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India Strategy
2QFY12 Preview: Weak
earnings; Downgrades continue
�� Different quarter same story; Results expected to be weak
The Sensex companies are expected to mirror the previous quarter with weak
headline profit growth of 10.8% on a consolidated basis and 14.6% on a
standalone basis. This is the weakest forecast in the last 8 quarters. Second,
even the sales growth at 16.9% is expected to be the slowest in the last 8
quarters. Third, margins on an aggregate basis are expected to continue
declining. Lastly, we continue to expect downgrades to our Sensex EPS from
1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340
(our expectation is Rs1250).
Margin pressure continues; Energy, IT & Autos worst hit
Aggregate Sensex EBITDA margins are expected to show a drop of 90bp. This is
largely led by Energy (-210bp YoY), Software (-200bp YoY) & Auto (-130bp YoY).
While input cost pressures are likely to ease off, we think slowing topline growth
will continue to drag earnings growth.
Energy, Pvt banks lead growth; Autos, Telecom & Tisco drag
Among Sensex cos, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite & ITC
are expected to be key contributors of growth. On the other hand Autos (Maruti,
Tata Motors), Telecom (Bharti) & TISCO are expected to drag down growth.
Rupee depreciation could cause earnings volatility
The depreciation of the rupee will likely cause volatility in earnings. On the
positive side, rupee EPS for IT companies (Infosys) should be upgraded. On the
negative side companies like Ranbaxy, Power Finance, Sintex are likely to report
losses on forex borrowings (most companies don’t route this through the P&L).
Strong Results: Ultratech, Suzlon, Eicher Motors
Weak Results: Tata Steel, Ranbaxy, L&T (guidance cut)
Sector
Potential Result
Outperformer
Potential Result
Underperformer Comments
Automobile - Maruti Suzuki
We expect double digit YoY growth in sales for the sector, driven by strong growth in two wheelers. However on a sequential
basis, sales are expected to be flat, despite seasonally strong quarter due to decline in passenger cars as well as production
issues at Maruti.
We expect Maruti’s sales to decline by 10% qoq (16% yoy), due to similar decline in volumes on labour unrest at Manesar
plant. Margins are expected to decline 145bps yoy and 50bps qoq due to higher input costs, discounts and negative
operating leverage.
We expect Tata Motors’ consolidated sales to grow 18% YoY, driven by 26% increase in JLR sales.
Banking ICICI Bk Union Bank,
BoB
Growth intact, but margins/asset quality could see pressure.
2Q12 PAT: Most Govt. banks on weak foot on topline / NPLs; Private Bk: Growth (profit) at +16-22%, ex HDFC BK (30%)
NBFCs: volume growth strong, but margins under pressure
Cement UltraTech,
India Cement
Ambuja,
Shree
Margins to drop QoQ, but stay better YoY; Volume growth recovers in 2Q but big regional disparities
Recent downward bias in energy prices has brought some respite to the inflation pressure on input costs
UltraTech, India Cements to outperform; Ambuja to underperform
Consumer ITC
Expect ITC to report over 7% volume growth in cigarettes. Backed by this and by already effected price hike of ~5% on
blended basis we see margins expanding 115bp yoy.
Expect HUL to post volume growth at ~10%. Led by ~4% growth in blended pricing we see revenue growth at 14%. As raw
material prices remain high yoy, expect margins to decline 20bp. Led by this we see PAT growth at 10%.
Energy - -
OIL India-We expect OIL’s 2Q profit to be 25% YoY higher at Rs11.5bn driven by 13% YoY higher oil price, 15% YoY higher
gas volumes
Reliance- We estimate RIL’s 2Q FY12E net profit to be 17% YoY higher at Rs57.7bn. We expect EBITDA to rise by 4% YoY
to Rs97.4bn
R&M companies- R&M companies will bear Rs32bn of the diesel and LPG-kerosene subsidy in 2Q. However, they will also
have to bear the petrol subsidy of Rs3bn
Healthcare Divis,
Glenmark
Aurobindo,
Ranbaxy
We expect 2Q results to be weak for most companies under our coverage as MTM hits pertaining to forex fluctuation is likely
to hurt profit growth. Moreover, slower domestic formulations business (especially acute therapy segments) is likely to affect
companies with higher exposure to acute therapies.
Overall for the sector, we expect average adjusted profit growth (ex-MTM losses) to be restricted at 1% even as we expect
sales growth of 12%, EBITDA growth of 10% YoY.
Industrials Suzlon
ABB,
L&T,
IVRC, NJCC
We expect 48%YoY growth in rec. PAT of Indian Engineering & Construction (E&C) majors (ex-Suzlon) led by improved
execution (L&T).
We expect the Indian E&C Sector, represented by BHEL, L&T, Suzlon, ABB, IVRCL and NJCC to report sales growth of
17%YoY, EBITDA growth of 26%YoY and Recurring PAT growth of 48%YoY.
We expect double digit growth in order backlog for most E&C companies.
Metals JSPL JSW Steel,
Tata Steel
In the Sept Q On a YoY basis, we expect profits to grow 17% and EBITDA to grow 20% on YoY basis.
In Sept Q, base metal prices were flat QoQ for Zinc, Cu and lead, but Al LME was down 7%QoQ. In steels, we expect
marginal improvement in volumes and flat ASP on a QoQ basis. But domestic margins for most steel cos will likely be lower
due to full impact of higher coking coal prices.
Real Estate Sobha DLF
We expect muted performance in 2Q from most of the real estate developers given the monsoons and limited new launches.
We expect the volume to be strong for the South India players given slew of launches since June 2011. The debt levels are
expected to remain flat given the benefits of non core asset sales (DLF and HDIL) likely to flow in from 3Q.
Software Infosys,
Hexaware Persistent
We expect a reasonably strong 5-6%qoq USD rev growth in 2Q for IT majors, net of 0.5-1% cross-currency impact.
Depreciation of INR vs. USD to help Infy, TCS post op. margin expansion while Wipro, HCLT, TechM, Persistent and Rolta
are likely to show qoq margin decline on account of wage hikes.
Hedging loss is likely to lower other income for vendors this qtr, especially TCS
Commentary on demand outlook is likely to be cautious (on account of macro health) but optimistic as customers continue to
spend on optimizing business.
Telecom Idea Cellular RCom
All eyes on margins post tariff hikes;
Seasonal weakness and slower net adds to drag topline growth.
MTM forex losses likely for Bharti & Rcom; Idea seems well placed but regulatory risk is a swing factor
Utilities JP Power
Adani Power,
Neyveli,
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 20%YoY, EBITDA growth of 31%YoY and PAT growth of
22%YoY mainly led by APL, GIPCL, JP Power and Tata Power.
Source: BofA Merrill Lynch Global Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
2QFY12 Preview: Weak
earnings; Downgrades continue
�� Different quarter same story; Results expected to be weak
The Sensex companies are expected to mirror the previous quarter with weak
headline profit growth of 10.8% on a consolidated basis and 14.6% on a
standalone basis. This is the weakest forecast in the last 8 quarters. Second,
even the sales growth at 16.9% is expected to be the slowest in the last 8
quarters. Third, margins on an aggregate basis are expected to continue
declining. Lastly, we continue to expect downgrades to our Sensex EPS from
1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340
(our expectation is Rs1250).
Margin pressure continues; Energy, IT & Autos worst hit
Aggregate Sensex EBITDA margins are expected to show a drop of 90bp. This is
largely led by Energy (-210bp YoY), Software (-200bp YoY) & Auto (-130bp YoY).
While input cost pressures are likely to ease off, we think slowing topline growth
will continue to drag earnings growth.
Energy, Pvt banks lead growth; Autos, Telecom & Tisco drag
Among Sensex cos, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite & ITC
are expected to be key contributors of growth. On the other hand Autos (Maruti,
Tata Motors), Telecom (Bharti) & TISCO are expected to drag down growth.
Rupee depreciation could cause earnings volatility
The depreciation of the rupee will likely cause volatility in earnings. On the
positive side, rupee EPS for IT companies (Infosys) should be upgraded. On the
negative side companies like Ranbaxy, Power Finance, Sintex are likely to report
losses on forex borrowings (most companies don’t route this through the P&L).
Strong Results: Ultratech, Suzlon, Eicher Motors
Weak Results: Tata Steel, Ranbaxy, L&T (guidance cut)
Sector
Potential Result
Outperformer
Potential Result
Underperformer Comments
Automobile - Maruti Suzuki
We expect double digit YoY growth in sales for the sector, driven by strong growth in two wheelers. However on a sequential
basis, sales are expected to be flat, despite seasonally strong quarter due to decline in passenger cars as well as production
issues at Maruti.
We expect Maruti’s sales to decline by 10% qoq (16% yoy), due to similar decline in volumes on labour unrest at Manesar
plant. Margins are expected to decline 145bps yoy and 50bps qoq due to higher input costs, discounts and negative
operating leverage.
We expect Tata Motors’ consolidated sales to grow 18% YoY, driven by 26% increase in JLR sales.
Banking ICICI Bk Union Bank,
BoB
Growth intact, but margins/asset quality could see pressure.
2Q12 PAT: Most Govt. banks on weak foot on topline / NPLs; Private Bk: Growth (profit) at +16-22%, ex HDFC BK (30%)
NBFCs: volume growth strong, but margins under pressure
Cement UltraTech,
India Cement
Ambuja,
Shree
Margins to drop QoQ, but stay better YoY; Volume growth recovers in 2Q but big regional disparities
Recent downward bias in energy prices has brought some respite to the inflation pressure on input costs
UltraTech, India Cements to outperform; Ambuja to underperform
Consumer ITC
Expect ITC to report over 7% volume growth in cigarettes. Backed by this and by already effected price hike of ~5% on
blended basis we see margins expanding 115bp yoy.
Expect HUL to post volume growth at ~10%. Led by ~4% growth in blended pricing we see revenue growth at 14%. As raw
material prices remain high yoy, expect margins to decline 20bp. Led by this we see PAT growth at 10%.
Energy - -
OIL India-We expect OIL’s 2Q profit to be 25% YoY higher at Rs11.5bn driven by 13% YoY higher oil price, 15% YoY higher
gas volumes
Reliance- We estimate RIL’s 2Q FY12E net profit to be 17% YoY higher at Rs57.7bn. We expect EBITDA to rise by 4% YoY
to Rs97.4bn
R&M companies- R&M companies will bear Rs32bn of the diesel and LPG-kerosene subsidy in 2Q. However, they will also
have to bear the petrol subsidy of Rs3bn
Healthcare Divis,
Glenmark
Aurobindo,
Ranbaxy
We expect 2Q results to be weak for most companies under our coverage as MTM hits pertaining to forex fluctuation is likely
to hurt profit growth. Moreover, slower domestic formulations business (especially acute therapy segments) is likely to affect
companies with higher exposure to acute therapies.
Overall for the sector, we expect average adjusted profit growth (ex-MTM losses) to be restricted at 1% even as we expect
sales growth of 12%, EBITDA growth of 10% YoY.
Industrials Suzlon
ABB,
L&T,
IVRC, NJCC
We expect 48%YoY growth in rec. PAT of Indian Engineering & Construction (E&C) majors (ex-Suzlon) led by improved
execution (L&T).
We expect the Indian E&C Sector, represented by BHEL, L&T, Suzlon, ABB, IVRCL and NJCC to report sales growth of
17%YoY, EBITDA growth of 26%YoY and Recurring PAT growth of 48%YoY.
We expect double digit growth in order backlog for most E&C companies.
Metals JSPL JSW Steel,
Tata Steel
In the Sept Q On a YoY basis, we expect profits to grow 17% and EBITDA to grow 20% on YoY basis.
In Sept Q, base metal prices were flat QoQ for Zinc, Cu and lead, but Al LME was down 7%QoQ. In steels, we expect
marginal improvement in volumes and flat ASP on a QoQ basis. But domestic margins for most steel cos will likely be lower
due to full impact of higher coking coal prices.
Real Estate Sobha DLF
We expect muted performance in 2Q from most of the real estate developers given the monsoons and limited new launches.
We expect the volume to be strong for the South India players given slew of launches since June 2011. The debt levels are
expected to remain flat given the benefits of non core asset sales (DLF and HDIL) likely to flow in from 3Q.
Software Infosys,
Hexaware Persistent
We expect a reasonably strong 5-6%qoq USD rev growth in 2Q for IT majors, net of 0.5-1% cross-currency impact.
Depreciation of INR vs. USD to help Infy, TCS post op. margin expansion while Wipro, HCLT, TechM, Persistent and Rolta
are likely to show qoq margin decline on account of wage hikes.
Hedging loss is likely to lower other income for vendors this qtr, especially TCS
Commentary on demand outlook is likely to be cautious (on account of macro health) but optimistic as customers continue to
spend on optimizing business.
Telecom Idea Cellular RCom
All eyes on margins post tariff hikes;
Seasonal weakness and slower net adds to drag topline growth.
MTM forex losses likely for Bharti & Rcom; Idea seems well placed but regulatory risk is a swing factor
Utilities JP Power
Adani Power,
Neyveli,
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 20%YoY, EBITDA growth of 31%YoY and PAT growth of
22%YoY mainly led by APL, GIPCL, JP Power and Tata Power.
Source: BofA Merrill Lynch Global Research
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