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1Q FY12 earnings preview
Risks to earnings remain
Bottom-up expectations (ex oil and gas & banks): Based on our analysts’
expectations, 1QFY12 earnings are likely to increase by 4.0% y-y; net sales are
expected to increase by 21.7% y-y.
The June-quarter is seasonally the weakest, and sequential declines in sales and
profits are likely to reflect this. On a quarterly basis, net profit should fall by 22.3% q-q;
net sales should fall by 8.8% q-q. In terms of margins, EBITDA margin is expected at
20.1%, a contraction of 130bps y-y and 39bps q-q.
Risks to earnings from the slowdown: Apart from seasonal weakness, we note that
earnings in this quarter could come under pressure given the ongoing slowdown in
economic growth momentum. The slowdown started with the investment cycle but
early signs suggest that it is spreading to the consumer. Further, even though global
commodity prices have come off their recent highs, they remain elevated on a y-y
basis; so raw material cost pressure could persist given the quarter or so lag in
transmission to input costs of companies.
We would closely watch this earnings season and accompanying management
commentary for signs of demand weakness for consumer-facing companies. Order
inflows for construction and infrastructure companies should provide us with the
direction of the investment cycle. Further, asset quality issues in the banking space
would also be something to look out for.
We have a constructive view on the market on a 12-month horizon, but we recommend
caution in the near-term going into the earnings season, especially after the sharp 8%
up-move of the market to date since the bottom on 20 June. This earnings season
might not be a tailwind for the market and news flow on the inflation front will likely get
worse in the coming couple of months before it gets better, we expect. In our view,
bouts of significant weakness would be an opportunity for selective buying.
In this note, we highlight the major factors at play across sectors, key result plays and
stock-wise expected sales and profit numbers, along with analyst commentaries for the
stocks in our coverage universe.
Key 1Q FY12 sector highlights
Sector Key 1Q FY12 sector highlights
Agri inputs Margins may fall this quarter on a y-y basis as raw material costs have moved up, growth rates to be robust.
Autos We expect 1QFY12 in general be a quarter of negative surprises. We expect EBITDA margins to come off
q-q due to increased raw material costs and lower volumes.
Banks We expect to continue to see diverging performance of private banks vs. PSU banks, with PSU banks
facing higher margins pressure, operating expense and provisions. We are estimating 10-20bp contraction
in NIMs due to the lag effect of low-yielding priority sector lending done in the previous quarter. However,
lending rate hikes by banks done in May will likely arrest any major fall in margins. Other income will be
muted, given subdued fee income growth and possible mark-to-market losses in the trading portfolio.
Construction & Infra We expect a pickup in order inflows sequentially for the mid-cap construction companies. Order inflow is
expected to be strong for L&T (LT IN) as well. We expect 10-15% revenue growth and stable EBITDA
margins y-y for the mid-caps while L&T is expected to report revenue growth of 20%. In our view, the
increase in interest costs is expected to significantly dent mid-cap earnings and we expect a net profit
decline y-y in many cases.
Consumer We expect companies to report robust sales growth, but primarily led by pricing with volume growth
showing some slowdown both y-y and q-q. RM prices are still high, so we expect margin pressures to
continue, but lower A&P spends could again help mitigate some of the impact as in 4QFY11.
Electrical equipment We expect muted revenue growth for the sector on grim outlook for overall power sector. Execution activity
is expected to have been hampered amidst concerns on environmental clearances and fuel availability
apart from macro headwinds such as interest rates leading to capex slowdown.
IT services 1QFY12 results will provide a window to the outlook for FY12 and be a test of expectations for the key
stocks. Impact of macro-economic deterioration on demand, continuation of pricing momentum, shift in
client spending towards discretionary segments and possible impacts of visa-related issues on revenue and
margins will be keenly watched. See only marginal upgrades in revenue guidance at Infosys (INFO IN) and
Cognizant (CTSH US) likely. Continuation of pricing momentum would be a positive trigger. Results unlikely
to lead to estimate upgrades, in our view. We expect expectations to lower in Wipro (WPRO IN) and HCL
Tech (HCLT IN) post results. Low street expectations at Infosys and high street expectations at TCS (TCS
IN) might lead to opposing impacts on stock prices, even in case of in-line results at both.
Oil & gas Despite recent moderation, oil prices were up 12% q-q in 1QFY12; Refining strength continues but some
moderation was seen in petchems in the quarter; Gas volumes likely to be flat as declined production was
offset by high LNG imports; 4Q under-recoveries expected at very high INR435bn (up 116% y-y; 39% q-q).
Pharma We expect 1QFY12 results for the pharmaceutical sector to reflect margin pressures and healthy revenue
growth. The margin pressures are expected to come from adverse macro-economic environment and lack
of one-off opportunities. We expect an 11.9% y-y growth in revenues for the sector, and a net profit decline
of 8.2%. Sequentially, we pencil in a growth of 2.6% in revenues and a decline of 3.2% in net profit. The
major contributors to a profit decline would be Ranbaxy with Valtrex exclusivity profits last year and Aricept
exclusivity profits last quarter and Sun with significant Protonix and Eloxatin profits last year.
Power Lower generation (planned maintenance shutdown and backdown issues) and relatively muted merchant
realisations (despite a peak-summer quarter) will weigh on profitability of private IPPs; growth broadly to be
driven by capacity expansion. We expect consensus earnings for a majority of IPPs to be trimmed post
results.
Property Largely company-specific. Revenues may be higher y-y but will be lower q-q due to seasonal factors plus
execution issues.
Telcos Continued sequential growth in top-line, as minutes usage continues to rise, offset by moderating price
declines. Margins could be broadly flattish or see modest improvement as benefits from stable competition
are slightly offset by 3G-related costs and MNP initiatives.
1Q FY12 potential surprises, risks and result plays
Sector Potential surprises, risks and result plays
Autos (Kapil Singh) We expect 1Q FY12 to be a quarter of q-q margin decline and negative surprises. MSIL, BJAUT and
TTMT could report negative surprises, while EXID could report a positive surprise, in our view.
Agri inputs (Aatash Shah) United Phosphorus (UNTP IN) could outperform post results if it beats estimates given lower growth
expectations
Banks (Prabhat Awasthi / Amit
Nanavati)
Despite margin pressure and higher credit cost expectation for the sector, we continue to believe that the
private banks will be in a better position to overcome the headwinds, given better ALM and stable asset
quality. Amongst the private banks, some may surprise on margins and asset quality and amongst PSU
banks, some could see further asset quality deterioration and higher-than-expected margin pressure.
Construction & Infra
(Saion Mukherjee /
Harish Venkateswaran)
We expect high interest costs to adversely impact net profit growth in the sector in 1Q FY12. But given the
low expectations and attractive valuations, we see potential for the stocks to go up even on in-line results.
We expect L&T (LT IN) to report strong inflows and earnings in line with consensus expectations. We
believe IVRCL (IVRC IN) and IRB (IRB IN) results could surprise the market positively and our earnings
expectations for these companies are above consensus. On NJCC (NJCC IN) and PUNJ (PUNJ IN), we
expect some disappointment as our earnings estimates are below consensus.
Consumer (Manish Jain / Anup
Sudhendranath)
With sector valuations above long-term average, we see potential for stocks to drift lower on even in-line
results. Hindustan Lever (HUVR IN) and Marico (MRCO IN) remain most 'at risk' from margin pressures,
while Nestle (NEST IN) could surprise on the upside
Electrical equipment / Transport
infrastructure (Amar Kedia)
No high conviction ideas to play for result surprises as we maintain a bearish undertone for the sector
IT services (Ashwin Mehta /
Pinku Pappan)
In-line results at Infosys (INFO IN) with FY12 EPS guidance raised to INR130 and 2QFY12 revenue
growth guidance at 6% q-q should be taken positively. In-line results at TCS (TCS IN) might not provide
enough ammunition to take the stock higher. Risks to consensus estimates at Wipro (WPRO IN) post 1Q
FY12 results, if the company guides for less than 5% q-q growth in 2Q FY12 (our estimates are lower than
street's by 5%). HCL Tech (HCLT IN) is a post-results play with expectation reset on margin stability vs.
street expectations of margin increase over FY11-12, could provide better entry points to the stock.
Downward bias to our Cognizant (CTSH US) 2Q FY12 revenue growth expectations on company-specific
European weakness, could be used to add positions to the stock. Stocks calls: Expect Infosys to react
positively, Wipro to react negatively to results. Corrections in HCL Tech should be used to add positions.
Do not see material stock reaction in TCS post results. Infosys and HCL Tech remain top picks.
Oil & Gas (Anil Sharma /
Ravikumar Adukia)
1Q FY12 results would likely disappoint. Despite strengthened regional refining margins, we expect RIL
(RIL IN) to report only muted growth. With upstream sharing back at 1/3rd (from effective 47% in 4Q FY11
and 38.7% in FY11), even after assuming 50% cash compensation, we see OMCs reporting 70-90% q-q
profit decline; If government compensation is not announced in time (as happened in 1Q FY11) OMCs may
report losses similar to 1Q FY11. Gas volumes are likely to remain flat q-q, and we do not see any big
surprises in gas companies’ earnings. We expect sharp q-q declines in GAIL's (GAIL IN) petchem
volumes and marginal declines in gas volumes, though we expect earnings to increase 15% q-q due to
lower subsidy share. We do not expect any sharp increase in volumes for PLNG (PLNG IN), and expect
earnings to decline 9% q-q (unless company surprises again on marketing margins) as 4Q had one-off
gains. Similarly, expect flat q-q volume for GSPL (GUJS IN), but earnings decline of 16% as 4Q had oneoff
accounting gains. We expect robust growth at IGL (IGL IN), and see 26% y-y and 4% q-q earnings
growth. Gujarat Gas (GGAS IN) may also disappoint (down 8% q-q), as spot LNG prices continue to
increase. Cairn India (CAIR IN) is likely to surprise positively as it benefitted from both volume (5% q-q)
and oil prices (up 12% q-q) increases, and we expect earnings to grow by 16% q-q.
Pharma (Saion Mukherjee / Aditya
Khemka)
We believe Glenmark (GNP IN) could surprise on the upside on higher-than-expected API sales. Glaxo
(GLXO IN) could also outperform expectations on account of higher-than-expected growth in the domestic
formulations. We are cautious on Ranbaxy (RBXY IN) as the results could negatively surprise on lower
margins due to expiry of Aricept exclusivity and higher interest burden resulting from an increase in debt.
Power (Anirudh Gangahar / Nishit
Jalan)
In general, we expect muted 1Q FY12 results with reported net profit to rise y-y but drop q-q. Within our
coverage universe, we expect negative reaction following results from Lanco Infra (LANCI IN) and JSW
Energy (JSW IN). For JSW Energy, we expect ~25% q-q decline in EBITDA, 50% q-q decline in net profit
due to lower PLF and muted merchant realisations. For Lanco, we expect delays in Udupi, Anpara
capacity commissioning to negatively impact cashflows and profitability. We expect EBITDA to be up 10%
q-q, but on consolidation, elimination plus higher interest outgo could dent profits to just about a breakeven
level. We expect a neutral-to-positive reaction on PWGR, NTPC, RPWR & ADANI.
Property (Aatash Shah) Stock performance post results is expected to be largely neutral. Focus will likely remain on balance sheets
and companies that show positive cash flow generation like HDIL (HDIL IN) and Unitech (UT IN) can
outperform.
Telcos (Sachin Gupta /
Neeraja Natarajan)
For Bharti (BHARTI IN), operational trends in Africa will likely be in focus, especially given the strong price
performance. IDEA (IDEA IN) has been executing strongly, and we expect this to continue.
Source: Nomura research
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