expect EBITDA margin to pick up qoq
for Dishman, Divis and Jubilant due to (1) high-margin contract from Astrazeneca
supplies, (2) better product mix for Divis and (3) increase in selling prices for Jubilant.
Property For 4QFY11E, we expect a varied growth trend depending on launches and sales in the
preceding quarters of FY2011E. Overall, we expect real estate companies to have a subdued
growth quarter due to (1) weak launches in the preceding quarters of FY2011E and (2) lower
than expected execution.
Commercial sales/leasing and retail space leasing have bottomed out / seen a marginal
uptick but with the impact of DTC still unclear, a significant uptick could be some time
away. We expect (1) launches to show a healthy uptick but (2) steady-to-marginally
higher end-user sales for the residential segment (excluding Mumbai) given that these
launches have happened towards the end of the quarter.
Technology We expect the Tier-I companies to report a 3.3-5.7% qoq US$ revenue growth in the March
2011 quarter, with HCLT the likely growth leader. We expect growth to be primarily volumeled
with modest pricing and cross-currency kickers. Among the Tier-IIs, we expect another
quarter of strong revenue growth from Hexaware, while a weak quarter from MindTree is
expected post the management's mid-quarter earnings warning.
We expect Infosys to guide for 18-20% US$ revenue growth guidance for FY2012E;
this implies a CQGR of 3.6-4.3%. We expect the company to build in conservatism in
its margin assumptions given its planned investments in local hiring and consulting. EPS
guidance may range from Rs132-137 assuming Rs45/US$ and a margin decline
guidance of 150-200 bps.
Telecom We expect some, though not meaningful, deceleration in sequential volume growth for
Bharti and Idea. Selective post-MNP pressure in the post-paid segment is likely to pressure
RPM a tad, though not much; we build in 0.5-1.5% qoq RPM decline for the three players
under our coverage. We estimate 3-6.3% sequential growth in wireless revenues for the
three operators. MNP and 3G launch expenses will likely keep margins under check.
4QFY11E earnings reports will also yield initial indicators on (1) the impact of MNP on
RPM; we expect the impact to be gradual and build in a modest 0.5-1.5% qoq decline
in RPM and (2) 3G uptake.
Utilities Merchant tariffs have shown signs of revival in 4QFY11 with the recovery being especially
pronounced in South India in the run-up to state elections. Players with significant merchant
sale in South India such as JSW Energy (from Vijaynagar pant) and Lanco Infratech (from
Kondapalli II) likely to benefit from strong merchant rates in South India.
EPC business to drive revenue growth for Reliance Infrastructure as execution of power
projects of Reliance Power gains momentum. Lanco will also likely see a pick-up in
construction revenues as construction for new projects gathers pace.
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
March 2011 quarter earnings preview. We expect earnings of KIE universe to grow
16.6% yoy led by Automobiles, Banking, Energy and Industrials, while Pharmaceuticals
and Telecom are likely to weigh down earnings. On an ex-Energy basis, we expect the
earnings of KIE universe to grow 12.6% yoy. We expect earnings of BSE-30 Index to
grow 17.6% yoy and 11.7% qoq. On an ex-Energy basis, we expect earnings of the
BSE-30 Index to grow 12% yoy. We expect upstream oil companies to report a sharp yoy
increase in revenues and net income due to (1) higher net crude price realizations and
(2) higher APM gas prices.
We expect yoy decline in profits for Pharmaceuticals and Telecom stocks
Sector-wise expectations for March 2011 quarter results
Key points Key points
Automobiles We expect strong growth in earnings (34% yoy, 15% qoq) for the sector driven by robust
volume growth. We expect EBITDA margins to remain flat qoq despite rise in input costs.
Impact of sharp rise in raw material costs will partially impact companies, in our view, due to
(1) fixed steel contracts until March 11, (2) 1-1.5% average price increase in January taken by
most companies and (3) improvement in product mix for some companies, which could
offset impact of rise in commodity costs, in our view.
Ashok Leyland, Tata Motors and Bharat Forge will be key stocks to monitor due to
strong improvement in volumes sequentially.
Banking Banking: NII growth to be impressive at 27% yoy (30% for public banks and 20% for
private banks) while overall earnings will likely grow at 30% yoy. Private banks would grow
by 37% yoy compared to 27% yoy for public sector banks. We expect overall NIMs to remain
strong, even as we expect marginal qoq compression. Staff expenses on retirement benefits
and the new regime on slippages (no manual interference) would be key items to look into in
public sector banks.
NBFCs: We expect core earnings to grow 20-30%, primarily on the back of strong loan
growth. However, NIMs will likely moderate and seasonal trend of expansion in margins
of NBFCs in 4Q may not be visible this year. We expect NIMs to shrink in the current
scenario given the delay in passing higher interest rates to customers; most NBFCs have
raised their lending rates but not fully passed on the rise in borrowings costs. We do
not expect any significant movement on asset quality performance during 4QFY11E.
Cement Cement prices saw a sharp revival in 4QFY11 with average cement prices increasing by
~Rs25-30/bag over 3QFY11 prices. All regions have seen price increases although it has been
relatively more moderate in South India and higher in North, Central and West India. A better
pricing environment will result in a significant sequential improvement in profitability for our
coverage universe.
Demand growth continues to be muted (4.6% YTD) although some sign of pick-up was
seen in February. Subdued volume growth along with high imported coal prices will
partially offset the benefits of a better pricing environment.
Chemicals Increase in global chemical prices qoq will be positive for the profitability of the chemical
segment of IOCL and GAIL. However, decline in chemical margins qoq will impact the
chemical segment for Reliance Industries.
Consumers We expect this quarter to be marked by pressure on gross margins due to input cost inflation
in key raw materials. We forecast just 1% EBITDA growth in consumer staples despite 15%
sales growth. Discretionary categories will likely outperform staples. We expect strong results
from GSK Consumer, ITC, Nestle, Titan, United Spirits and weak results from Colgate, Dabur,
HUL, Jyothy.
We expect 15% yoy sales growth in ITC's cigarette segment led by pricing; yoy volume
growth will likely be 2%. We expect HUL to report sales growth of 15% yoy, driven by
trade and consumer promotion-led volumes. HUL will likely post one of its lowest-ever
EBITDA margins. Asian Paints will likely report sales growth of ~25% led by continued
good demand conditions in Tier-II and Tier-III towns and pricing growth of 11%. We
expect strong sales growth of 60% yoy for Jubilant Foodworks aided by Cricket World
Cup.
Energy Upstream oil: ONGC and OIL will likely report a sharp yoy increase in revenues and net
income due to (1) higher net crude price realizations and (2) higher APM gas prices. We
assume that upstream companies will bear 33.3% of the overall subsidy burden. GAIL will
likely report a qoq increase in EBITDA due to higher PE prices, which will be partly mitigated
by a higher subsidy burden.
Downstream oil: Performance of R&M companies will depend on the contributions
from government and upstream companies. We estimate gross under-recoveries of
Rs282 bn for the industry for 4QFY11E. We assume compensation of Rs218 bn from
the government in 4QFY11. We estimate higher refining margins qoq.
Industrials Industrials: Order inflows and commentary on investment scenarios would be the key to
watch for. While execution is likely to be strong for bellwether stocks like L&T and BHEL,
there could be risk on margins originating from higher commodity prices, competition as well
as mix changes. We expect strong revenue growth in L&T led by a pick-up in execution of
certain large orders in the backlog. A low base effect would also aid yoy growth, especially
for companies such as ABB, Siemens etc. We are yet to witness strong positive traction in
industrial capex activity. Continued competition in the domestic T&D sector would pressure
segment margins. We expect Suzlon to report sales of 600-650 MW in this quarter but high
interest and preciation will likely lead to a net loss.
Construction: Strong order backlog to drive revenue growth of IVRCL and Nagarjuna
Construction. However, rising interest costs may impact profitability of these
companies. Execution of large BOT projects in the backlog to drive revenues of Sadbhav
Engineering. We expect some revival in execution in Punj Lloyd; however, the company
continues to face execution issues in its large Libyan orders.
Infrastructure: Pick-up in airport traffic and generation from operating power plants
will likely boost revenue growth for GMR and GVK. However, net profit would continue
to be adversely impacted by higher interest and depreciation costs. Pick-up in port
volumes to drive revenue growth for MPSEZ - expect >50 MT of port volumes in FY2011E
Media Television: We expect weak 4QFY11E across C&S TV segment given success of Indian
cricket team in ICC CWC 2011 and shift of advertising dollars away from GECs as a
consequence. Zee TV will be impacted by continued operating losses in its sports business,
resulting in yoy EBITDA decline. Sun TV would be better placed on account of one-off gains
from blockbuster movie 'Endhiraan'. Dish TV is likely to report continued positive operating
leverage (higher EBITDA margin) led by (1) strong volume growth (maturity of subscriber base
over time) and (2) modest ARPU growth.
Print: We expect robust 4QFY11 across print media (barring HT Media and subsidiary
HMVL) led by robust advertising growth supported by incremental advertising spends
from ICC CWC 2011. Cost structure would remain under some pressure on account of
yoy newsprint price inflation and higher cost of doing business across markets due to
rising competition. Rising competitive intensity in core markets and expansion in new
markets will pressure HT Media and HMVL with flat EBITDA performance, leaving
limited scope for positive surprises in the near term.
Metals Ferrous: We expect US$70-100/ton qoq increase in steel realization for the March 2011
quarter. Steel prices have increased in the March quarter primarily on the back of cost-push
factors, increase in scrap, coking coal and iron ore prices. This will reflect in US$50-60/ ton
increase in profitability sequentially.
Non-ferrous: Similar to 3QFY11, we expect a solid performance from non-ferrous
companies. Performance will be driven by higher commodity prices. On an average,
zinc, lead and aluminium prices have risen 3.5% qoq, 9% qoq and 7.1% qoq to
US$2,394/ton, US$2,602/ton and US$2,506/ton. We expect increase in power and fuel
charges primarily on the back of higher coal costs.
Pharmaceuticals Generics: We expect Ranbaxy to report sequential improvement in sales from the US due to
a pick-up in sales of exclusivity sales of Aricept launched on Nov 25. We expect the Indian
market growth rate to pick up for Cipla, Ranbaxy post the low growth reported in 2010.
CMO/CROs: We expect CMOs/CROs such as Dishman, Divis to report sequential
improvement in sales growth in 4QFY11. However, yoy comparisons for Jubilant are
meaningless due to a demerger of business. We expect EBITDA margin to pick up qoq
for Dishman, Divis and Jubilant due to (1) high-margin contract from Astrazeneca
supplies, (2) better product mix for Divis and (3) increase in selling prices for Jubilant.
Property For 4QFY11E, we expect a varied growth trend depending on launches and sales in the
preceding quarters of FY2011E. Overall, we expect real estate companies to have a subdued
growth quarter due to (1) weak launches in the preceding quarters of FY2011E and (2) lower
than expected execution.
Commercial sales/leasing and retail space leasing have bottomed out / seen a marginal
uptick but with the impact of DTC still unclear, a significant uptick could be some time
away. We expect (1) launches to show a healthy uptick but (2) steady-to-marginally
higher end-user sales for the residential segment (excluding Mumbai) given that these
launches have happened towards the end of the quarter.
Technology We expect the Tier-I companies to report a 3.3-5.7% qoq US$ revenue growth in the March
2011 quarter, with HCLT the likely growth leader. We expect growth to be primarily volumeled
with modest pricing and cross-currency kickers. Among the Tier-IIs, we expect another
quarter of strong revenue growth from Hexaware, while a weak quarter from MindTree is
expected post the management's mid-quarter earnings warning.
We expect Infosys to guide for 18-20% US$ revenue growth guidance for FY2012E;
this implies a CQGR of 3.6-4.3%. We expect the company to build in conservatism in
its margin assumptions given its planned investments in local hiring and consulting. EPS
guidance may range from Rs132-137 assuming Rs45/US$ and a margin decline
guidance of 150-200 bps.
Telecom We expect some, though not meaningful, deceleration in sequential volume growth for
Bharti and Idea. Selective post-MNP pressure in the post-paid segment is likely to pressure
RPM a tad, though not much; we build in 0.5-1.5% qoq RPM decline for the three players
under our coverage. We estimate 3-6.3% sequential growth in wireless revenues for the
three operators. MNP and 3G launch expenses will likely keep margins under check.
4QFY11E earnings reports will also yield initial indicators on (1) the impact of MNP on
RPM; we expect the impact to be gradual and build in a modest 0.5-1.5% qoq decline
in RPM and (2) 3G uptake.
Utilities Merchant tariffs have shown signs of revival in 4QFY11 with the recovery being especially
pronounced in South India in the run-up to state elections. Players with significant merchant
sale in South India such as JSW Energy (from Vijaynagar pant) and Lanco Infratech (from
Kondapalli II) likely to benefit from strong merchant rates in South India.
EPC business to drive revenue growth for Reliance Infrastructure as execution of power
projects of Reliance Power gains momentum. Lanco will also likely see a pick-up in
construction revenues as construction for new projects gathers pace.
Source: Kotak Institutional Equities estimates
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