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Strategy
September 2011 quarter earnings preview. We expect the earnings of the KIE
universe to grow 3.5% yoy on an ex-Energy basis, but decline 24.2% yoy on an overall
basis; yoy comparisons of financial performance of R&M companies are not meaningful
due to fluctuations in timing and in the quantum of compensation/subsidy from the
government. We expect the earnings of the Energy and Telecom sectors to decline yoy
while the earnings of Cement, Consumers, Industrials and Technology will likely improve
yoy. We expect the earnings of the BSE-30 Index to grow 11.7% yoy and 6% qoq. On
an ex-Energy basis, we expect the earnings of the BSE-30 Index to grow 4.6% yoy.
Q2FY12 RESULTS PREVIEW
13.5% revenue growth expected during the quarter (ex Oil &
Gas)
We expect stocks under our coverage (ex-banking / NBFCs) to report revenue
growth of about 14.7% on a YoY basis. This is partly helped by the scale up in
revenues of Cairn India. Ex - Oil & Gas, revenue growth is expected to be about
13.5%. Among others, Cement, Capital Goods and IT are expected to propel this
growth. Revenues of Cement and IT companies are expected to be driven by
volumes. Higher execution should drive revenues of Capital Goods companies. We
will watch our for execution issues, if any, in Construction and Capital Goods
sectors.
For Banks / NBFCs, we expect muted credit growth during Q2FY12. Although system
wide loan growth came at 20.4% YoY (as on September 09, 2011), in absolute
terms loans declined by Rs.120 bn during Q2FY12 (till September 09, 2011). This
implies sequential growth of 0.3% during Q2FY12; YTD growth of 3.4%. However,
deposit mobilization has slightly improved to 17.7% (as on September 09, 2011) as
against 14.7% witnessed a year ago.
Moreover, we are expecting flat/marginal compression in NIM (QoQ) during Q2FY12
as compared to 20-30 bps compression witnessed during Q1FY12 (again depending
on the CASA mix or liability franchise of the individual banks) as transmission of high
base rates would more than offset the lagged impact of deposit re-pricing at higher
rates. However, NBFCs are likely to witness continued compression on their margins,
as borrowing costs for them have been rising with limited scope to charge higher
rates from borrowers on back of moderating loan growth.
Margins are expected to be lower for our coverage universe (ex-
Oil & Gas)
EBIDTA margins for the companies under our coverage are expected to be lower on
a YoY basis (ex Oil & Gas). Most of the sectors, except Capital Goods and Cement
are expected to witness pressure on margins on YoY basis. The pressure on margins
is due to pressure on revenues (Shipping) and higher raw material prices
(Automobiles, Media) which companies have not been able to pass on fully.
Moreover, salary increases and rupee appreciation on a YoY basis (depreciation on
QoQ basis, though) are expected to hurt margins of IT companies.
As far as banks are concerned, pre-provisioning profits are expected to rise by about
11.1% v/s a 14.5% rise in NIIs. A relatively lower treasury profit is expected to have
an impact. We also expect PSU banks which are yet to migrate (fully) to automated
NPA recognition system are likely to witness higher slippage and hence have to set
aside higher provisions during Q2FY12. Many banks are also likely to spring negative
surprises by recognizing higher slippage in the agriculture segment. NBFCs are
expected to report a muted growth of about 3.1% in pre-provisioning profits on back
of weak core performance.
Focus on concerns
While 2QFY12 results will be important, the focus has been and is expected to be on
some of the other pressing concerns.
Domestically, we will focus hard on the execution issues, if any, faced by capital
goods and construction companies. More importantly, the order bookings by large
capital goods and construction companies during the quarter will be of interest to us.
The past few quarters have seen a slow-down in order flows. We will also keenly
hear the management comments on any momentum in decision - making and order
- flows for these companies.
Inflation and the increase in interest rates will remain a focus point for the markets.
To that extent, results of debt heavy companies will be watched with caution and so
also the results of all rate sensitive sectors, we understand.
We will also maintain a close watch on the global commodity prices. These are
expected to impact margins of companies in 2QFY12. While prices have moderated
a bit in 2QFY12, further moderation is desirable. However, increase in the
commodity prices from these levels may keep margins of corporate India under
pressure, if the increases are not fully passed on. Any lingering impact may dampen
sentiments.
We will also closely track the management comments on the impact of the global
economic issues on client decisions and budgets. This will be more important for the
prospects of the IT sector.
Conclusion
Markets have been very choppy and have remained under pressure since the past
few months due to the global economic concerns and also domestic issues - scams,
lack of decision making, high inflation, etc.
In such a scenario, corporate results assume greater importance. Expectations are
not very high, in our view, which may act as a cushion for the markets. We opine
that, if the markets have to sustain the current levels and move up, it will need to
have more confidence in the medium-to-long term growth rates of Corporate India.
Also, the above-mentioned concerns have to be effectively and immediately
addressed.
The room for disappointment is very limited, in our view. Disappointment in earnings
or on future outlook may result in corresponding/specific corrections
Key points Key points
Automobiles We expect a weak quarter for auto companies driven by raw material cost pressures. We estimate
revenues to increase by 18% yoy and 4% qoq for companies under our coverage but expect EBITDA
margins to decline by 140 bps yoy due to raw material cost pressures and adverse product mix. For our
coverage universe we expect adjusted earnings (excluding forex translation losses on foreign debt) to
decline by 3% yoy but improve by 2% qoq.
We expect Bajaj Auto, Hero Motocorp, M&M and Bharat Forge to report positive yoy
earnings growth while Ashok Leyland, Maruti Suzuki, Tata Motors and Exide Industries are
likely to report a decline in earnings. Raw material costs will likely decline from 3QFY12E as
current contracts for steel expire (by October) and tyre prices soften with a quarter's lag.
Decline in aluminum prices will likely more than offset impact of rise in tyre prices this
quarter for Bajaj Auto, Hero Motocorp and Maruti Suzuki.
Banking We expect banks to deliver 10% yoy earnings growth. Qoq growth will be similar as 1QFY12 saw oneoff
provisioning pertaining to revised NPL provisioning norms. NII growth to be 12% yoy. Overall NIM to
remain flat qoq as banks have taken a disproportionate hike in lending rates while wholesale rates have
been stable. Slippages to remain at elevated levels for public banks as they complete the final leg of
transition to the stringent NPL platform while private banks would see limited impact. Provisions would
remain high on the back of higher specific provisions.
We expect NBFCs to report a stable quarter. NIM to remain flat qoq. Loan growth trends to
remain healthy. We see limited deterioration in asset quality in the current quarter. We
expect higher forex losses to tamper earnings growth for PFC and REC.
Cement Our coverage universe will register a 7.7% yoy growth in volumes in 2QFY12E primarily driven by (1)
strong volume growth of ACC and Jaiprakash and (2) first signals of a potential demand revival with
industry volumes registering a strong 11% and 8% yoy growth in July and August. Cement prices
declined by Rs14-15/bag sequentially due to seasonal impact of monsoon months. However, post the
weakness witnessed in monsoon (months of July and August), cement prices are already showing signs
of revival in several pockets—especially those of West and North India.
We estimate a 38% sequential dip in profitability driven primarily by (1) 6% qoq decline in
average realizations on account of pricing weakness in the months of July and August and
(2) 4% qoq decline in volumes. We, however, see an abatement of input cost inflation
factoring a modest 5% sequential increase in operating costs driven primarily by freight and
raw material costs.
Chemicals Decline in global chemical margins qoq will be negative for the profitability of the chemical segment of
Reliance Industries.
Consumers We expect good sales growth for staples driven by modest volume growth and high price increases.
Discretionary products sales likely benefited from festive season sales. Gross margin pressure will
continue on a yoy basis although it will likely ease off sequentially. Savings in adspends will likely help
manage EBITDA margins. HUL, ITC, Jubilant Foodworks, Nestle will likely deliver strong results.
We expect 13% yoy sales growth in ITC's cigarette segment, led by mix of pricing and
volume growth. We expect HUL to report sales growth of 14% yoy, driven by volume
growth of 7%. Increase in material cost will likely be offset by adspends savings and we
expect HUL's overall EBITDA margin to be flat on a yoy basis. Asian Paints will likely report
~34% yoy sales growth led by mix of pricing (~15%) and volume growth driven by a low
base and festive season sales.
Energy Upstream oil: ONGC and OIL will likely report a strong yoy increase in revenues and net income due to
sharply higher net crude price realizations. We assume that upstream companies will bear 33.33% of
the overall subsidy burden. GAIL will likely report a qoq increase in EBITDA due to a lower subsidy
burden.
Downstream oil: Performance of R&M companies will depend on contributions from
government and upstream companies. We estimate gross under-recoveries of Rs234 bn for
the industry for 2QFY12E. We assume nil compensation from the government in 2QFY12E.
We expect refining margins for OMCs to improve qoq led by higher tariff protection; this
will be partly mitigated by inventory/adventitious losses.
Industrials Industrials: Order inflows and commentary on investment scenario would be the key factors to focus on.
We may see execution slippage as some of the projects slow down based on weak investment scenario
as well as structural issues such as coal availability etc. We see risks to margins from higher commodity
prices, competition as well as mix changes. Industrial capex activity remains weak and woud reflect in
performance of companies such as Thermax, Voltas and Crompton. Continued high competition in the
domestic T&D sector would continue to pressure power segment margins. We expect Suzlon to report
sales of about 450 MW in this quarter but high interest and depreciation will likely lead to a net loss.
Construction: Existing order backlog to drive moderate revenue growth for IVRCL and
Nagarjuna although higher interest expense may impact net profits (expect yoy decline in
net profits). Execution of large BOT projects in the backlog to drive revenues of Sadbhav
Engineering.
Infrastructure: Stronger port volumes to drive revenue growth for MPSEZ and GPPL.
Media Television: We expect the weak advertising environment to continue on the back of rising interest rates
and weak economic environment (and sentiment) in 2QFY12E. However, the advertising uptick
characterized by the festival season seems to be coming through. Zee will likely report reduced sports
losses. Sun TV will likely report reduced domestic subscription revenues. Dish TV will likely report
continued positive operating leverage even as operating metrics (subscriber addition, ARPU and churn)
will likely be under pressure.
Print: We expect the weak advertising environment to continue on the back of rising interest
rates and weak economic environment (and sentiment) in 2QFY12E. However, >50% of
regional print media advertising comes from local advertisers, largely unaffected by
economic slowdown and likely to report uptick given the festival season. HT Media will
likely report pressure on English print advertising from real estate and BFSI sectors.
Metals Ferrous: We expect the profitability of steel companies to decline sequentially in 2QFY12E due to lagged
impact of increase in coking coal prices. Steel companies may have used higher-priced coking coal
during the quarter having exhausted their cheaper coking coal in the previous quarter. We forecast a
decline in EBITDA/ton for all steel companies. Tata Steel’s profitability is likely to be impacted by weak
performance of its European operations where demand still remains subdued. JSW Steel and Sesa Goa's
performance would be impacted by the ban on mining iron ore in Karnataka. Besides, this is a
seasonally weak quarter for Sesa Goa due to monsoons. Sharp depreciation of Re against US$ will also
result in forex losses for players with FCCBs.
Non-ferrous: Performance of all the non-ferrous companies is likely to be affected by the
softening of commodity prices during 2QFY12E. LME zinc, aluminum, copper and lead
prices have each fallen 2-8% sequentially over the last quarter. STLT's profits will likely
decline sequentially on the back of decline in commodity prices. Hindalco’s performance is
expected to be impacted by bi-annual shutdown in the early part of the quarter at its copper
plant and sequential decline in aluminum prices. Sharp depreciation of Re against US$ will
also result in forex losses for Sterlite.
Pharmaceuticals Generics: We expect a muted quarter for generics in general with the exception of certain companies
such as (1) Cipla driven by export sales and (2) Lupin and Glenmark, driven by India sales growth and
one-time licensing fees from Medicis and Sanofi, respectively. We expect Ranbaxy's results to be
subdued due to large MTM losses on forex loans and outstanding derivatives position. We expect Cipla,
Cadila and DRL to report poor India sales growth.
CMO/CROs: We expect muted results for Jubilant, Dishman, Biocon. We expect Divis to
report 30% PAT growth due to low base last year. We expect Jubilant and Dishman to
report yoy PAT decline. We expect Jubilant's results to be offset by large MTM losses on its
huge forex loans.
Property For 2QFY12E, we expect varied growth trends depending on launches and sales in 2HFY11 and
1HFY12E. Overall, we expect real estate companies to have a subdued-to-moderate growth in 2QFY12E
due to (1) marginally weaker-than-expected launches over the past four quarters, (2) lower-thanexpected
execution and (3) increase in interest rates, which will impact demand. Demand is worst hit in
Mumbai while Bengaluru remains the most resilient market.
Demand for India-wide office space/commercial property has bounced back post a dip in
CY2009 and is expected to grow a further 20% in CY2011E. However, with supply
continuing to outstrip demand, we believe it is unlikely that lease rates will appreciate
meaningfully. A slowdown in SEZ supply (28% of potential supply to CY2013E) due to tax
uncertainty could result in a potential favorable impact on demand-supply balance.
Technology We expect robust sequential volume growth (4-7%) for most players in the industry barring Wipro
among the Tier-Is and Mphasis/Tech Mahindra among the Tier-II names. We see TCS and Cognizant
once again leading the Tier-I pack on volume growth with Infosys and HCLT also reporting robust
numbers. Wipro is likely to lag although on expected lines. Among Tier-IIs, we expect MindTree and
Satyam to lead the pack. Adverse cross-currency movements will hit reported US$ revenue growth by
50-80 bps across companies. Overall, we expect 3.5-6% US$ revenue growth across Tier-I names and
0.5-6.5% growth across Tier-IIs.
Margin expansion would primarily be led by benefits from sharp Re depreciation during the
quarter (3-4% across companies, difference being on account of cash-flow hedging for
some companies and also different average spot computation methodologies). Among the
Tier-I names, we expect Infosys and TCS to report strong margin expansion; we build in 140
bps and 90 bps qoq improvement, respectively. HCLT faces wage hike headwinds and so
does Wipro (two-month impact). We also note that Wipro benefits only marginally from Re
depreciation on account of its cash-flow hedges at lower levels. We build in 140 bps qoq
decline in Wipro’s global IT margins and 120 bps decline for HCLT.
Telecom We expect a weak quarter for the Indian wireless players. September is typically a weak quarter for
wireless volume growth and 2QFY12E is unlikely to be any different. In addition, sharp Re depreciation
during the quarter is likely to result in substantial forex losses, especially for Bharti. We do note that it is
a tad early to assess the impact of recent tariff hikes on volume or realization given (1) the hike was
implemented for new subs to begin with; extant subs will move to revised base tariffs gradually, and (2)
Setpember quarter seasonality will make it difficult to isolate the impact of price increases on volumes.
We expect the Indian wireless companies to post 2-3% consolidated revenue growth qoq,
with volumes registering a muted 0.9-2.5% growth in a seasonally weak quarter. RPMs are
expected to be marginally up at 0.5-0.7% over 1QFY12, even though it is too early to assess
the impact of the recent tariff hikes. Forex impact of the sharp depreciation in Re versus the
US$ in 2QFY12 will exacerbate the impact of weak operational results, driving sharp decline
in net income for both Bharti and Idea. We expect incremental forex losses of Rs6.3 bn for
Bharti and Rs400 mn for Idea.
Utilities Expect merchant tariffs to remain subdued due to monsoons and players with significant merchant
exposure such as JSW Energy, JSPL, Adani Power and Lanco Infratech will likely take a hit on their
realizations.
Seasonally strong quarter for NHPC (hydro generation). Generation growth remains
subdued for NTPC despite capacity addition on account of lower demand from SEBs during
monsoons and strong hydro generation. Revenues to decline for Mumbai distribution
utilities (Reliance Infrastructure and Tata Power) on account of lower demand in 2QFY12.
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
September 2011 quarter earnings preview. We expect the earnings of the KIE
universe to grow 3.5% yoy on an ex-Energy basis, but decline 24.2% yoy on an overall
basis; yoy comparisons of financial performance of R&M companies are not meaningful
due to fluctuations in timing and in the quantum of compensation/subsidy from the
government. We expect the earnings of the Energy and Telecom sectors to decline yoy
while the earnings of Cement, Consumers, Industrials and Technology will likely improve
yoy. We expect the earnings of the BSE-30 Index to grow 11.7% yoy and 6% qoq. On
an ex-Energy basis, we expect the earnings of the BSE-30 Index to grow 4.6% yoy.
Q2FY12 RESULTS PREVIEW
13.5% revenue growth expected during the quarter (ex Oil &
Gas)
We expect stocks under our coverage (ex-banking / NBFCs) to report revenue
growth of about 14.7% on a YoY basis. This is partly helped by the scale up in
revenues of Cairn India. Ex - Oil & Gas, revenue growth is expected to be about
13.5%. Among others, Cement, Capital Goods and IT are expected to propel this
growth. Revenues of Cement and IT companies are expected to be driven by
volumes. Higher execution should drive revenues of Capital Goods companies. We
will watch our for execution issues, if any, in Construction and Capital Goods
sectors.
For Banks / NBFCs, we expect muted credit growth during Q2FY12. Although system
wide loan growth came at 20.4% YoY (as on September 09, 2011), in absolute
terms loans declined by Rs.120 bn during Q2FY12 (till September 09, 2011). This
implies sequential growth of 0.3% during Q2FY12; YTD growth of 3.4%. However,
deposit mobilization has slightly improved to 17.7% (as on September 09, 2011) as
against 14.7% witnessed a year ago.
Moreover, we are expecting flat/marginal compression in NIM (QoQ) during Q2FY12
as compared to 20-30 bps compression witnessed during Q1FY12 (again depending
on the CASA mix or liability franchise of the individual banks) as transmission of high
base rates would more than offset the lagged impact of deposit re-pricing at higher
rates. However, NBFCs are likely to witness continued compression on their margins,
as borrowing costs for them have been rising with limited scope to charge higher
rates from borrowers on back of moderating loan growth.
Margins are expected to be lower for our coverage universe (ex-
Oil & Gas)
EBIDTA margins for the companies under our coverage are expected to be lower on
a YoY basis (ex Oil & Gas). Most of the sectors, except Capital Goods and Cement
are expected to witness pressure on margins on YoY basis. The pressure on margins
is due to pressure on revenues (Shipping) and higher raw material prices
(Automobiles, Media) which companies have not been able to pass on fully.
Moreover, salary increases and rupee appreciation on a YoY basis (depreciation on
QoQ basis, though) are expected to hurt margins of IT companies.
As far as banks are concerned, pre-provisioning profits are expected to rise by about
11.1% v/s a 14.5% rise in NIIs. A relatively lower treasury profit is expected to have
an impact. We also expect PSU banks which are yet to migrate (fully) to automated
NPA recognition system are likely to witness higher slippage and hence have to set
aside higher provisions during Q2FY12. Many banks are also likely to spring negative
surprises by recognizing higher slippage in the agriculture segment. NBFCs are
expected to report a muted growth of about 3.1% in pre-provisioning profits on back
of weak core performance.
Focus on concerns
While 2QFY12 results will be important, the focus has been and is expected to be on
some of the other pressing concerns.
Domestically, we will focus hard on the execution issues, if any, faced by capital
goods and construction companies. More importantly, the order bookings by large
capital goods and construction companies during the quarter will be of interest to us.
The past few quarters have seen a slow-down in order flows. We will also keenly
hear the management comments on any momentum in decision - making and order
- flows for these companies.
Inflation and the increase in interest rates will remain a focus point for the markets.
To that extent, results of debt heavy companies will be watched with caution and so
also the results of all rate sensitive sectors, we understand.
We will also maintain a close watch on the global commodity prices. These are
expected to impact margins of companies in 2QFY12. While prices have moderated
a bit in 2QFY12, further moderation is desirable. However, increase in the
commodity prices from these levels may keep margins of corporate India under
pressure, if the increases are not fully passed on. Any lingering impact may dampen
sentiments.
We will also closely track the management comments on the impact of the global
economic issues on client decisions and budgets. This will be more important for the
prospects of the IT sector.
Conclusion
Markets have been very choppy and have remained under pressure since the past
few months due to the global economic concerns and also domestic issues - scams,
lack of decision making, high inflation, etc.
In such a scenario, corporate results assume greater importance. Expectations are
not very high, in our view, which may act as a cushion for the markets. We opine
that, if the markets have to sustain the current levels and move up, it will need to
have more confidence in the medium-to-long term growth rates of Corporate India.
Also, the above-mentioned concerns have to be effectively and immediately
addressed.
The room for disappointment is very limited, in our view. Disappointment in earnings
or on future outlook may result in corresponding/specific corrections
Key points Key points
Automobiles We expect a weak quarter for auto companies driven by raw material cost pressures. We estimate
revenues to increase by 18% yoy and 4% qoq for companies under our coverage but expect EBITDA
margins to decline by 140 bps yoy due to raw material cost pressures and adverse product mix. For our
coverage universe we expect adjusted earnings (excluding forex translation losses on foreign debt) to
decline by 3% yoy but improve by 2% qoq.
We expect Bajaj Auto, Hero Motocorp, M&M and Bharat Forge to report positive yoy
earnings growth while Ashok Leyland, Maruti Suzuki, Tata Motors and Exide Industries are
likely to report a decline in earnings. Raw material costs will likely decline from 3QFY12E as
current contracts for steel expire (by October) and tyre prices soften with a quarter's lag.
Decline in aluminum prices will likely more than offset impact of rise in tyre prices this
quarter for Bajaj Auto, Hero Motocorp and Maruti Suzuki.
Banking We expect banks to deliver 10% yoy earnings growth. Qoq growth will be similar as 1QFY12 saw oneoff
provisioning pertaining to revised NPL provisioning norms. NII growth to be 12% yoy. Overall NIM to
remain flat qoq as banks have taken a disproportionate hike in lending rates while wholesale rates have
been stable. Slippages to remain at elevated levels for public banks as they complete the final leg of
transition to the stringent NPL platform while private banks would see limited impact. Provisions would
remain high on the back of higher specific provisions.
We expect NBFCs to report a stable quarter. NIM to remain flat qoq. Loan growth trends to
remain healthy. We see limited deterioration in asset quality in the current quarter. We
expect higher forex losses to tamper earnings growth for PFC and REC.
Cement Our coverage universe will register a 7.7% yoy growth in volumes in 2QFY12E primarily driven by (1)
strong volume growth of ACC and Jaiprakash and (2) first signals of a potential demand revival with
industry volumes registering a strong 11% and 8% yoy growth in July and August. Cement prices
declined by Rs14-15/bag sequentially due to seasonal impact of monsoon months. However, post the
weakness witnessed in monsoon (months of July and August), cement prices are already showing signs
of revival in several pockets—especially those of West and North India.
We estimate a 38% sequential dip in profitability driven primarily by (1) 6% qoq decline in
average realizations on account of pricing weakness in the months of July and August and
(2) 4% qoq decline in volumes. We, however, see an abatement of input cost inflation
factoring a modest 5% sequential increase in operating costs driven primarily by freight and
raw material costs.
Chemicals Decline in global chemical margins qoq will be negative for the profitability of the chemical segment of
Reliance Industries.
Consumers We expect good sales growth for staples driven by modest volume growth and high price increases.
Discretionary products sales likely benefited from festive season sales. Gross margin pressure will
continue on a yoy basis although it will likely ease off sequentially. Savings in adspends will likely help
manage EBITDA margins. HUL, ITC, Jubilant Foodworks, Nestle will likely deliver strong results.
We expect 13% yoy sales growth in ITC's cigarette segment, led by mix of pricing and
volume growth. We expect HUL to report sales growth of 14% yoy, driven by volume
growth of 7%. Increase in material cost will likely be offset by adspends savings and we
expect HUL's overall EBITDA margin to be flat on a yoy basis. Asian Paints will likely report
~34% yoy sales growth led by mix of pricing (~15%) and volume growth driven by a low
base and festive season sales.
Energy Upstream oil: ONGC and OIL will likely report a strong yoy increase in revenues and net income due to
sharply higher net crude price realizations. We assume that upstream companies will bear 33.33% of
the overall subsidy burden. GAIL will likely report a qoq increase in EBITDA due to a lower subsidy
burden.
Downstream oil: Performance of R&M companies will depend on contributions from
government and upstream companies. We estimate gross under-recoveries of Rs234 bn for
the industry for 2QFY12E. We assume nil compensation from the government in 2QFY12E.
We expect refining margins for OMCs to improve qoq led by higher tariff protection; this
will be partly mitigated by inventory/adventitious losses.
Industrials Industrials: Order inflows and commentary on investment scenario would be the key factors to focus on.
We may see execution slippage as some of the projects slow down based on weak investment scenario
as well as structural issues such as coal availability etc. We see risks to margins from higher commodity
prices, competition as well as mix changes. Industrial capex activity remains weak and woud reflect in
performance of companies such as Thermax, Voltas and Crompton. Continued high competition in the
domestic T&D sector would continue to pressure power segment margins. We expect Suzlon to report
sales of about 450 MW in this quarter but high interest and depreciation will likely lead to a net loss.
Construction: Existing order backlog to drive moderate revenue growth for IVRCL and
Nagarjuna although higher interest expense may impact net profits (expect yoy decline in
net profits). Execution of large BOT projects in the backlog to drive revenues of Sadbhav
Engineering.
Infrastructure: Stronger port volumes to drive revenue growth for MPSEZ and GPPL.
Media Television: We expect the weak advertising environment to continue on the back of rising interest rates
and weak economic environment (and sentiment) in 2QFY12E. However, the advertising uptick
characterized by the festival season seems to be coming through. Zee will likely report reduced sports
losses. Sun TV will likely report reduced domestic subscription revenues. Dish TV will likely report
continued positive operating leverage even as operating metrics (subscriber addition, ARPU and churn)
will likely be under pressure.
Print: We expect the weak advertising environment to continue on the back of rising interest
rates and weak economic environment (and sentiment) in 2QFY12E. However, >50% of
regional print media advertising comes from local advertisers, largely unaffected by
economic slowdown and likely to report uptick given the festival season. HT Media will
likely report pressure on English print advertising from real estate and BFSI sectors.
Metals Ferrous: We expect the profitability of steel companies to decline sequentially in 2QFY12E due to lagged
impact of increase in coking coal prices. Steel companies may have used higher-priced coking coal
during the quarter having exhausted their cheaper coking coal in the previous quarter. We forecast a
decline in EBITDA/ton for all steel companies. Tata Steel’s profitability is likely to be impacted by weak
performance of its European operations where demand still remains subdued. JSW Steel and Sesa Goa's
performance would be impacted by the ban on mining iron ore in Karnataka. Besides, this is a
seasonally weak quarter for Sesa Goa due to monsoons. Sharp depreciation of Re against US$ will also
result in forex losses for players with FCCBs.
Non-ferrous: Performance of all the non-ferrous companies is likely to be affected by the
softening of commodity prices during 2QFY12E. LME zinc, aluminum, copper and lead
prices have each fallen 2-8% sequentially over the last quarter. STLT's profits will likely
decline sequentially on the back of decline in commodity prices. Hindalco’s performance is
expected to be impacted by bi-annual shutdown in the early part of the quarter at its copper
plant and sequential decline in aluminum prices. Sharp depreciation of Re against US$ will
also result in forex losses for Sterlite.
Pharmaceuticals Generics: We expect a muted quarter for generics in general with the exception of certain companies
such as (1) Cipla driven by export sales and (2) Lupin and Glenmark, driven by India sales growth and
one-time licensing fees from Medicis and Sanofi, respectively. We expect Ranbaxy's results to be
subdued due to large MTM losses on forex loans and outstanding derivatives position. We expect Cipla,
Cadila and DRL to report poor India sales growth.
CMO/CROs: We expect muted results for Jubilant, Dishman, Biocon. We expect Divis to
report 30% PAT growth due to low base last year. We expect Jubilant and Dishman to
report yoy PAT decline. We expect Jubilant's results to be offset by large MTM losses on its
huge forex loans.
Property For 2QFY12E, we expect varied growth trends depending on launches and sales in 2HFY11 and
1HFY12E. Overall, we expect real estate companies to have a subdued-to-moderate growth in 2QFY12E
due to (1) marginally weaker-than-expected launches over the past four quarters, (2) lower-thanexpected
execution and (3) increase in interest rates, which will impact demand. Demand is worst hit in
Mumbai while Bengaluru remains the most resilient market.
Demand for India-wide office space/commercial property has bounced back post a dip in
CY2009 and is expected to grow a further 20% in CY2011E. However, with supply
continuing to outstrip demand, we believe it is unlikely that lease rates will appreciate
meaningfully. A slowdown in SEZ supply (28% of potential supply to CY2013E) due to tax
uncertainty could result in a potential favorable impact on demand-supply balance.
Technology We expect robust sequential volume growth (4-7%) for most players in the industry barring Wipro
among the Tier-Is and Mphasis/Tech Mahindra among the Tier-II names. We see TCS and Cognizant
once again leading the Tier-I pack on volume growth with Infosys and HCLT also reporting robust
numbers. Wipro is likely to lag although on expected lines. Among Tier-IIs, we expect MindTree and
Satyam to lead the pack. Adverse cross-currency movements will hit reported US$ revenue growth by
50-80 bps across companies. Overall, we expect 3.5-6% US$ revenue growth across Tier-I names and
0.5-6.5% growth across Tier-IIs.
Margin expansion would primarily be led by benefits from sharp Re depreciation during the
quarter (3-4% across companies, difference being on account of cash-flow hedging for
some companies and also different average spot computation methodologies). Among the
Tier-I names, we expect Infosys and TCS to report strong margin expansion; we build in 140
bps and 90 bps qoq improvement, respectively. HCLT faces wage hike headwinds and so
does Wipro (two-month impact). We also note that Wipro benefits only marginally from Re
depreciation on account of its cash-flow hedges at lower levels. We build in 140 bps qoq
decline in Wipro’s global IT margins and 120 bps decline for HCLT.
Telecom We expect a weak quarter for the Indian wireless players. September is typically a weak quarter for
wireless volume growth and 2QFY12E is unlikely to be any different. In addition, sharp Re depreciation
during the quarter is likely to result in substantial forex losses, especially for Bharti. We do note that it is
a tad early to assess the impact of recent tariff hikes on volume or realization given (1) the hike was
implemented for new subs to begin with; extant subs will move to revised base tariffs gradually, and (2)
Setpember quarter seasonality will make it difficult to isolate the impact of price increases on volumes.
We expect the Indian wireless companies to post 2-3% consolidated revenue growth qoq,
with volumes registering a muted 0.9-2.5% growth in a seasonally weak quarter. RPMs are
expected to be marginally up at 0.5-0.7% over 1QFY12, even though it is too early to assess
the impact of the recent tariff hikes. Forex impact of the sharp depreciation in Re versus the
US$ in 2QFY12 will exacerbate the impact of weak operational results, driving sharp decline
in net income for both Bharti and Idea. We expect incremental forex losses of Rs6.3 bn for
Bharti and Rs400 mn for Idea.
Utilities Expect merchant tariffs to remain subdued due to monsoons and players with significant merchant
exposure such as JSW Energy, JSPL, Adani Power and Lanco Infratech will likely take a hit on their
realizations.
Seasonally strong quarter for NHPC (hydro generation). Generation growth remains
subdued for NTPC despite capacity addition on account of lower demand from SEBs during
monsoons and strong hydro generation. Revenues to decline for Mumbai distribution
utilities (Reliance Infrastructure and Tata Power) on account of lower demand in 2QFY12.
Source: Kotak Institutional Equities estimates
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