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Across the Board: 2QFY12E earnings preview
2QFY12E earnings preview: India coverage
In this note, we aggregate data for our coverage
in India (133 stocks across 14 sectors) to quantify
expectations for 2QFY12E.
Revenue slowdown and high interest cost to
weigh on earnings
We expect a deceleration in revenue growth in
2QFY12E at 19% vs. 25% in 1Q on a slowdown in
domestic demand, along with high interest
expenses, to lead to net income growth of 9% (vs.
11%/16% in 1Q/4Q). We expect 9 out of 14 sectors
to witness yoy margin contraction in 2Q, led by IT,
Auto, and Industrials. While we expect EBIT to
expand for most sectors in 2Q due to top-line
growth, we expect Autos to report a yoy EBIT
decline as cost pressures weigh on profits.
Our top Buys to deliver 25% EBIT growth
and 12% net income growth this quarter
We believe our top ‘Buys’ will outperform our
broader coverage in FY12E and deliver aggregate
24% top-line growth and 25% growth in EBIT. Our
top picks are currently trading at a 9% discount to
MSCI India’s 12-month fwd P/E.
Analyzing the impact of forex fluctuation on
our coverage
We analyze the impact of the recent depreciation
of the Indian Rupee vs. US dollar on our coverage.
We arrive at the following conclusions: (1)
Companies, which have foreign debt or significant
imports and no natural hedge in the form of
export revenue could have significant negative
impact such as JAIA.BO, PWFC.BO and ICMN.BO
(all Neutral), among other stocks, and in turn have
negative P&L impact. (2) We also highlight
companies, which have a natural hedge to a high
proportion of foreign debt, like state utilities
NTPC.BO (Neutral) and PGRD.BO (Sell), where
tariffs are linked to input costs. (3) We believe the
IT sector is the biggest beneficiary of INR
depreciation as a significant portion of revenues
comes from exports, and the sector has minimal
exposure to foreign debt. We highlight INFY.BO
(Buy) and HCLT.BO (CL-Buy). Upstream oil
companies such as CAIL.BO (Buy) are likely to
benefit, while RELI.BO (Neutral) is likely to benefit
due to its higher proportion of export sales.
Sector 2QFY12 expectations
Automobiles
> We expect 1% yoy decline in net income for the sector, driven by 10% aggregate yoy revenue growth but
140bps EBIT margin decline. Sequentially, we expect net income to be seasonally stronger and grow by
24%, driven by 33% 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 2Q and FY2012.
Consumer Staples
> We 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.
> Raw materials, particularly those based on crude remained high through the quarter, particularly for HUL,
Marico, Dabur, and Colgate.
> Input cost pressure in the quarter was further increased by the rupee depreciation witnessed towards the
end of the quarter, although this may benefit Marico and Dabur to an extent.
Fertilizers
> Agri chemicals volumes to decline qoq due to seasonality. We expect margins to remain subdued (due to
uncertainty in Europe and US markets) and soda ash margins to be under pressure due to higher costs.
> Things to look out for: Revenue growth guidance for Europe and US markets.
Financials
> We expect net income growth of 24% yoy in 2Q driven by an operating income growth of 15% and lower
loan provisioning.
> We expect the NIMs to compress (YoY) due to a) lower incremental LDR (YTD:42%) and b) impact of
higher NPLs from moving to system-based NPL recognition for state-owned banks.
Healthcare
> We expect average revenue growth of 13% yoy in 1QFY12 for our coverage universe. Revenue growth will
remain stable compared with the previous year's quarter.
> We expect EBIT growth to slow down at 8% yoy for the Indian healthcare sector in 1QFY12 due to 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 in FY12 will be a key metric to watch. > Impact of higher commodity prices on margin performance
during the quarter and for FY12.
> Given the strong balance sheet for these companies, market is likely to focus on revenue growth guidance
for FY12-FY13.
Infrastructure
> Weak order inflows have been a key feature of the infrastructure segment in 1Q. Updates on order inflow
visibility in FY12 would be the key.
> We expect steady toll collection on operational projects and strong execution on existing order backlog in
the construction division of infrastructure companies.> We expect net margins to decline due to high finance
costs for majority of the companies under our 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.
Sector 2QFY12 expectations
IT Services
> We expect a strong quarter for the IT services sector led by the large caps, as we believe revenue
momentum for the sector has not slowed due to macro concerns. We expect a 6.5% qoq revenue growth
on the back of sustained volumes.
> Our recent IT trip supports our view that 2011 projects are not to be impacted, which has also been
supported by Accenture’s recent results and positive commentary.
> Among the major fundamental drivers to watch out for this quarter are: (1) Outlook for 2012 and
management commentary on uncertainty around IT budgets; (2) BFSI/Telecom vertical may see pressure
this quarter.(3) We expect the strong currency moves in the past 3 weeks to be mitigated by currency
hedges (average INR-USD exchange rate of 45.7 during the quarter). However, we would watch out for the
impact of mark-to-market losses on these hedges.
Materials: Cement
> Despite improved realizations in 2Q, 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 2QFY12.
> We estimate 3QFY12 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 2QFY12
base metal prices (except aluminum) declined 5%-6% qoq.
Oil & Gas
> RIL's 2QFY12 earnings is likely to remain under pressure largely driven by lower margins in Petrochem
business partly offset by higher refining margins, in our view.
> Earnings will be impacted negatively for Cairn India and positively for ONGC due to the one-time
adjustment for royalty on the Rajasthan block.
Subsidy burden for the upstream companies has been provisionally fixed at 33% for the quarter and as of
now it seems there will not be any deviation thereof.
Real estate
> We expect revenues to be driven by increased execution of projects.
> We expect better news flow on pre-sales given significant launches by companies like Sobha, Prestige and
Unitech.
> We expect action on the debt reduction front.
Utilities
> We expect the overall utilization levels and merchant realizations to decline due to seasonally weak
quarter and deteriorating finances of the state electricity boards.
> We expect some companies to book notional fx losses due to rupee depreciation.
> Things to look out for: trend of fuel supplies and news flows on capacity additions.
Source: Goldman Sachs Research estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Across the Board: 2QFY12E earnings preview
2QFY12E earnings preview: India coverage
In this note, we aggregate data for our coverage
in India (133 stocks across 14 sectors) to quantify
expectations for 2QFY12E.
Revenue slowdown and high interest cost to
weigh on earnings
We expect a deceleration in revenue growth in
2QFY12E at 19% vs. 25% in 1Q on a slowdown in
domestic demand, along with high interest
expenses, to lead to net income growth of 9% (vs.
11%/16% in 1Q/4Q). We expect 9 out of 14 sectors
to witness yoy margin contraction in 2Q, led by IT,
Auto, and Industrials. While we expect EBIT to
expand for most sectors in 2Q due to top-line
growth, we expect Autos to report a yoy EBIT
decline as cost pressures weigh on profits.
Our top Buys to deliver 25% EBIT growth
and 12% net income growth this quarter
We believe our top ‘Buys’ will outperform our
broader coverage in FY12E and deliver aggregate
24% top-line growth and 25% growth in EBIT. Our
top picks are currently trading at a 9% discount to
MSCI India’s 12-month fwd P/E.
Analyzing the impact of forex fluctuation on
our coverage
We analyze the impact of the recent depreciation
of the Indian Rupee vs. US dollar on our coverage.
We arrive at the following conclusions: (1)
Companies, which have foreign debt or significant
imports and no natural hedge in the form of
export revenue could have significant negative
impact such as JAIA.BO, PWFC.BO and ICMN.BO
(all Neutral), among other stocks, and in turn have
negative P&L impact. (2) We also highlight
companies, which have a natural hedge to a high
proportion of foreign debt, like state utilities
NTPC.BO (Neutral) and PGRD.BO (Sell), where
tariffs are linked to input costs. (3) We believe the
IT sector is the biggest beneficiary of INR
depreciation as a significant portion of revenues
comes from exports, and the sector has minimal
exposure to foreign debt. We highlight INFY.BO
(Buy) and HCLT.BO (CL-Buy). Upstream oil
companies such as CAIL.BO (Buy) are likely to
benefit, while RELI.BO (Neutral) is likely to benefit
due to its higher proportion of export sales.
Sector 2QFY12 expectations
Automobiles
> We expect 1% yoy decline in net income for the sector, driven by 10% aggregate yoy revenue growth but
140bps EBIT margin decline. Sequentially, we expect net income to be seasonally stronger and grow by
24%, driven by 33% 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 2Q and FY2012.
Consumer Staples
> We 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.
> Raw materials, particularly those based on crude remained high through the quarter, particularly for HUL,
Marico, Dabur, and Colgate.
> Input cost pressure in the quarter was further increased by the rupee depreciation witnessed towards the
end of the quarter, although this may benefit Marico and Dabur to an extent.
Fertilizers
> Agri chemicals volumes to decline qoq due to seasonality. We expect margins to remain subdued (due to
uncertainty in Europe and US markets) and soda ash margins to be under pressure due to higher costs.
> Things to look out for: Revenue growth guidance for Europe and US markets.
Financials
> We expect net income growth of 24% yoy in 2Q driven by an operating income growth of 15% and lower
loan provisioning.
> We expect the NIMs to compress (YoY) due to a) lower incremental LDR (YTD:42%) and b) impact of
higher NPLs from moving to system-based NPL recognition for state-owned banks.
Healthcare
> We expect average revenue growth of 13% yoy in 1QFY12 for our coverage universe. Revenue growth will
remain stable compared with the previous year's quarter.
> We expect EBIT growth to slow down at 8% yoy for the Indian healthcare sector in 1QFY12 due to 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 in FY12 will be a key metric to watch. > Impact of higher commodity prices on margin performance
during the quarter and for FY12.
> Given the strong balance sheet for these companies, market is likely to focus on revenue growth guidance
for FY12-FY13.
Infrastructure
> Weak order inflows have been a key feature of the infrastructure segment in 1Q. Updates on order inflow
visibility in FY12 would be the key.
> We expect steady toll collection on operational projects and strong execution on existing order backlog in
the construction division of infrastructure companies.> We expect net margins to decline due to high finance
costs for majority of the companies under our 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.
Sector 2QFY12 expectations
IT Services
> We expect a strong quarter for the IT services sector led by the large caps, as we believe revenue
momentum for the sector has not slowed due to macro concerns. We expect a 6.5% qoq revenue growth
on the back of sustained volumes.
> Our recent IT trip supports our view that 2011 projects are not to be impacted, which has also been
supported by Accenture’s recent results and positive commentary.
> Among the major fundamental drivers to watch out for this quarter are: (1) Outlook for 2012 and
management commentary on uncertainty around IT budgets; (2) BFSI/Telecom vertical may see pressure
this quarter.(3) We expect the strong currency moves in the past 3 weeks to be mitigated by currency
hedges (average INR-USD exchange rate of 45.7 during the quarter). However, we would watch out for the
impact of mark-to-market losses on these hedges.
Materials: Cement
> Despite improved realizations in 2Q, 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 2QFY12.
> We estimate 3QFY12 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 2QFY12
base metal prices (except aluminum) declined 5%-6% qoq.
Oil & Gas
> RIL's 2QFY12 earnings is likely to remain under pressure largely driven by lower margins in Petrochem
business partly offset by higher refining margins, in our view.
> Earnings will be impacted negatively for Cairn India and positively for ONGC due to the one-time
adjustment for royalty on the Rajasthan block.
Subsidy burden for the upstream companies has been provisionally fixed at 33% for the quarter and as of
now it seems there will not be any deviation thereof.
Real estate
> We expect revenues to be driven by increased execution of projects.
> We expect better news flow on pre-sales given significant launches by companies like Sobha, Prestige and
Unitech.
> We expect action on the debt reduction front.
Utilities
> We expect the overall utilization levels and merchant realizations to decline due to seasonally weak
quarter and deteriorating finances of the state electricity boards.
> We expect some companies to book notional fx losses due to rupee depreciation.
> Things to look out for: trend of fuel supplies and news flows on capacity additions.
Source: Goldman Sachs Research estimates.
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