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2QFY12 earnings preview
2QFY12 reported earnings growth would be muted due to the one-time
impact of INR depreciation, estimated at 3% of earnings. Pre-exceptional
earnings growth for Sensex should, however, improve from 1Q level
(7.5%) to 13.4% YoY due to Bharti and SBI reporting better YoY
numbers. Our key pre-results buy ideas would be Dr Reddy’s, Axis bank
and ACC. Disappointments possible from steel companies, JPA and
property companies. We also remain cautious on the capital goods sector
in the context of potential negative surprises on orderbooking.
Pre-excp earnings growth to improve sequentially in 2QFY12
We expect Sensex (free float weighted) pre-exceptional earnings growth to be
13.4% YoY better than 7.5% seen in 1QFY12 largely driven by Bharti and SBI. In In
the base quarter, Bharti’s Africa operation had a high tax provision and SBI’s
provisioning numbers should be comparable YoY from 2Q onwards.
CLSA’s coverage universe (pre-exp and ex-state owned oil & gas) will also be
similar at 11% YoY.
The sectors that would be a drag on overall earnings growth would be autos,
metals, telecom (R Comm and Idea) and property – all expected to report an
earnings decline.
Cement sector should report a strong 50% growth in ebitda due to better pricing.
At the company level, we see YoY growth decelerating for 50/93 companies.
Reported numbers impacted due to forex hit
INR depreciation of 10% against USD, 15% against JPY would impact reported
earnings for companies with unhedged foreign currency liabilities.
Lanco, Ranbaxy and Tata Power will likely report loss on this account while the
reported numbers of Bharti, PFC, Suzlon, L&T, Tata Motors, Tata steel, JSW steel,
Tata power and IT companies will be impacted.
Certain other companies viz. R Comm, Bharat Forge, Godrej Consumer etc will
likely make a direct adjustment in the reserves / gross block.
Overall, we estimate that the CLSA coverage universe will see a one time impact of
approx 3% of pre-ex earnings.
Lower margins factored in, revenue and interest costs to watch
We expect the ebitda margins for the CLSA coverage universe (ex oil & gas) to be
down 160bps YoY in line with the trend over the last few quarters.
Cement, telecom, pharma and power should see ebitda margin expansion, whereas
margin deceleration would be visible in property and autos.
The full impact of higher interest costs would be visible from 2Q onwards and can
be potential source of disappointments / earnings cut.
Sector Key trends
Autos • Earnings of auto companies will remain under pressure in 2QFY12 due to moderating volume growth and rising cost pressures
• 4W stocks: Maruti and Tata Motors will report YoY decline in profits while M&M will report mid-single digit growth. Maruti’s 2Q
results will be impacted by the month-long strike at Manesar plant.
• 2W stocks: Hero MotoCorp & Bajaj Auto will outperform in 2Q with double-digit YoY earnings growth due to better volume growth
and lesser margin pressures than 4Ws
Banks/FIs • During 2QFY12, we expect Indian banks to report 15% growth in profit driven by healthy growth in operating profit.
• Sector loans have grown by 20% YoY and will be key to NII growth as NIMs may be under pressure.
• CASA growth for banks would see some pressure, but margins would expand QoQ due to hike in lending rates.
• Asset quality trends will be the key to watch, especially stress in infrastructure sector. PSU banks may see slippages due to
transition to automated NPL recognition.
• Axis may surprise on the upside and SBI may see uptick in profits after 2 subdued quarters; depreciation of Rupee will result in
high MTM losses for PFC.
Cap goods • L&T – focus on order inflow guidance; Expect 20% revenue growth, tamed down by Fx, margins
• JPA profits weaker YoY on lower cement margins. Property profits higher, construction weaker
• For BHEL we forecast Ebitda margins to fall by 40bps YoY to 17.3%. Consequently, Ebitda increases by 11% YoY, to 16.4bn.
Cement • Cement demand showed a pick up with 2Q estimated to have grown at ~7% (cf. 1% in 1Q).
• Average cement prices are estimated to be down ~7% QoQ due to pressures in most markets (ex-south)
• On a YoY basis, a low base would help as our coverage would report strong earnings growth.
Consumer • While we expect topline momentum to continue in 2Q, input costs should continue to stay high while A&P should also inch up on a
QoQ basis.
• We expect HUL to report a 8% volume growth; lower margins and higher taxes would moderate the net earnings growth to 5%
• ITC’s cigarette volume should rise ~7% with margin expansion; on the whole, we expect net earnings to rise 17% YoY
Media • We believe softness in the advertising market will continue in 2QFY12.
Metals • Steel: All steel companies, with the exception of JSPL, will report YoY decline in earnings. Tata Steel’s consol profit will decline
29% YoY, in spite of a strong 27% YoY growth in standalone profits, as Ebitda/t for Corus will fall sharply to mid-teens.
• Base Metals: Both Sterlite and Hindalco will report strong profit growth in 1Q but Sterlite’s profit growth at 44% will be stronger
than Hindalco’s at 12%. Higher profits in HZL and earnings accretion from Anglo Zinc will boost Sterlite’s 2Q results. Hindalco will
benefit from YoY higher LME prices but fuel costs will be higher YoY as well.
Oil & gas–
State
owned
• While we build in 55% as government share and one-third for upstream for full year FY12, we expect Rs100bn as government
support in 2QFY12 even as upstream sharing stays at one-third.
• Despite a 51%QoQ decline in gross under-recoveries in 1Q, this kind of sharing will keep the downstream companies
(IOC/BPCL/HPCL) in losses for 2Q.
• Upstream companies will report their highest ever quarterly profit due to the decline in under-recoveries. While OIL should register
a 39%YoY increase, ONGC net profit may rise by 47%YoY.
Oil & gas–
Private
• Lower KGD6 production would be more than offset by higher refining (US$10.5/bbl, + $0.3/bblQoQ) and higher other income
resulting in a 2%QoQ increase in Reliance’s net profit to Rs57.5bn.
• A one time prior period charge related to Cairn’s share of royalty borne by ONGC will pull down Cairn’s profit by a sharp 75%QoQ.
Pharma • Pharma companies reported earnings for the quarter are likely to be muted or even see declines due to forex losses on hedges
and translation loss on foreign liabilities.
• Domestic formulations growth should be modest on a YoY basis considering pick up in month of August. Ebitda margins are also
usually higher this quarter because of higher contribution of domestic business.
Power • NTPC’s generation is down 2% in July and August due to lower PLFs at most of its plants. We expect 10% growth in preexceptional
profit in 2QFY12 mainly due to increase in the regulated equity with the commissioning of new units.
• Tata Power’s standalone profits are expected to increase by 6% YoY in 1Q. For the Indonesian coal companies we expect 14mt
sales and realization of US$90/t
Property • DLF’s sales/revenues down on no new launches but land sale profits will support PAT.
• Unitech sales flat but expect lower revenues on weak execution.
• Sobha to post strong sales, steady revenues. Flat quarter for Oberoi.
IT • The recent correction and EPS downgrades mean that tier-1 Tech stocks enter this result season amidst lowered investor
expectations.
• Near term EPS may be bolstered by positive currency swing, but FY13 revenue growth, the most prominent indicator of stock
performance, remains suspect under these macro economic uncertainties
• We see the up-coming results season as a mere hiatus leading to the uncertainty of the 2012 budgeting season. A muted
budgeting season will impact the revenue trajectory more than what a strengthening dollar can rescue. We maintain our negative
stance on the sector.
Telecom • Mobile net addition momentum has slowed in 2QFY12.
• We estimate revenue per minute to remain stable but profits to be hit by forex losses on overseas borrowings
Source: CLSA Asia-Pacific Markets
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2QFY12 earnings preview
2QFY12 reported earnings growth would be muted due to the one-time
impact of INR depreciation, estimated at 3% of earnings. Pre-exceptional
earnings growth for Sensex should, however, improve from 1Q level
(7.5%) to 13.4% YoY due to Bharti and SBI reporting better YoY
numbers. Our key pre-results buy ideas would be Dr Reddy’s, Axis bank
and ACC. Disappointments possible from steel companies, JPA and
property companies. We also remain cautious on the capital goods sector
in the context of potential negative surprises on orderbooking.
Pre-excp earnings growth to improve sequentially in 2QFY12
We expect Sensex (free float weighted) pre-exceptional earnings growth to be
13.4% YoY better than 7.5% seen in 1QFY12 largely driven by Bharti and SBI. In In
the base quarter, Bharti’s Africa operation had a high tax provision and SBI’s
provisioning numbers should be comparable YoY from 2Q onwards.
CLSA’s coverage universe (pre-exp and ex-state owned oil & gas) will also be
similar at 11% YoY.
The sectors that would be a drag on overall earnings growth would be autos,
metals, telecom (R Comm and Idea) and property – all expected to report an
earnings decline.
Cement sector should report a strong 50% growth in ebitda due to better pricing.
At the company level, we see YoY growth decelerating for 50/93 companies.
Reported numbers impacted due to forex hit
INR depreciation of 10% against USD, 15% against JPY would impact reported
earnings for companies with unhedged foreign currency liabilities.
Lanco, Ranbaxy and Tata Power will likely report loss on this account while the
reported numbers of Bharti, PFC, Suzlon, L&T, Tata Motors, Tata steel, JSW steel,
Tata power and IT companies will be impacted.
Certain other companies viz. R Comm, Bharat Forge, Godrej Consumer etc will
likely make a direct adjustment in the reserves / gross block.
Overall, we estimate that the CLSA coverage universe will see a one time impact of
approx 3% of pre-ex earnings.
Lower margins factored in, revenue and interest costs to watch
We expect the ebitda margins for the CLSA coverage universe (ex oil & gas) to be
down 160bps YoY in line with the trend over the last few quarters.
Cement, telecom, pharma and power should see ebitda margin expansion, whereas
margin deceleration would be visible in property and autos.
The full impact of higher interest costs would be visible from 2Q onwards and can
be potential source of disappointments / earnings cut.
Sector Key trends
Autos • Earnings of auto companies will remain under pressure in 2QFY12 due to moderating volume growth and rising cost pressures
• 4W stocks: Maruti and Tata Motors will report YoY decline in profits while M&M will report mid-single digit growth. Maruti’s 2Q
results will be impacted by the month-long strike at Manesar plant.
• 2W stocks: Hero MotoCorp & Bajaj Auto will outperform in 2Q with double-digit YoY earnings growth due to better volume growth
and lesser margin pressures than 4Ws
Banks/FIs • During 2QFY12, we expect Indian banks to report 15% growth in profit driven by healthy growth in operating profit.
• Sector loans have grown by 20% YoY and will be key to NII growth as NIMs may be under pressure.
• CASA growth for banks would see some pressure, but margins would expand QoQ due to hike in lending rates.
• Asset quality trends will be the key to watch, especially stress in infrastructure sector. PSU banks may see slippages due to
transition to automated NPL recognition.
• Axis may surprise on the upside and SBI may see uptick in profits after 2 subdued quarters; depreciation of Rupee will result in
high MTM losses for PFC.
Cap goods • L&T – focus on order inflow guidance; Expect 20% revenue growth, tamed down by Fx, margins
• JPA profits weaker YoY on lower cement margins. Property profits higher, construction weaker
• For BHEL we forecast Ebitda margins to fall by 40bps YoY to 17.3%. Consequently, Ebitda increases by 11% YoY, to 16.4bn.
Cement • Cement demand showed a pick up with 2Q estimated to have grown at ~7% (cf. 1% in 1Q).
• Average cement prices are estimated to be down ~7% QoQ due to pressures in most markets (ex-south)
• On a YoY basis, a low base would help as our coverage would report strong earnings growth.
Consumer • While we expect topline momentum to continue in 2Q, input costs should continue to stay high while A&P should also inch up on a
QoQ basis.
• We expect HUL to report a 8% volume growth; lower margins and higher taxes would moderate the net earnings growth to 5%
• ITC’s cigarette volume should rise ~7% with margin expansion; on the whole, we expect net earnings to rise 17% YoY
Media • We believe softness in the advertising market will continue in 2QFY12.
Metals • Steel: All steel companies, with the exception of JSPL, will report YoY decline in earnings. Tata Steel’s consol profit will decline
29% YoY, in spite of a strong 27% YoY growth in standalone profits, as Ebitda/t for Corus will fall sharply to mid-teens.
• Base Metals: Both Sterlite and Hindalco will report strong profit growth in 1Q but Sterlite’s profit growth at 44% will be stronger
than Hindalco’s at 12%. Higher profits in HZL and earnings accretion from Anglo Zinc will boost Sterlite’s 2Q results. Hindalco will
benefit from YoY higher LME prices but fuel costs will be higher YoY as well.
Oil & gas–
State
owned
• While we build in 55% as government share and one-third for upstream for full year FY12, we expect Rs100bn as government
support in 2QFY12 even as upstream sharing stays at one-third.
• Despite a 51%QoQ decline in gross under-recoveries in 1Q, this kind of sharing will keep the downstream companies
(IOC/BPCL/HPCL) in losses for 2Q.
• Upstream companies will report their highest ever quarterly profit due to the decline in under-recoveries. While OIL should register
a 39%YoY increase, ONGC net profit may rise by 47%YoY.
Oil & gas–
Private
• Lower KGD6 production would be more than offset by higher refining (US$10.5/bbl, + $0.3/bblQoQ) and higher other income
resulting in a 2%QoQ increase in Reliance’s net profit to Rs57.5bn.
• A one time prior period charge related to Cairn’s share of royalty borne by ONGC will pull down Cairn’s profit by a sharp 75%QoQ.
Pharma • Pharma companies reported earnings for the quarter are likely to be muted or even see declines due to forex losses on hedges
and translation loss on foreign liabilities.
• Domestic formulations growth should be modest on a YoY basis considering pick up in month of August. Ebitda margins are also
usually higher this quarter because of higher contribution of domestic business.
Power • NTPC’s generation is down 2% in July and August due to lower PLFs at most of its plants. We expect 10% growth in preexceptional
profit in 2QFY12 mainly due to increase in the regulated equity with the commissioning of new units.
• Tata Power’s standalone profits are expected to increase by 6% YoY in 1Q. For the Indonesian coal companies we expect 14mt
sales and realization of US$90/t
Property • DLF’s sales/revenues down on no new launches but land sale profits will support PAT.
• Unitech sales flat but expect lower revenues on weak execution.
• Sobha to post strong sales, steady revenues. Flat quarter for Oberoi.
IT • The recent correction and EPS downgrades mean that tier-1 Tech stocks enter this result season amidst lowered investor
expectations.
• Near term EPS may be bolstered by positive currency swing, but FY13 revenue growth, the most prominent indicator of stock
performance, remains suspect under these macro economic uncertainties
• We see the up-coming results season as a mere hiatus leading to the uncertainty of the 2012 budgeting season. A muted
budgeting season will impact the revenue trajectory more than what a strengthening dollar can rescue. We maintain our negative
stance on the sector.
Telecom • Mobile net addition momentum has slowed in 2QFY12.
• We estimate revenue per minute to remain stable but profits to be hit by forex losses on overseas borrowings
Source: CLSA Asia-Pacific Markets
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