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QE Jun-11 Earnings Preview:
Watch Earnings Dispersion
and Pricing Power
Quick Comment – MS analysts forecast 24% YoY
growth for 114 companies: This compares with growth
of 11% YoY in QE Mar-11. Excluding government-
owned oil companies, earnings are likely to see
deceleration in growth at 14% YoY versus 17% growth
in QE Mar-11. MS analysts expect BSE Sensex
earnings to rise 14% YoY vs. 4% growth in QE Mar-11.
Margin compression in eight out of 10 sectors: MS
analysts expect aggregate (ex-government-owned oil
companies) revenues to grow 25% YoY with a
contraction of 168bp YoY in EBITDA margins. Energy is
likely to see the most margin expansion, while Materials
is likely to see the most contraction in margins. Our
analysts expect strongest earnings growth for Energy (at
156%) YoY followed by Consumer Staples (at 17% YoY),
whereas Utilities and Telecoms are likely to a see fall in
earnings.
Key observations about our analysts’ forecasts: 1)
Depreciation expenses to rise 17% YoY; 2) net financial
expenses are likely to turn to net financial income (up
from –Rs217mn to Rs2.4bn). About one-third of our
coverage universe is likely to report a drop in net profit
YoY. About 30% of our sample will likely report profit
growth in excess of 25%.
Our view: Earnings dispersion underpins our view that
this is a good stock-picking setting. The pace of
downward revisions could slow given corporate
fundamentals. Watch out for how companies exercise
pricing power – 38% of our sample is likely to see YoY
margin expansion this quarter. Our proprietary earnings
growth leading indicator signals a mild acceleration in
broad market growth in F2012. For the Sensex, we see
18% growth in earnings in F2012 and F2013. Broad
market earnings could edge higher to 16-17% in the
coming quarters. '
F2011: Key Highlights
• The aggregation of quarterly earnings for F2011
suggests that the Sensex companies and the
broad market (for 1,282 companies) earnings
grew at 21% YoY and 19% YoY, respectively.
• Industrials and Telecom have reported the
strongest and weakest earnings growth.
• The detailed analysis of this data suggests that
the global earnings of the Sensex companies in
F2011 grew by 44% Yo,Y while the domestic
earnings for these companies grew by 6% YoY
during the period.
QEJun-11 Earnings Expectations for Sensex Cos
• The earnings growth estimates for Sensex
companies seem to show lot of dispersion within
sectors. Even as two-wheelers are likely to report
modest growth, the four-wheelers are likely to see
weak earnings. Similarly, SBI is likely to see a fall
in earnings while HDFC Bank is likely to report a
growth of 31% YoY. That is also the case with
Tata Steel and Sterlite in Materials, Wipro and
Infosys / TCS in Technology, and Reliance Infra
and Tata Power in Utilities.
• The biggest contributors to Sensex earnings
growth are Sterlite Industries, Reliance Industries
and Tata Motors (in that order).
• The largest negative contributors to Sensex
earnings growth are Tata Steel and SBI.
Earnings Expectations Commentary from our Analysts’
Sector Earnings Expectation Rationale
Autos Neutral Volume growth has been muted across key segments for this quarter, in addition sustained cost pressures
will continue to a fall in operating margins. Overall, we expect the Auto space to post a subdued performance
at the net income level.
Banks Neutral to Negative Margin compression and seasonally slow quarter in terms of volume growth to weigh on revenue
progression. Loan loss provisions will be higher esp. for SOE banks as they will have to catch up to the new
provisioning calendar and higher provisioning on restructured loans introduced in the May Monetary Policy.
Cement Neutral to Negative We estimate YoY volume growth to be muted. Margins are likely to be flat / decline marginally on a sequential
basis on the back of higher costs and softening prices. For companies with high exposure to South, margins
could improve marginally given prices were resilient in the region for most part of the quarter
FMCG Neutral Strong revenue growth driven by continuing strong volume growth and sharp price increases across
consumption categories in India. Sustained cost pressures will continue to drive gross margins lower with
fall in operating margins cushioned by fall in advertisement expenses YoY.
Energy Neutral We estimate companies with exposure to Upstream and Refining to report strong F1Q12 results due to
sequentially improved crude oil prices and GRM. However Petrochemical prices and netbacks are weak
sequentially. For government owned upstream companies (Oil India), net realisation will be capped at US$56-
60/bbl due to higher subsidy burden and for oil-marketing companies the quantum of compensation from
government would decide the ultimate profitability
Healthcare Neutral Inline - Strong number from Fortis (ramp up in new hospitals). Lack of new launches and higher last quarter
QoQ comp - DRL, Lupin - will make these lackluster results. Sun may surprise on the upside due to Taro and
Taxotere (launch still not confirmed in IMS). Ranb, Biocon, Cipla and GSK should be no surprise quarter.
Industrials (Infra) Positive for L&T; Negative for
the remaining
For L&T and BHEL, we expect ~30% YoY growth in revenues. Order inflows for L&T is also expected to be
strong in F1Q11.Revenue growth for companies like JPA, IVRC and NCC will be muted at single digits.
Increase in input costs (esp steel & metals) will lead to margins declines across the sector. High working
cap debt and higher interest costs will weigh down mid-cap construction companies profits causing YoY
declines in bottom-line. Highly leveraged infra developers like GMR and JPA's interest & depreciation costs
will weigh down on their profits.
Metals Neutral Steel companies should see a sequential EBITDA per ton compression due to decrease in steel prices and
increase in RM costs this quarter. Marginal decline in Zinc, and Copper coupled with input cost pressures
should lead to marginal QoQ decline in earnings for Sterlite and Hindalco. Higher operating costs to drive
margins down QoQ for NMDC and CIL
Media Positive For ZEEL and Sun we expect good ad and sub growth to aid healthy results. UTV should see El Shaddai
earnings stream starting this quarter. DTIL good subscriber, ARPU growth to continue. Hathway should show
moderate growth aided by digital subscriber increase
Real estate Neutral We expect mixed performance in the sector. OBER, GPL and IBREL could be sequentially lower due to lumpy
recognition in the previous quarter. Sobha could show positive results based on ongoing new launches and
recognition. DLF and JIL are expected to remain flat sequentially. B/S should in general stabilize to marginally
improve.
Technology Neutral We believe Infosys’ revenue growth could surprise positively in Jun-11 quarter while consensus earnings
estimates for Wipro could come down. Although, TCS may deliver yet another strong quarter, the current price
appears to be factoring in high expectations (US$ revenue growth of 26% yoy and flat margins in FY12e)
leaving little room for upside, in our view. Within mid-caps, we prefer HCLT and remain cautious on other
stocks like Mphasis and Patni as margins could surprise negatively.
Telecoms Neutral We expect telecom operators to report 3-4% Revenue growth, however EBITDA growth could be higher at 5-
6% on a QoQ basis. Profits to be muted yet again due to 3G related interest and depreciation. Revenue
growth is largely due to our expectation of stable ARPMs and MOUs especially with subscriber additions
trending lower than the previous quarter.
Utilities Neutral IPPs such as Adani Power, JSW Energy and Lanco will have higher sales volumes due to additional
capacities. However, we believe merchant realizations will be softer on a YoY basis. While fuel issues will
have a bearing on performance, we believe it may not be very different from F4Q11. We do not see any
significant surprise from the results of NTPC, Tata Power and Reliance Infrastructure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��''India Strategy
QE Jun-11 Earnings Preview:
Watch Earnings Dispersion
and Pricing Power
Quick Comment – MS analysts forecast 24% YoY
growth for 114 companies: This compares with growth
of 11% YoY in QE Mar-11. Excluding government-
owned oil companies, earnings are likely to see
deceleration in growth at 14% YoY versus 17% growth
in QE Mar-11. MS analysts expect BSE Sensex
earnings to rise 14% YoY vs. 4% growth in QE Mar-11.
Margin compression in eight out of 10 sectors: MS
analysts expect aggregate (ex-government-owned oil
companies) revenues to grow 25% YoY with a
contraction of 168bp YoY in EBITDA margins. Energy is
likely to see the most margin expansion, while Materials
is likely to see the most contraction in margins. Our
analysts expect strongest earnings growth for Energy (at
156%) YoY followed by Consumer Staples (at 17% YoY),
whereas Utilities and Telecoms are likely to a see fall in
earnings.
Key observations about our analysts’ forecasts: 1)
Depreciation expenses to rise 17% YoY; 2) net financial
expenses are likely to turn to net financial income (up
from –Rs217mn to Rs2.4bn). About one-third of our
coverage universe is likely to report a drop in net profit
YoY. About 30% of our sample will likely report profit
growth in excess of 25%.
Our view: Earnings dispersion underpins our view that
this is a good stock-picking setting. The pace of
downward revisions could slow given corporate
fundamentals. Watch out for how companies exercise
pricing power – 38% of our sample is likely to see YoY
margin expansion this quarter. Our proprietary earnings
growth leading indicator signals a mild acceleration in
broad market growth in F2012. For the Sensex, we see
18% growth in earnings in F2012 and F2013. Broad
market earnings could edge higher to 16-17% in the
coming quarters. '
F2011: Key Highlights
• The aggregation of quarterly earnings for F2011
suggests that the Sensex companies and the
broad market (for 1,282 companies) earnings
grew at 21% YoY and 19% YoY, respectively.
• Industrials and Telecom have reported the
strongest and weakest earnings growth.
• The detailed analysis of this data suggests that
the global earnings of the Sensex companies in
F2011 grew by 44% Yo,Y while the domestic
earnings for these companies grew by 6% YoY
during the period.
QEJun-11 Earnings Expectations for Sensex Cos
• The earnings growth estimates for Sensex
companies seem to show lot of dispersion within
sectors. Even as two-wheelers are likely to report
modest growth, the four-wheelers are likely to see
weak earnings. Similarly, SBI is likely to see a fall
in earnings while HDFC Bank is likely to report a
growth of 31% YoY. That is also the case with
Tata Steel and Sterlite in Materials, Wipro and
Infosys / TCS in Technology, and Reliance Infra
and Tata Power in Utilities.
• The biggest contributors to Sensex earnings
growth are Sterlite Industries, Reliance Industries
and Tata Motors (in that order).
• The largest negative contributors to Sensex
earnings growth are Tata Steel and SBI.
Earnings Expectations Commentary from our Analysts’
Sector Earnings Expectation Rationale
Autos Neutral Volume growth has been muted across key segments for this quarter, in addition sustained cost pressures
will continue to a fall in operating margins. Overall, we expect the Auto space to post a subdued performance
at the net income level.
Banks Neutral to Negative Margin compression and seasonally slow quarter in terms of volume growth to weigh on revenue
progression. Loan loss provisions will be higher esp. for SOE banks as they will have to catch up to the new
provisioning calendar and higher provisioning on restructured loans introduced in the May Monetary Policy.
Cement Neutral to Negative We estimate YoY volume growth to be muted. Margins are likely to be flat / decline marginally on a sequential
basis on the back of higher costs and softening prices. For companies with high exposure to South, margins
could improve marginally given prices were resilient in the region for most part of the quarter
FMCG Neutral Strong revenue growth driven by continuing strong volume growth and sharp price increases across
consumption categories in India. Sustained cost pressures will continue to drive gross margins lower with
fall in operating margins cushioned by fall in advertisement expenses YoY.
Energy Neutral We estimate companies with exposure to Upstream and Refining to report strong F1Q12 results due to
sequentially improved crude oil prices and GRM. However Petrochemical prices and netbacks are weak
sequentially. For government owned upstream companies (Oil India), net realisation will be capped at US$56-
60/bbl due to higher subsidy burden and for oil-marketing companies the quantum of compensation from
government would decide the ultimate profitability
Healthcare Neutral Inline - Strong number from Fortis (ramp up in new hospitals). Lack of new launches and higher last quarter
QoQ comp - DRL, Lupin - will make these lackluster results. Sun may surprise on the upside due to Taro and
Taxotere (launch still not confirmed in IMS). Ranb, Biocon, Cipla and GSK should be no surprise quarter.
Industrials (Infra) Positive for L&T; Negative for
the remaining
For L&T and BHEL, we expect ~30% YoY growth in revenues. Order inflows for L&T is also expected to be
strong in F1Q11.Revenue growth for companies like JPA, IVRC and NCC will be muted at single digits.
Increase in input costs (esp steel & metals) will lead to margins declines across the sector. High working
cap debt and higher interest costs will weigh down mid-cap construction companies profits causing YoY
declines in bottom-line. Highly leveraged infra developers like GMR and JPA's interest & depreciation costs
will weigh down on their profits.
Metals Neutral Steel companies should see a sequential EBITDA per ton compression due to decrease in steel prices and
increase in RM costs this quarter. Marginal decline in Zinc, and Copper coupled with input cost pressures
should lead to marginal QoQ decline in earnings for Sterlite and Hindalco. Higher operating costs to drive
margins down QoQ for NMDC and CIL
Media Positive For ZEEL and Sun we expect good ad and sub growth to aid healthy results. UTV should see El Shaddai
earnings stream starting this quarter. DTIL good subscriber, ARPU growth to continue. Hathway should show
moderate growth aided by digital subscriber increase
Real estate Neutral We expect mixed performance in the sector. OBER, GPL and IBREL could be sequentially lower due to lumpy
recognition in the previous quarter. Sobha could show positive results based on ongoing new launches and
recognition. DLF and JIL are expected to remain flat sequentially. B/S should in general stabilize to marginally
improve.
Technology Neutral We believe Infosys’ revenue growth could surprise positively in Jun-11 quarter while consensus earnings
estimates for Wipro could come down. Although, TCS may deliver yet another strong quarter, the current price
appears to be factoring in high expectations (US$ revenue growth of 26% yoy and flat margins in FY12e)
leaving little room for upside, in our view. Within mid-caps, we prefer HCLT and remain cautious on other
stocks like Mphasis and Patni as margins could surprise negatively.
Telecoms Neutral We expect telecom operators to report 3-4% Revenue growth, however EBITDA growth could be higher at 5-
6% on a QoQ basis. Profits to be muted yet again due to 3G related interest and depreciation. Revenue
growth is largely due to our expectation of stable ARPMs and MOUs especially with subscriber additions
trending lower than the previous quarter.
Utilities Neutral IPPs such as Adani Power, JSW Energy and Lanco will have higher sales volumes due to additional
capacities. However, we believe merchant realizations will be softer on a YoY basis. While fuel issues will
have a bearing on performance, we believe it may not be very different from F4Q11. We do not see any
significant surprise from the results of NTPC, Tata Power and Reliance Infrastructure.
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