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Across the Board: 1QFY12E earnings preview
1QFY12E: Another tough quarter;
commodities save the day
We expect 1QFY12 to be a tough quarter, with
EBIT growth (ex. commodities) at a modest 15%
vs. 17% in 4Q11. Revenue growth continues to be
strong at 20% vs. 22% in 4Q11. Including
commodity companies, we expect EBIT growth at
21%, led by Energy/Metals. On a sequential basis,
we estimate EBIT growth to remain flat with 10
sectors to witness qoq decline in earnings.
Hard landing scenario materializing: Fourth
straight quarter of margin compression
As highlighted in our report India: Being stock
selective in a difficult macro environment; 5 Buy and
4 Sell ideas, dated May 13, 2011, high inflation in
previous cycles has been a harbinger of lower
growth, lower margins and compressed
multiples. This is the fourth straight quarter
wherein we expect India Inc. to report margin
compression (100 bp for India coverage) – we
expect 10 of 14 sectors to report yoy margin
contraction. Real Estate, Financials, Telecom, Metals
would witness the maximum margin contraction, as
cost pressures/interest payments weigh on profits.
Macro risks weigh on valuations
Despite MSCI India trading 10% below its 5-yr avg,
high inflation, tightening financial conditions and
policy inertia have kept the markets range-bound.
Our GS Global ECS Research team continues
to remain underweight India, and any change of
view would hinge upon incremental positive data
points on inflation, movement on the reforms front
and uptick in investment spend. We expect FY12E
to be challenging for Indian companies, with
net income growth for India coverage (ex. Energy) to
decelerate to 14% in FY12E, vs. 23% in FY11. (Gse
FY12E EPS 5% below IBES consensus). Against this
backdrop, we highlight top picks, which we expect
would deliver superior FY12E EBIT growth.
Our top ‘Buys’ to deliver 28% EBIT growth
We believe our top sector ‘Buys’ will outperform our
India coverage in FY12E and deliver average 24%/
28% growth in Revenue/EBIT. Our top picks, which
offer an avg. 3-yr EBITDA CAGR of 22%, are trading
in line with MSCI India and at a discount to its peers,
and given their growth potential, we believe this is a
good buying opportunity.
13: 1QFY12 expectations for sectors under coverage
Source: Goldman Sachs Research estimates.
Sector 1QFY12 expectations
Automobiles
> We expect 12% yoy growth in net income for the sector, driven by 20% aggregate yoy revenue growth.
Sequentially, we expect net income to decline by 8% 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
> Expect sales growth for most companies to be led by pricing as well as volumes as most companies have
taken price increases to offset input cost inflation.
> Will also look for updates on impact of increased competition in hair care, skin care, fruit juices and noodles.
Fertilizers
> Price stabilization in US and Europe, sustained volume and pricing growth in India and RoW.
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 13% yoy in 1QFY12 for our coverage universe. Revenue growth will
remain stable compared to the previous year's quarter.
> We expect EBIT growth to slow down at 8% yoy for the Indian healthcare sector in 1QFY12 due the absence
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
> Given the strong Balance Sheet for these companies, market is likely to focus of revenue growth guidance for
FY12-13
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 the
construction divisions of infrastructure companies
> We expect net margins to decline due to high finance cost for majority of the companies under coverage.
> High commodity prices are likely to put pressure on margins but given the continuity of high commodity prices
for the past 2 quarters, we expect companies to deploy cost cutting measures to maintain margins.
IT Services
> We expect a strong quarter for the IT services sector led by the large caps. We expect a 4.3% qoq revenue
growth on the back of sustained volumes.
> Among the major fundamental drivers to watch out for this quarter are (1) Outlook for FY2012 and
management commentary on the strength of IT spending despite macro concerns, (2) wage hike impact, hiring
guidance to remain robust, (3) BFSI / Retail may continue to grow, telecom may recover, (4) Incremental impact
Sector 1QFY12 expectations
Materials: Cement
> Inspite of improved realizations in 1Q, we expect cement companies to report flat to slight sequential
improvement in margins this quarter, as higher costs would partially offset higher prices. Cement volumes have
been weak in 1QFY12.
> We estimate 2QFY12 to be the trough quarter driven by seasonal softening of prices, and sustained cost
pressures - We expect revenue/EBIT to grow by 13%/9% yoy, due to higher prices.
Materials: Metals
> For steel companies, we expect sequential margin compression, on lower realizations and higher coking coal
costs.
> For Base Metals, we expect lower realizations and cost pressures to weigh on profits - average 1QFY12 base
metal prices (except aluminum) declined 5-6% QoQ
Media
> The DTH space has seen healthy subscriber additions over the last couple of months. The impact of this on
ARPUs would be a key thing to watch for DTH companies.
Oil & Gas
> The Key thing to watch would be the under-recoveries share for upstream/downstream. Reportedly a
transparent subsidy-sharing could be likely implemented with a possibility of a positive impact on earnings of
upstream companies
> RIL 1QFY12 earnings is likely to remain under pressure largely driven by lower margins in Petrochem business
partly offset by higher refining margins, in our view.
Real estate
> Expect revenues to be driven by increased execution of projects
> Expect better news flow on pre-sales given significant launches by companies like Sobha, Prestige and DLF
Telecom
> In 1Q, we expect Bharti and Idea to show 4%/6% qoq wireless revenue growth led by stable RPMs and
healthy net adds.
> However, we expect D&A and Interest expenses related to 3G network launch to impact earnings.
Utilities
> We expect earnings to increase YoY based on higher installed capacity (1.8GW increase in 1QFY12) and
stronger merchant rates driven by summer demand
> Short term rates have recovered to ~Rs 4.76 by 1QFY12, as we head to seasonally stronger summer
demand. Thermal PLF is consistent YoY.
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