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Inflation taking its toll
Sensex revenue growth remains healthy at 20%+; margins drag bottom-line growth:
For 2QFY2012, on a yoy basis, the top line of Sensex companies continued to
show healthy (23%) growth, aided by persistence of higher inflation and strong
33% yoy growth in sales of oil and gas companies. Growth in EBITDA and bottom
line was lower due to a ~120bp compression each in operating and profit margin.
EBITDA growth stood at 16% yoy (ex-ONGC 14%), while PAT growth stood at 15%
yoy (ex-ONGC 8%). Adjusting for forex gains/losses, growth on the adjusted PBT
level, ex-ONGC, stood moderate at 9% yoy. Overall, quality of earnings was not
up to the mark, as higher profits of ONGC (partly driven by the non-core factor of
low subsidy-sharing assumption) largely offsetted the lower-than-expected earnings
of metals and mining, power and telecom companies.
In our view, the compression in margins over the past few quarters reflects the
resource constraints faced by India Inc. both from higher commodity prices and
government policy paralysis. Resource constraints have translated into higher inflation,
which has dented the EBITDA margin in the form of higher raw-material costs. Also,
higher inflation has led to higher interest rates, which have affected the bottom line.
On a sectoral basis performance of banking and FMCG sectors was steady. Earnings
growth for banking sector was aided by sequential expansion in NIM for almost all
banks, which offsetted asset-quality pressures (especially faced by the public sector
banks). Earnings trajectory for FMCG sector continued to be healthy on the back of
steady top line growth and cost rationalisation undertaken by the companies. On
the flip side, results of metal companies disappointed by reporting a 34% yoy decline
in profits. Realizations of metal companies remained strong, but profitability was
hampered as they could not fully pass on raw-material cost pressures. Other
disappointments from the results season included Maruti Suzuki from the auto pack
and Bharti Airtel from the telecom sector.
Sensex earnings growth likely to moderate to ~10% levels in FY2012, expect
revival in FY2013: We expect Sensex EPS growth to moderate to ~10% levels in
FY2012, as the impact of higher raw-material costs as well as high interest rates
affects the profitability of corporates. We have cut our Sensex EPS estimates by
~2% each for FY2012 and FY2013 during the current results season. However, the
overhang on FY2013 earnings has reduced, with the RBI hinting at the peaking of
interest rates in the current rate cycle at the current levels and moderating commodity
prices on the back of slower global growth prospects. Overall, we expect Sensex
companies to deliver a 13.6% earnings CAGR over FY2011-13E to `1,308. A fair
multiple of 14x FY2013E EPS yields a Sensex target of 18,300, implying a moderate
~9% upside from current levels over the next 6-9 months.
Sovereign debt crisis - No quick fix seen: Recent events such as the late October
meeting of Eurozone political leaders indicated the urge to avert a catastrophic
event, but the path to a sustainable solution remains challenging and could continue
to lead to volatility in the near term. In our view, the long-term choice confronting
Eurozone countries is likely to be in the form of either forming of a fiscal union or
disintegration of Euro in an orderly manner and subsequent currency
devaluation-led export growth driving the economic recovery, highlighting the
complexity of the challenges facing the Eurozone countries
Macro outlook
Indication of peaking of interest rates
The Reserve Bank of India (RBI) in its 2QFY2012 monetary policy
review turned less hawkish and indicated that the likelihood of
further policy rate hike the upcoming policy review was lower.
The RBI, since March 2010, has steadfastly stuck to its
anti-inflationary stance and has raised the key policy rates on
13 occasions (resulting in a sharp 525bp increase in the effective
policy rate). The change of stance by the Central Bank and
suggestion of a possible peak at the current levels, in our view,
augur well for India, Inc., as interest rates have shot up sharply
over the past 18 odd months and interest costs have already
begun to dent the margins and overall profitability of corporates.
Even the cost of overseas borrowing has increased considerably
in the aftermath of the ongoing sovereign debt crisis in the
Eurozone and risk-aversion among global investors.
Although we do not expect the RBI to cut key policy rates in the
short term unless the global macro scenario deteriorates further,
even the end of the prolonged tightening stance should, at least
marginally, improve the outlook for GDP growth in FY2013.
Inflation likely to moderate but remain above the
comfort zone
In our view, the signaling of the peaking of policy rates removes
a key overhang on the outlook for FY2013 Sensex earnings,
provided incrementally inflationary pressures do not re-emerge.
The likelihood of the latter happening looks slightly lower,
considering the moderating trend in commodity prices (Reuters
CRB Index down by 6% on a qoq average basis). Trends in the
Reuters CRB Index suggest moderation in headline WPI inflation
from December 2011.
Over the past five years, there has been ~88% positive correlation
between the yoy change in the monthly average of the Reuters
CRB Index and headline WPI inflation numbers with a
three-month lag. The yoy rise in Reuters CRB Index has slowed
from 32.0% in June 2011 (which has reflected in WPI inflation
numbers for September 2011) to just 4.6% during November
2011 (expected to reflect in domestic inflation numbers from
February 2012). Even after factoring in the impact of the recent
sharp depreciation of INR vis-à-vis the USD, we expect
WPI inflation to moderate to 8.5% by February 2012.
Also, the impact of the previous monetary tightening is yet to
flow through fully, in our view. Hence, we expect headline inflation
to start moderating from December 2011, provided commodity
prices do not resume their uptrend on hopes of further stimulus
measures and consequent expectations of liquidity flows.
The RBI's aggressive tightening stance has been based primarily
on the stickiness of headline WPI inflation numbers, well above
the comfortable range. Going forward, we expect headline
inflation to trend downwards on expectations of cooling global
commodity prices due to slower global growth prospects and
consequent lower demand. Hence, the likelihood of further policy
rate hikes appears limited as of now. Having said that, we do
not expect the RBI to cut policy rates unless the inflation trajectory
settles down in the comfort range or domestic growth dips sharply.
Sovereign debt crisis - No quick fix seen
Sovereign debt crisis concerns amongst Eurozone countries have
been persisting for more than a year now and have recently
gotten worse. The muted to negative GDP growth in these
countries has made matters more severe. One of the key reasons
for the persistence of these issues has been the inability of political
leaders to come together and agree on a common strategy for
resolution.
Recent events such as the late October meeting of Eurozone
political leaders indicated the urge to avert a catastrophic event,
but the path to a sustainable solution remains challenging and
could continue to lead to volatility in the near term. The basic
problem with PIIGS countries is that so many of them, including
not just Greece but even the likes of Spain, have unemployment
rate as high as 15-16%. Now, one way to create employment is
by public spending, but with the ECB still hesitant to outright
print money, the actual firepower of its bailout fund is not as
high as is required to fund the fiscal deficits of troubled countries.
The stronger countries are still not able to reconcile their own
citizens to a bailout, without imposing fiscal restrictions on the
likes of Greece and Italy. But such kind of conditional bailout is
not tenable, like was seen during the IMF bailout at the time of
the Asian crisis.
So, the only solution that remains if the Euro countries are not
able to hammer out some kind of a fiscal union is to disintegrate
the Euro in an orderly fashion. Then the weaker PIIGS countries
will be able to float their own currencies, which would be much
cheaper than the Euro. On the strength of their undervalued
currencies, they will eventually find a way out of their economic
woes through export growth. Naturally, in the short term, such
an exercise as Euro break-up is hugely complicated and involves
a huge risk of volatility.
Italy - Latest in the line of fire, though fundamentals
appear stronger than other PIIGS countries
Apart from Greece, even Italy has come under intense pressure
arising from its sovereign debt issues. Yields on the 10-year Italian
bonds recently topped the 7% level, a level widely deemed to be
unsustainable. An increase in the cost of using the country's bonds
to raise funds offsets hopes for more reforms in Italy. The rise at
the shorter end has been even sharper, suggesting the reducing
investor confidence in the world's third-biggest sovereign bond
market. Greece, Portugal and Ireland were forced to seek
financial aid after yields on their bonds exceeded the 7% mark.
Italy's public debt to GDP stood at the second highest level at
~120%, next only to Greece's 142%, amongst Eurozone
countries.
Having said that, the fact remains that economies of Italy and
Spain are substantially larger and stronger than other PIIGS
countries and issues ailing them are neither multiple nor as
onerous. Saving rate in Italy is reasonably high at 16.7% as
compared to 4.1% for Greece and 8.9% for Portugal. Even fiscal
deficit as a percentage of GDP is nearly half the levels of Greece
and Portugal. So, an immediate default can be avoided, provided
confidence is restored and lower cost funding is provided to PIG
countries. Then, the admittedly gradual process of rectifying the
other imbalances can be undertaken in these nations
2QFY2012 Sensex earnings - A mixed bag
Revenue growth remains healthy at 20%+; margins drag
bottom-line growth: On a yoy basis, the top line of Sensex
companies continued to show healthy (23%) growth, primarily
driven by strong 33% yoy growth in sales of oil and gas
companies. EBITDA and bottom-line growth was lower due to a
~133bp yoy and ~110bp yoy compression in operating and
profit margin, respectively. EBITDA growth stood at 16% yoy
(ex-ONGC 14%), while PAT growth was at 14.8% yoy (ex-ONGC
just 7.8%). Adjusting for forex gains/losses, growth on the
adjusted PBT level was reasonable at 16% yoy; however
ex-ONGC, growth stood moderate at 9% yoy.
In our view, the compression in margins over the past few quarters
reflects the resource constraints faced by India, Inc. both from
higher commodity prices and government policy paralysis.
Resource constraints have translated into higher inflation, which
has dented the EBITDA margin in the form of higher raw-material
costs. Also, higher inflation has led to higher interest rates, which
have affected the bottom line.
Sectoral overview of earnings for Sensex companies
On the positive side, Sensex earnings growth was primarily
driven by strong performance of oil and gas companies
and steady performance of banking and FMCG stocks.
ONGC surprised positively by reporting considerably
higher-than-expected bottom line, which was partly driven by
the non-core factor of low subsidy-sharing assumption.
Earnings growth for the banking sector was aided by
sequential expansion in NIM for almost all banks, which offsetted
asset-quality pressures (especially faced by public sector banks).
NIM expansion, in our view, has been on the back of a lesser
aggressive stance adopted by the SBI (due to low capital adequacy
and change of management) and continuation of ICICI Bank's
consolidation strategy, which has given more leeway to relatively
smaller banks to aggressively price their loans. However, going
forward, the scope for NIM expansion in the form of higherlending
yields looks limited as already interest rates (SBI's PLR,
10-year G-Sec yield) have reached multi-year highs. Also, going
forward, with slowing economic growth on the domestic as well
as overseas front, asset-quality pressures are likely to accentuate
for the sector as a whole.
On the flip side, results of metal companies disappointed by
reporting a 34% yoy decline in profit. Realizations of metal
companies remained strong, but profitability was hampered as
they could not fully pass on raw-material cost pressures. Tata
Steel was the major laggard in the sector, registering a sharp
81% yoy fall in profits, despite 15% yoy top-line growth. The
company's EBITDA margin shrunk rather steeply by 4.4% yoy.
Other disappointments from the results season included
Maruti Suzuki from the auto pack and Bharti Airtel from the
telecom sector. Although we were expecting poor numbers for
both these companies, the actual performance turned out to be
even lower than our expectations.
Sensex earnings largely in-line with our expectations, but quality
of earnings poor: Earnings (adjusted for forex and other
extraordinary items) for Sensex companies in 2QFY2012 were
in-line with our estimates; however, ex-ONGC, profits were ~4%
lower than expectations. During the quarter, operating profit and
net profit margins were largely in-line with our expectations at
22.7% (est. 23.0%) and 12.8% (est. 12.7%) , respectively.
On the bottom-line front, although profitability was on expected
lines, poor performance of sectors such as metals and mining
and telecom was masked by considerably better profits in case
of oil and gas companies. Ex-ONGC, profits for Sensex
companies were 3.7% below expectations. Metal and mining
companies disappointed by reporting considerably
lower-than-expected earnings (36.5% below our estimates), which
were largely offset by strong growth (19.4% above expectations)
in profits of oil and gas companies (partly aided by
non-core reasons) and continuance of healthy performance by
the FMCG sector.
Sensex earnings cut by ~2% each for FY2012 and FY2013: We
have cut our earnings estimates for Sensex companies by ~2%
each for FY2012 and FY2013. On a sectoral basis, Sensex metal
companies witnessed the sharpest earnings downward revision
(by 10-15%) for FY2012 and FY2013. Earnings for the financials
sector also saw a downward revision by 3-5% for FY2012 and
FY2013, primarily to factor in the weakening asset-quality trend
amid the slowing domestic and global growth scenario. On the
positive side, earnings of Sensex IT companies witnessed an uptick of
2-3%, aided partly by the sharp depreciation witnessed in INR vs. USD.
Review of Angel coverage universe earnings
Earnings growth for Angel's coverage universe (ex-ONGC) stood
weak at 6% yoy: On a yoy basis, our coverage universe registered
growth of 21% in the top line, 15% (13% ex-ONGC) in operating
profit and 11% (just 6% ex-ONGC) in the bottom line. Overall
quality of earnings was relatively weak, as profits of oil and gas
companies (partly driven by the non-core factor of low subsidysharing
assumption) largely offsetted the lower-than-expected
earnings of metals and mining, power and telecom companies.
Adjusting for forex gains/losses, growth on the adjusted PBT level
was reasonable at 13% yoy; however, ex-ONGC, growth slowed
considerably to 9% yoy.
Earnings for the financials coverage universe grew at a
reasonable pace on the back of steady performance of largecap
banking stocks. The financials coverage universe registered
reasonable growth of 11% yoy. Certain mid-cap banks such as
Bank of India, OBC and Central Bank of India witnessed a sharp
decline in profit.
IT and FMCG stocks continued to deliver a healthy
performance. Earnings of the FMCG coverage stocks increased
reasonably by 18% yoy and that of IT grew by 17% yoy.
Coverage universe results largely on expected lines: The
2QFY2012 earnings trajectory for our coverage universe was
largely in-line with our estimates. Performance on the operating
margin as well as net profit margin front was in-line with expectations.
On a sectoral basis, profit growth was better than expected
for the oil and gas, financials, FMCG and power sectors. Earnings
of pharma companies were considerably below expectations and
declined sharply even on a yoy basis.
Other sectors, which disappointed vis-à-vis expectations,
included the earnings of metals and mining, telecom and
construction companies. Earnings of cement companies were
also below expectations, despite registering strong growth on a
yoy basis, as realizations proved out to be lower than the
indications from our channel checks.
Profitability of capital goods companies continued to be
muted as higher interest rates and government policy paralysis
hampered new order inflows. The profitability of few companies
in the auto and auto ancillary sector also suffered setbacks. Maruti
Suzuki's earnings fell sharply due to the impact of employee strike and
forex loss due to the recent sharp depreciation of INR vs. JPY.
Sensex earnings growth to moderate to ~10%
levels in FY2012; pick-up expected in FY2013
We expect Sensex EPS growth to moderate to ~10% levels in
FY2012, as the impact of higher raw-material costs as well as
multi-year high interest rates affects the profitability of corporates.
We have cut our Sensex EPS estimates by ~2% each for FY2012
and FY2013 during the current results season, in addition to the
5-6% reduction since 1QFY2012. We expect earnings growth to
pick up to 17.7% levels in FY2013, with the RBI hinting at the
peaking of interest rates in the current rate cycle at the current
levels and cooling commodity prices on the back of slower global
growth prospects.
The primary growth drivers of Sensex EPS over FY2011-13E are
expected to be BFSI, oil and gas and IT stocks, with the BFSI
sector expected to contribute 34.8% to overall growth in Sensex
EPS during the period, while contribution from the oil and gas
and IT sector is estimated to be at 18.8% and 11.6%. Strong
performance by the BFSI sector highlights the underpenetration
of financial services in India, which would drive credit growth in
the years to come. Metal companies are expected to contribute
7.7% to Sensex EPS growth over FY2011-13E, primarily backed
by capacity expansions. On the other hand, sectors such as
telecom, power and FMCG are expected to underperform the
others. The combined contribution of all these sectors to Sensex
EPS growth is expected to be 12.6% over FY2011-13E. Overall,
we expect Sensex companies to deliver a reasonable 13.6% CAGR
in EPS over FY2011-13E to `1,308. A fair multiple of 14x
FY2013E EPS yields a Sensex target of 18,300, implying a
moderate ~9% upside from current levels
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Inflation taking its toll
Sensex revenue growth remains healthy at 20%+; margins drag bottom-line growth:
For 2QFY2012, on a yoy basis, the top line of Sensex companies continued to
show healthy (23%) growth, aided by persistence of higher inflation and strong
33% yoy growth in sales of oil and gas companies. Growth in EBITDA and bottom
line was lower due to a ~120bp compression each in operating and profit margin.
EBITDA growth stood at 16% yoy (ex-ONGC 14%), while PAT growth stood at 15%
yoy (ex-ONGC 8%). Adjusting for forex gains/losses, growth on the adjusted PBT
level, ex-ONGC, stood moderate at 9% yoy. Overall, quality of earnings was not
up to the mark, as higher profits of ONGC (partly driven by the non-core factor of
low subsidy-sharing assumption) largely offsetted the lower-than-expected earnings
of metals and mining, power and telecom companies.
In our view, the compression in margins over the past few quarters reflects the
resource constraints faced by India Inc. both from higher commodity prices and
government policy paralysis. Resource constraints have translated into higher inflation,
which has dented the EBITDA margin in the form of higher raw-material costs. Also,
higher inflation has led to higher interest rates, which have affected the bottom line.
On a sectoral basis performance of banking and FMCG sectors was steady. Earnings
growth for banking sector was aided by sequential expansion in NIM for almost all
banks, which offsetted asset-quality pressures (especially faced by the public sector
banks). Earnings trajectory for FMCG sector continued to be healthy on the back of
steady top line growth and cost rationalisation undertaken by the companies. On
the flip side, results of metal companies disappointed by reporting a 34% yoy decline
in profits. Realizations of metal companies remained strong, but profitability was
hampered as they could not fully pass on raw-material cost pressures. Other
disappointments from the results season included Maruti Suzuki from the auto pack
and Bharti Airtel from the telecom sector.
Sensex earnings growth likely to moderate to ~10% levels in FY2012, expect
revival in FY2013: We expect Sensex EPS growth to moderate to ~10% levels in
FY2012, as the impact of higher raw-material costs as well as high interest rates
affects the profitability of corporates. We have cut our Sensex EPS estimates by
~2% each for FY2012 and FY2013 during the current results season. However, the
overhang on FY2013 earnings has reduced, with the RBI hinting at the peaking of
interest rates in the current rate cycle at the current levels and moderating commodity
prices on the back of slower global growth prospects. Overall, we expect Sensex
companies to deliver a 13.6% earnings CAGR over FY2011-13E to `1,308. A fair
multiple of 14x FY2013E EPS yields a Sensex target of 18,300, implying a moderate
~9% upside from current levels over the next 6-9 months.
Sovereign debt crisis - No quick fix seen: Recent events such as the late October
meeting of Eurozone political leaders indicated the urge to avert a catastrophic
event, but the path to a sustainable solution remains challenging and could continue
to lead to volatility in the near term. In our view, the long-term choice confronting
Eurozone countries is likely to be in the form of either forming of a fiscal union or
disintegration of Euro in an orderly manner and subsequent currency
devaluation-led export growth driving the economic recovery, highlighting the
complexity of the challenges facing the Eurozone countries
Macro outlook
Indication of peaking of interest rates
The Reserve Bank of India (RBI) in its 2QFY2012 monetary policy
review turned less hawkish and indicated that the likelihood of
further policy rate hike the upcoming policy review was lower.
The RBI, since March 2010, has steadfastly stuck to its
anti-inflationary stance and has raised the key policy rates on
13 occasions (resulting in a sharp 525bp increase in the effective
policy rate). The change of stance by the Central Bank and
suggestion of a possible peak at the current levels, in our view,
augur well for India, Inc., as interest rates have shot up sharply
over the past 18 odd months and interest costs have already
begun to dent the margins and overall profitability of corporates.
Even the cost of overseas borrowing has increased considerably
in the aftermath of the ongoing sovereign debt crisis in the
Eurozone and risk-aversion among global investors.
Although we do not expect the RBI to cut key policy rates in the
short term unless the global macro scenario deteriorates further,
even the end of the prolonged tightening stance should, at least
marginally, improve the outlook for GDP growth in FY2013.
Inflation likely to moderate but remain above the
comfort zone
In our view, the signaling of the peaking of policy rates removes
a key overhang on the outlook for FY2013 Sensex earnings,
provided incrementally inflationary pressures do not re-emerge.
The likelihood of the latter happening looks slightly lower,
considering the moderating trend in commodity prices (Reuters
CRB Index down by 6% on a qoq average basis). Trends in the
Reuters CRB Index suggest moderation in headline WPI inflation
from December 2011.
Over the past five years, there has been ~88% positive correlation
between the yoy change in the monthly average of the Reuters
CRB Index and headline WPI inflation numbers with a
three-month lag. The yoy rise in Reuters CRB Index has slowed
from 32.0% in June 2011 (which has reflected in WPI inflation
numbers for September 2011) to just 4.6% during November
2011 (expected to reflect in domestic inflation numbers from
February 2012). Even after factoring in the impact of the recent
sharp depreciation of INR vis-à-vis the USD, we expect
WPI inflation to moderate to 8.5% by February 2012.
Also, the impact of the previous monetary tightening is yet to
flow through fully, in our view. Hence, we expect headline inflation
to start moderating from December 2011, provided commodity
prices do not resume their uptrend on hopes of further stimulus
measures and consequent expectations of liquidity flows.
The RBI's aggressive tightening stance has been based primarily
on the stickiness of headline WPI inflation numbers, well above
the comfortable range. Going forward, we expect headline
inflation to trend downwards on expectations of cooling global
commodity prices due to slower global growth prospects and
consequent lower demand. Hence, the likelihood of further policy
rate hikes appears limited as of now. Having said that, we do
not expect the RBI to cut policy rates unless the inflation trajectory
settles down in the comfort range or domestic growth dips sharply.
Sovereign debt crisis - No quick fix seen
Sovereign debt crisis concerns amongst Eurozone countries have
been persisting for more than a year now and have recently
gotten worse. The muted to negative GDP growth in these
countries has made matters more severe. One of the key reasons
for the persistence of these issues has been the inability of political
leaders to come together and agree on a common strategy for
resolution.
Recent events such as the late October meeting of Eurozone
political leaders indicated the urge to avert a catastrophic event,
but the path to a sustainable solution remains challenging and
could continue to lead to volatility in the near term. The basic
problem with PIIGS countries is that so many of them, including
not just Greece but even the likes of Spain, have unemployment
rate as high as 15-16%. Now, one way to create employment is
by public spending, but with the ECB still hesitant to outright
print money, the actual firepower of its bailout fund is not as
high as is required to fund the fiscal deficits of troubled countries.
The stronger countries are still not able to reconcile their own
citizens to a bailout, without imposing fiscal restrictions on the
likes of Greece and Italy. But such kind of conditional bailout is
not tenable, like was seen during the IMF bailout at the time of
the Asian crisis.
So, the only solution that remains if the Euro countries are not
able to hammer out some kind of a fiscal union is to disintegrate
the Euro in an orderly fashion. Then the weaker PIIGS countries
will be able to float their own currencies, which would be much
cheaper than the Euro. On the strength of their undervalued
currencies, they will eventually find a way out of their economic
woes through export growth. Naturally, in the short term, such
an exercise as Euro break-up is hugely complicated and involves
a huge risk of volatility.
Italy - Latest in the line of fire, though fundamentals
appear stronger than other PIIGS countries
Apart from Greece, even Italy has come under intense pressure
arising from its sovereign debt issues. Yields on the 10-year Italian
bonds recently topped the 7% level, a level widely deemed to be
unsustainable. An increase in the cost of using the country's bonds
to raise funds offsets hopes for more reforms in Italy. The rise at
the shorter end has been even sharper, suggesting the reducing
investor confidence in the world's third-biggest sovereign bond
market. Greece, Portugal and Ireland were forced to seek
financial aid after yields on their bonds exceeded the 7% mark.
Italy's public debt to GDP stood at the second highest level at
~120%, next only to Greece's 142%, amongst Eurozone
countries.
Having said that, the fact remains that economies of Italy and
Spain are substantially larger and stronger than other PIIGS
countries and issues ailing them are neither multiple nor as
onerous. Saving rate in Italy is reasonably high at 16.7% as
compared to 4.1% for Greece and 8.9% for Portugal. Even fiscal
deficit as a percentage of GDP is nearly half the levels of Greece
and Portugal. So, an immediate default can be avoided, provided
confidence is restored and lower cost funding is provided to PIG
countries. Then, the admittedly gradual process of rectifying the
other imbalances can be undertaken in these nations
2QFY2012 Sensex earnings - A mixed bag
Revenue growth remains healthy at 20%+; margins drag
bottom-line growth: On a yoy basis, the top line of Sensex
companies continued to show healthy (23%) growth, primarily
driven by strong 33% yoy growth in sales of oil and gas
companies. EBITDA and bottom-line growth was lower due to a
~133bp yoy and ~110bp yoy compression in operating and
profit margin, respectively. EBITDA growth stood at 16% yoy
(ex-ONGC 14%), while PAT growth was at 14.8% yoy (ex-ONGC
just 7.8%). Adjusting for forex gains/losses, growth on the
adjusted PBT level was reasonable at 16% yoy; however
ex-ONGC, growth stood moderate at 9% yoy.
In our view, the compression in margins over the past few quarters
reflects the resource constraints faced by India, Inc. both from
higher commodity prices and government policy paralysis.
Resource constraints have translated into higher inflation, which
has dented the EBITDA margin in the form of higher raw-material
costs. Also, higher inflation has led to higher interest rates, which
have affected the bottom line.
Sectoral overview of earnings for Sensex companies
On the positive side, Sensex earnings growth was primarily
driven by strong performance of oil and gas companies
and steady performance of banking and FMCG stocks.
ONGC surprised positively by reporting considerably
higher-than-expected bottom line, which was partly driven by
the non-core factor of low subsidy-sharing assumption.
Earnings growth for the banking sector was aided by
sequential expansion in NIM for almost all banks, which offsetted
asset-quality pressures (especially faced by public sector banks).
NIM expansion, in our view, has been on the back of a lesser
aggressive stance adopted by the SBI (due to low capital adequacy
and change of management) and continuation of ICICI Bank's
consolidation strategy, which has given more leeway to relatively
smaller banks to aggressively price their loans. However, going
forward, the scope for NIM expansion in the form of higherlending
yields looks limited as already interest rates (SBI's PLR,
10-year G-Sec yield) have reached multi-year highs. Also, going
forward, with slowing economic growth on the domestic as well
as overseas front, asset-quality pressures are likely to accentuate
for the sector as a whole.
On the flip side, results of metal companies disappointed by
reporting a 34% yoy decline in profit. Realizations of metal
companies remained strong, but profitability was hampered as
they could not fully pass on raw-material cost pressures. Tata
Steel was the major laggard in the sector, registering a sharp
81% yoy fall in profits, despite 15% yoy top-line growth. The
company's EBITDA margin shrunk rather steeply by 4.4% yoy.
Other disappointments from the results season included
Maruti Suzuki from the auto pack and Bharti Airtel from the
telecom sector. Although we were expecting poor numbers for
both these companies, the actual performance turned out to be
even lower than our expectations.
Sensex earnings largely in-line with our expectations, but quality
of earnings poor: Earnings (adjusted for forex and other
extraordinary items) for Sensex companies in 2QFY2012 were
in-line with our estimates; however, ex-ONGC, profits were ~4%
lower than expectations. During the quarter, operating profit and
net profit margins were largely in-line with our expectations at
22.7% (est. 23.0%) and 12.8% (est. 12.7%) , respectively.
On the bottom-line front, although profitability was on expected
lines, poor performance of sectors such as metals and mining
and telecom was masked by considerably better profits in case
of oil and gas companies. Ex-ONGC, profits for Sensex
companies were 3.7% below expectations. Metal and mining
companies disappointed by reporting considerably
lower-than-expected earnings (36.5% below our estimates), which
were largely offset by strong growth (19.4% above expectations)
in profits of oil and gas companies (partly aided by
non-core reasons) and continuance of healthy performance by
the FMCG sector.
Sensex earnings cut by ~2% each for FY2012 and FY2013: We
have cut our earnings estimates for Sensex companies by ~2%
each for FY2012 and FY2013. On a sectoral basis, Sensex metal
companies witnessed the sharpest earnings downward revision
(by 10-15%) for FY2012 and FY2013. Earnings for the financials
sector also saw a downward revision by 3-5% for FY2012 and
FY2013, primarily to factor in the weakening asset-quality trend
amid the slowing domestic and global growth scenario. On the
positive side, earnings of Sensex IT companies witnessed an uptick of
2-3%, aided partly by the sharp depreciation witnessed in INR vs. USD.
Review of Angel coverage universe earnings
Earnings growth for Angel's coverage universe (ex-ONGC) stood
weak at 6% yoy: On a yoy basis, our coverage universe registered
growth of 21% in the top line, 15% (13% ex-ONGC) in operating
profit and 11% (just 6% ex-ONGC) in the bottom line. Overall
quality of earnings was relatively weak, as profits of oil and gas
companies (partly driven by the non-core factor of low subsidysharing
assumption) largely offsetted the lower-than-expected
earnings of metals and mining, power and telecom companies.
Adjusting for forex gains/losses, growth on the adjusted PBT level
was reasonable at 13% yoy; however, ex-ONGC, growth slowed
considerably to 9% yoy.
Earnings for the financials coverage universe grew at a
reasonable pace on the back of steady performance of largecap
banking stocks. The financials coverage universe registered
reasonable growth of 11% yoy. Certain mid-cap banks such as
Bank of India, OBC and Central Bank of India witnessed a sharp
decline in profit.
IT and FMCG stocks continued to deliver a healthy
performance. Earnings of the FMCG coverage stocks increased
reasonably by 18% yoy and that of IT grew by 17% yoy.
Coverage universe results largely on expected lines: The
2QFY2012 earnings trajectory for our coverage universe was
largely in-line with our estimates. Performance on the operating
margin as well as net profit margin front was in-line with expectations.
On a sectoral basis, profit growth was better than expected
for the oil and gas, financials, FMCG and power sectors. Earnings
of pharma companies were considerably below expectations and
declined sharply even on a yoy basis.
Other sectors, which disappointed vis-à-vis expectations,
included the earnings of metals and mining, telecom and
construction companies. Earnings of cement companies were
also below expectations, despite registering strong growth on a
yoy basis, as realizations proved out to be lower than the
indications from our channel checks.
Profitability of capital goods companies continued to be
muted as higher interest rates and government policy paralysis
hampered new order inflows. The profitability of few companies
in the auto and auto ancillary sector also suffered setbacks. Maruti
Suzuki's earnings fell sharply due to the impact of employee strike and
forex loss due to the recent sharp depreciation of INR vs. JPY.
Sensex earnings growth to moderate to ~10%
levels in FY2012; pick-up expected in FY2013
We expect Sensex EPS growth to moderate to ~10% levels in
FY2012, as the impact of higher raw-material costs as well as
multi-year high interest rates affects the profitability of corporates.
We have cut our Sensex EPS estimates by ~2% each for FY2012
and FY2013 during the current results season, in addition to the
5-6% reduction since 1QFY2012. We expect earnings growth to
pick up to 17.7% levels in FY2013, with the RBI hinting at the
peaking of interest rates in the current rate cycle at the current
levels and cooling commodity prices on the back of slower global
growth prospects.
The primary growth drivers of Sensex EPS over FY2011-13E are
expected to be BFSI, oil and gas and IT stocks, with the BFSI
sector expected to contribute 34.8% to overall growth in Sensex
EPS during the period, while contribution from the oil and gas
and IT sector is estimated to be at 18.8% and 11.6%. Strong
performance by the BFSI sector highlights the underpenetration
of financial services in India, which would drive credit growth in
the years to come. Metal companies are expected to contribute
7.7% to Sensex EPS growth over FY2011-13E, primarily backed
by capacity expansions. On the other hand, sectors such as
telecom, power and FMCG are expected to underperform the
others. The combined contribution of all these sectors to Sensex
EPS growth is expected to be 12.6% over FY2011-13E. Overall,
we expect Sensex companies to deliver a reasonable 13.6% CAGR
in EPS over FY2011-13E to `1,308. A fair multiple of 14x
FY2013E EPS yields a Sensex target of 18,300, implying a
moderate ~9% upside from current levels
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