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India Strategy
1QFY12 Preview: Weak results
to drive more downgrades
�� Weak results expected; 4 key points
First, our bottom up Sensex EPS growth estimate at under 12% (10.5% ex-PSU
oil cos) is the weakest forecast in the past 7 quarters. We expect markets to give
up recent gains and correct back to below the 18,000 levels. Second, profit
growth continues to remain concentrated with top-5 companies contributing more
than 70% of the growth. We expect 6 out of the 30 companies to show a decline
in profits. Third, margins on an aggregate basis are expected to continue showing
decline on a YoY basis across most sectors. Lastly, we continue to expect
downgrades to our Sensex EPS from 1225 currently to below the 1200 levels.
EBITDA margin decline to continue; Telecom & IT likely worst hit
Aggregate Sensex EBITDA margins are expected to show a decline by 40bp.
This is largely led by Real Estate (-640bps YoY), Telecom (-250bps YoY) and
Software (-200bps YoY).
Energy, Pvt banks lead growth; Autos, Telecom & SBI drag
Among Sensex companies, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite
& Infy are expected to be the key contributors of the growth. On the other hand
SBI, Autos (Maruti, Tata Motors), Telecom (Bharti) & TISCO are expected to drag
down growth.
Downgrade phase expected to continue
FY12E Sensex EPS has seen significant downgrades over the last quarter.
Because of rising interest rates and input costs, we continue to expect more
downgrades to our bottom-up FY12E Sensex EPS of Rs1225 (to below 1200).
Result Buys: ICICI Bank, HCL Tech, Lupin
Results Underperforms: Ambuja, SAIL, Ashok Leyland
Mid Cap Buys: Apollo, Eicher, Havells, Divis
Sector
Potential Result
Outperformer
Potential Result
Underperformer Comments
Auto Eicher Motors Maruti Suzuki
On a sequential basis, sales are expected to decline, mainly due to seasonality (CVs) and slowdown in cars as well as strike
at Maruti. Profits are expected to grow much slower due to inflationary cost pressures impacting margins.
We expect Ashok Leyland’s sales to increase just 6% yoy, despite significant increase in realization due to 10% decline in
volumes.
We expect Tata Motors’ consolidated sales to grow 21% YoY, driven by 27% increase in JLR sales.
Banking ICICI Bk Axis Bk,
IDFC
1Q earnings: weakness ahead for most govt. banks; Topline growth in mid-teens for govt banks, as margins decline yoy.
Earnings growth: a mixed-bag; weak for govt. banks, private bks at+30%
MTM loss on bonds could add on to earnings woes for few govt. banks;
NBFCs: volume growth strong, but some margin pressure
Cement Ultratech,
India Cements Ambuja
Stable profits; demand weakness expected to offset tad better margins
Mixed price trends in 1Q FY12; west & central witness weakness; Costs continue to rise
UltraTech, India Cements expected to outperform; Ambuja expected to underperform
Energy - -
OIL India-We expect OIL’s 1Q profit to be 62% YoY higher at Rs8.1bn driven by 33% YoY higher oil and gas volumes and
prices.
Reliance- We estimate RIL’s 1Q FY12E net profit to be 16% YoY higher at Rs56.2bn. We expect EBITDA to rise by 13%
YoY to Rs106bn
R&M companies- R&M companies will bear Rs38bn of the diesel and LPG-kerosene subsidy in 1Q. However, they will also
have to bear the entire petrol subsidy of over Rs30bn.
Healthcare Divis,
Lupin
GSK,
Ranbaxy
Results would be affected by high base of last year (for Ranbaxy, Divis) as well as some exceptional items (Piramal,
Aurobindo). We expect average sales growth of 17% YoY, EBITDA growth of 7% YoY and profit growth of 13% YoY for our
coverage universe (Ex Ranbaxy and Piramal).
Domestic formulations to sustain 15%+ growth rates for most players driven by recent ramp up in salesforce.
Industrials Suzlon
BHEL,
IVRC,
NJCC
We expect 19%YoY growth in rec. PAT of Indian Engineering & Construction (E&C) majors (ex-Suzlon) led by improved
execution (BHEL, L&T, ABB) and better margin (BHEL, L&T, ABB).
We expect the Indian E&C Sector, represented by BHEL, L&T, Suzlon, ABB, IVRCL and NJCC to report (ex - Suzlon) sales
growth of 16%YoY, EBITDA growth of 21%YoY and Recurring PAT growth of 19%YoY.
We expect double digit growth in order backlog for most E&C companies.
Metals Coal India,
Tata Steel
Sesa,
SAIL
In the March Q on a QoQ basis, we expect aggregate profit to decline 9%; EBITDA to decline 1% and sales to decline 8%.
On a YoY basis, we expect profits to grow 23% and EBITDA to grow 24% on YoY basis.
In base metal companies the impact of price movement should be mixed as Al LME was up 4%QoQ, while Zn LME was
down 6%QoQ in June Q.
Real
Estate Unitech DLF
We expect muted performance in 1Q from most of the real estate developers given limited new launches.
We expect most of the developers to report QoQ growth in earnings supported by improvement in margin. We are though
building in fall in margin on YoY basis due to rising construction cost and flat sale realization.
Software HCL Tech,
TCS Wipro
Volume growth this qtr should be seasonally better than Mar quarter.
Wage hikes/visa costs to impact op margins this qtr.
Realization should move up, though pricing still tough
Demand, pipeline commentary to stay positive; Expect positive surprise from TCS & HCLT
Telecom Bharti RCom
Modest topline growth & stable EBITDA margins;
Traffic momentum intact despite slower net adds; Benign attrition in revenue per minute to continue.
Net profit trends may not be comparable due to 3G roll-out; Bharti Africa to post strong performance
Utilities Adani Power NTPC
In the Utility sector, markets would be focused on extent of fall in merchant power rates and progress on future plans such as
expansion in generation capacity, update on new IPP projects, impact of coal on PLFs and AT&C loss reduction in New
Delhi JVs of Reliance and Tata Power.
We expect the Indian Utility Sector to report sales growth of 10%YoY, EBITDA growth of 17%YoY and PAT growth of
8%YoY mainly led by GIPCL, Rel Infra and Tata Power.
Source: BofA Merrill Lynch Global Research
CR
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