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India Equity Research Reports, IPO and Stock News
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SECTOR SPECIFIC EXPECTATIONS
Cement
The cement companies under our coverage are expected to post a growth of 5% YoY and 7% QoQ during Q3FY12 despite insignificant uptick in the infrastructure segment. Low base and improved rural demand are key drivers. Operating margins of the companies are likely to improve as high as 100-700 bps due to a significant improvement in average realization (18-26% growth on YoY) mainly triggered by solid jump in realization in the Southern region. However, a continued operating cost pressure viz- raw materials, power & fuel and transportation has negated realization growth to an extent and is expected to persist in the coming quarters. The industry saw strong pricing power mainly on account of a suitable production discipline maintained by industry players. However, the sustainability of pricing should be the key factor in the coming quarters, for which we strongly believe that industrial capex should pick up and expedite infrastructure activities. We continue to prefer ACC and Ultratech over Ambuja among large players and maintain our BUY rating on India Cement and JK Cement.
CONSTRUCTION
The construction companies under our coverage are expected to report revenue growth of 12% YoY and 19% QoQ in Q3 FY12. JP Associates and Unity Infra are to be the main driver, which are expected to grow by 19% and 18% YoY, respectively followed by 13% growth in Simplex Infrastructures Ltd. We believe this quarter is going to be crucial for the construction sector in the wake of substantial movement of exchange rates, which may be a standstill for companies having exposure to foreign loans. JP Associates is expected to be impacted most due to its unhedged FCCB of US$354mn (due for redemption in Sept 2012).
Key things to watch out for this quarter: 1) pace of execution pick up post the monsoon, 2) effect of exchange movement in the P&L, 3) impact of high interest costs, and 4) working capital management contemplated by many companies in the last two-three quarters.
CAPITAL GOODS
We expect overall order inflows for the capital goods sector to slow down, continuing the trend witnessed in the September quarter. We expect both BHEL and L&T to see a y-o-y decline in order inflows, which is likely to lead to order book depletion for both. At EBIDTA levels, we expect margin pressures to flow in, though not very significant, as the quarterly revenues would be dependent on the existing order book, which should have better margins than the new orders.
The key data points to watch out would be the management commentaries on order inflows going forward and the balance sheet position of these companies, particularly on the working capital side.
Utilities
We expect NTPC and Powergrid to post modest growth in line with their capacity expansion. As usual, there would be one offs and provisional write backs and write offs, resulting in an adjusted profit number.
Key data points to watch out would be gross block addition for each of the companies and balance sheet position of these companies, particularly on the working capital side.
METALS & MINING
FERROUS METALS:
Volume growth (QoQ): We expect flat sales volume growth for Tata Steel, SAIL and JSW Steel ltd. Realization trend: During Q3FY12, domestic flat steel prices showed no growth q-o-q, whereas long steel products prices were up about 2% q-o-q. We expect steel companies to report flat to about 1% QoQ growth in realization. Raw material prices: Average iron ore prices during Q3FY12 were USD129/MT (63.5% fe – FOB India), declining by 21.6% QoQ. Coking coal contracts for the quarter were done at USD285/MT as compared to USD305/MT during Q2FY12. Profitability: Raw material prices during Q3FY12 were lower as compared to Q2FY12 and steel realizations were flat QoQ. Nevertheless, the significant QoQ depreciation of the Indian Rupee vs the USD by 11% resulted in higher cost of coking coal imports, which dampened the benefits of lower dollar denominated raw material prices of iron ore and coking coal during the quarter.
NON FERROUS METALS: Realization: Aluminium, zinc, lead and copper prices fell QoQ by 13%, 15%, 19% and 17%, respectively to USD2090/MT, USD1897/MT, USD1982/MT and USD7488/MT during Q3FY12 (YoY prices were also down for all commodities by 11%, 18%, 17% and 13%, respectively).
OIL & GAS
Brent price averaged at US$109.31/bbl, down 3% Q-o-Q but 26% up Y-o-Y in Q3 FY12. Regional GRMs were down 13% sequentially but 45% Y-o-Y at US$7.98/bbl. Crude prices have been resilient despite the global economic slowdown mainly due to supply side issues, particularly in the OPEC region + concerns of impending sanctions against Iran that may disrupt supplies in the near term.
Refining margins come off recent highs
Average Singapore refining margins for Q3 FY12 stood at US$8/bbl v/s US$9/bbl in Q2FY12. This was mainly due to weak product cracks, particularly gasoline (down US$6.6/bbl QoQ) and naphtha (down US$7.1/bbl QoQ). Also, light-heavy spreads (Dubai-Brent) too contracted US$2.6/bbl QoQ. However, Indian refiners are expected to post steeper declines in refining margins mainly led by steeper decline in light-heavy spreads and a decline in product cracks with a higher weightage in the Indian product slate.
Reliance Industries (RIL) is expected to post US$2.3/bbl QoQ decline in GRMs in Q3 to US$7.9/bbl. This is mainly due to i) higher decline in LPG, naphtha cracks, which have a higher weightage in RIL’s product slate and increase in FO cracks, which have a lower weightage; and ii) QoQ lower light-heavy crude spreads (mainly Arab Heavy-Dubai and Oriente-Dubai).
Under recoveries
We model `313bn of under-recoveries in Q3 FY12 – `134bn towards LPG/ kerosene and the balance `179bn towards auto fuels. We assume upstream companies to contribute 33% and R&M companies to contribute the balance in Q3FY12. We have not assumed any government contribution to the overall subsidy in Q3 in addition to the already announced `300bn subsidy in H1. R&M companies are expected to account for the `150bn subsidy support from the government in Q3.
We expect R&M companies to post losses of ` 110.43bn in Q3, mainly due to higher under-recoveries and lack of government subsidy support. The PAT numbers are subject to change as and when any additional support from the government is announced. However, R&M companies may write back MTM forex losses on foreign currency denominated debt incurred in H1 in their Q3 results. The impact of this would be `9.07bn for BPCL and ` 23.1bn for IOC. This write-back, if done, would restrict the losses to `33.35bn and `11.3bn for BPCL and IOC, respectively. However, our base case numbers do not include the impact of this write-back.
Rupee depreciation
Rupee averaged at `51.0 in Q3 FY12, a fall of 11.4% Q-o-Q. For December month, it averaged at `52.6, a drop of 3% compared to average of Q2 FY12. The rupee depreciation is hitting revenues of state-run oil marketing firms as the weakening of the rupee against the dollar by Re 1 impacts costs of diesel, kerosene and cooking gas by ` 9,300 crore per annum.
RIL: RIL is expected to post QoQ decline in PAT mainly due to fall across its business segments viz. Refining, Petchem and E&P. We expect RIL to report PAT of `47bn, a decline of 18% QoQ and 9% YoY.
ONGC: We expect ONGC to report PAT of `81bn in Q3, a YoY growth of 14% but a decline of 6% QoQ. The QoQ decline is mainly due to an increase in subsidy burden by 47% QoQ to `84bn, led by the steep depreciation in the `.
Cairn India: We expect Cairn India to report PAT of `21bn in Q3 FY12 v/s `20bn in Q3 FY11. The muted growth in Q3 FY12 PAT despite much higher crude prices (up 27% YoY) is mainly due to the impact of royalty on RJ crude, which will be accounted in this quarter but was not accounted in Q3 FY11 (cumulative impact of royalty from start of production till Q2 FY12 was accounted in Q2 itself). Hence, the numbers are not strictly comparable on a YoY basis.
PHARMA
Genericization of blockbuster drugs and currency fluctuation are the key
To maintain steady growth momentum: While the patent expiry of blockbuster drugs like Lipitor, Zyprexa, Caduet, etc. benefits Indian pharma companies, a sharp ~9% depreciation of ` v/s US$ has made the financial performance volatile during Q3FY12. However, Indian pharma companies are expected to maintain its steady growth momentum in Q3FY12 led by buoyant formulation exports and gradual growth in domestic formulations and CRAMS.
While the genericisation of blockbuster molecules in regulated markets and better export realization due to the rupee depreciation will keep formulation export buoyant, the domestic formulation segment is expected to report a growth of 12-14% despite price competition and macro concerns. Similarly, we expect the CRAMS segment to maintain gradual progress supported by a steady improvement in global pharma outsourcing during the quarter.
Expect margin expansion but currency fluctuation to make earnings volatile: On the profitability parameter, we expect margin expansion for Indian pharma companies mainly due to better export realization caused by currency fluctuation upon buoyant exports. On the contrary, forex loss on derivative positions and on forex loan exposure would make net profits volatile in Q3FY12.
Amongst the pharma stocks under our coverage, we estimate Jubilant Life Sciences will deliver robust earnings growth of 125%, followed by Divis Lab (31%) and Dr Reddy (29%). Dishman Pharma, on low base of Q3FY11, is estimated to report over 5x earnings growth. On the contrary, we expect Ranbaxy to disappoint grossly despite the launch of generic Lipitor and Caduet during Q3FY12. Jubilant Life Sciences: We expect Jubilant Life to see a margin expansion of >800bps (resulting in an 83% rise in EBITDA), led by healthy recovery in CRAMS operation and the rupee depreciation, on sales growth of 19%. In the similar lines, we estimate net profits will more than double (i.e. 124% growth) as notional forex translation losses can be differed (as per the amended AS 11). Divis Laboratories is estimated to deliver over 30% growth in both sales and profits led by continued recovery in the global pharma out-sourcing and the rupee depreciation. We expect Ranbaxy laboratories to continue its disappointing financial performance in Q4CY11 with a loss of ` 2.85bn despite the launch of generic version of Lipitor (the largest drug of the world) and Caduet in the US during the quarter. While the launch of generic Lipitor and Caduet in the US (bringing in incremental sales of ~$45-50mn) and higher sales realizations from the rupee depreciation strengthen the core operating performance, estimated huge forex loss of over $133 mn on its forex loan exposure and derivatives will result in a loss of ` 2.85bn in Q4CY11.
Moreover, we got a hint from the management that Ranbaxy is likely to charge $500mn to the P&L statement in Q4CY11 as a provision for the settlement of ongoing facility issues with the USFDA. Though we have not factored the said charge in our estimates, it would multiply the losses if charged fully for this quarter. Dr Reddy’s Laboratories, supported by the launch of Olanzapine 20mg under 180 days exclusivity and continuing ramp up in its recently launched limited competition products in the US, is likely to deliver 26% growth in sales in Q3FY12. With the exclusive product opportunity and the rupee depreciation, margins are expected to expand by 270bps resulting in a 29% growth in net profits in Q3FY12.
Biocon: Though we estimate a 27% decline in sales and flat in net profit for Biocon in Q3FY12 (primarily due to the divestment of its German trading arm – Axicorp), its core operation (excluding licensing income and Axicorp’s trading sales) is estimated to deliver healthy 27% growth in net profits on sales growth of 13%. Dishman Pharma is estimated to report over 5x growth in net profits in Q3FY12 over a low base of Q3FY11 (which was impacted adversely due to operating loss at Carbogen Amcis). We expect Dishman to report 18% growth in sales.
Top Result Picks: Jubilant Life Sciences and Divis Laboratories
Top Sell: Ranbaxy Laboratories
However, we expect healthy financial performance by Dr Reddy, Biocon and Dishman Pharma during the quarter.
REAL ESTATE
Real Estate Sector We expect real estate companies to report growth in revenues due to higher pace of execution on y-o-y and q-o-q basis after the monsoon. We expect majority of real estate companies to report lower area sold due to lack of new project launches and sluggish demand on account of strong property prices and higher interest cost even being the festive season. Leasing activities are also likely to fall on q-o-q basis due to the prevailing macro-economic environment. We believe demand for SEZ will continue to remain strong. We expect property prices and lease rental in major markets to rise on y-o-y basis but remain flat on q-o-q basis. We estimate margins of the real estate companies will remain under pressure due to inflationary pressure. We expect majority of real estate companies to report a drop in profitability due to higher interest cost and low margins. We expect overall debt level of majority of real estate companies to peak out.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SECTOR SPECIFIC EXPECTATIONS
Cement
The cement companies under our coverage are expected to post a growth of 5% YoY and 7% QoQ during Q3FY12 despite insignificant uptick in the infrastructure segment. Low base and improved rural demand are key drivers. Operating margins of the companies are likely to improve as high as 100-700 bps due to a significant improvement in average realization (18-26% growth on YoY) mainly triggered by solid jump in realization in the Southern region. However, a continued operating cost pressure viz- raw materials, power & fuel and transportation has negated realization growth to an extent and is expected to persist in the coming quarters. The industry saw strong pricing power mainly on account of a suitable production discipline maintained by industry players. However, the sustainability of pricing should be the key factor in the coming quarters, for which we strongly believe that industrial capex should pick up and expedite infrastructure activities. We continue to prefer ACC and Ultratech over Ambuja among large players and maintain our BUY rating on India Cement and JK Cement.
CONSTRUCTION
The construction companies under our coverage are expected to report revenue growth of 12% YoY and 19% QoQ in Q3 FY12. JP Associates and Unity Infra are to be the main driver, which are expected to grow by 19% and 18% YoY, respectively followed by 13% growth in Simplex Infrastructures Ltd. We believe this quarter is going to be crucial for the construction sector in the wake of substantial movement of exchange rates, which may be a standstill for companies having exposure to foreign loans. JP Associates is expected to be impacted most due to its unhedged FCCB of US$354mn (due for redemption in Sept 2012).
Key things to watch out for this quarter: 1) pace of execution pick up post the monsoon, 2) effect of exchange movement in the P&L, 3) impact of high interest costs, and 4) working capital management contemplated by many companies in the last two-three quarters.
CAPITAL GOODS
We expect overall order inflows for the capital goods sector to slow down, continuing the trend witnessed in the September quarter. We expect both BHEL and L&T to see a y-o-y decline in order inflows, which is likely to lead to order book depletion for both. At EBIDTA levels, we expect margin pressures to flow in, though not very significant, as the quarterly revenues would be dependent on the existing order book, which should have better margins than the new orders.
The key data points to watch out would be the management commentaries on order inflows going forward and the balance sheet position of these companies, particularly on the working capital side.
Utilities
We expect NTPC and Powergrid to post modest growth in line with their capacity expansion. As usual, there would be one offs and provisional write backs and write offs, resulting in an adjusted profit number.
Key data points to watch out would be gross block addition for each of the companies and balance sheet position of these companies, particularly on the working capital side.
METALS & MINING
FERROUS METALS:
Volume growth (QoQ): We expect flat sales volume growth for Tata Steel, SAIL and JSW Steel ltd. Realization trend: During Q3FY12, domestic flat steel prices showed no growth q-o-q, whereas long steel products prices were up about 2% q-o-q. We expect steel companies to report flat to about 1% QoQ growth in realization. Raw material prices: Average iron ore prices during Q3FY12 were USD129/MT (63.5% fe – FOB India), declining by 21.6% QoQ. Coking coal contracts for the quarter were done at USD285/MT as compared to USD305/MT during Q2FY12. Profitability: Raw material prices during Q3FY12 were lower as compared to Q2FY12 and steel realizations were flat QoQ. Nevertheless, the significant QoQ depreciation of the Indian Rupee vs the USD by 11% resulted in higher cost of coking coal imports, which dampened the benefits of lower dollar denominated raw material prices of iron ore and coking coal during the quarter.
NON FERROUS METALS: Realization: Aluminium, zinc, lead and copper prices fell QoQ by 13%, 15%, 19% and 17%, respectively to USD2090/MT, USD1897/MT, USD1982/MT and USD7488/MT during Q3FY12 (YoY prices were also down for all commodities by 11%, 18%, 17% and 13%, respectively).
OIL & GAS
Brent price averaged at US$109.31/bbl, down 3% Q-o-Q but 26% up Y-o-Y in Q3 FY12. Regional GRMs were down 13% sequentially but 45% Y-o-Y at US$7.98/bbl. Crude prices have been resilient despite the global economic slowdown mainly due to supply side issues, particularly in the OPEC region + concerns of impending sanctions against Iran that may disrupt supplies in the near term.
Refining margins come off recent highs
Average Singapore refining margins for Q3 FY12 stood at US$8/bbl v/s US$9/bbl in Q2FY12. This was mainly due to weak product cracks, particularly gasoline (down US$6.6/bbl QoQ) and naphtha (down US$7.1/bbl QoQ). Also, light-heavy spreads (Dubai-Brent) too contracted US$2.6/bbl QoQ. However, Indian refiners are expected to post steeper declines in refining margins mainly led by steeper decline in light-heavy spreads and a decline in product cracks with a higher weightage in the Indian product slate.
Reliance Industries (RIL) is expected to post US$2.3/bbl QoQ decline in GRMs in Q3 to US$7.9/bbl. This is mainly due to i) higher decline in LPG, naphtha cracks, which have a higher weightage in RIL’s product slate and increase in FO cracks, which have a lower weightage; and ii) QoQ lower light-heavy crude spreads (mainly Arab Heavy-Dubai and Oriente-Dubai).
Under recoveries
We model `313bn of under-recoveries in Q3 FY12 – `134bn towards LPG/ kerosene and the balance `179bn towards auto fuels. We assume upstream companies to contribute 33% and R&M companies to contribute the balance in Q3FY12. We have not assumed any government contribution to the overall subsidy in Q3 in addition to the already announced `300bn subsidy in H1. R&M companies are expected to account for the `150bn subsidy support from the government in Q3.
We expect R&M companies to post losses of ` 110.43bn in Q3, mainly due to higher under-recoveries and lack of government subsidy support. The PAT numbers are subject to change as and when any additional support from the government is announced. However, R&M companies may write back MTM forex losses on foreign currency denominated debt incurred in H1 in their Q3 results. The impact of this would be `9.07bn for BPCL and ` 23.1bn for IOC. This write-back, if done, would restrict the losses to `33.35bn and `11.3bn for BPCL and IOC, respectively. However, our base case numbers do not include the impact of this write-back.
Rupee depreciation
Rupee averaged at `51.0 in Q3 FY12, a fall of 11.4% Q-o-Q. For December month, it averaged at `52.6, a drop of 3% compared to average of Q2 FY12. The rupee depreciation is hitting revenues of state-run oil marketing firms as the weakening of the rupee against the dollar by Re 1 impacts costs of diesel, kerosene and cooking gas by ` 9,300 crore per annum.
RIL: RIL is expected to post QoQ decline in PAT mainly due to fall across its business segments viz. Refining, Petchem and E&P. We expect RIL to report PAT of `47bn, a decline of 18% QoQ and 9% YoY.
ONGC: We expect ONGC to report PAT of `81bn in Q3, a YoY growth of 14% but a decline of 6% QoQ. The QoQ decline is mainly due to an increase in subsidy burden by 47% QoQ to `84bn, led by the steep depreciation in the `.
Cairn India: We expect Cairn India to report PAT of `21bn in Q3 FY12 v/s `20bn in Q3 FY11. The muted growth in Q3 FY12 PAT despite much higher crude prices (up 27% YoY) is mainly due to the impact of royalty on RJ crude, which will be accounted in this quarter but was not accounted in Q3 FY11 (cumulative impact of royalty from start of production till Q2 FY12 was accounted in Q2 itself). Hence, the numbers are not strictly comparable on a YoY basis.
PHARMA
Genericization of blockbuster drugs and currency fluctuation are the key
To maintain steady growth momentum: While the patent expiry of blockbuster drugs like Lipitor, Zyprexa, Caduet, etc. benefits Indian pharma companies, a sharp ~9% depreciation of ` v/s US$ has made the financial performance volatile during Q3FY12. However, Indian pharma companies are expected to maintain its steady growth momentum in Q3FY12 led by buoyant formulation exports and gradual growth in domestic formulations and CRAMS.
While the genericisation of blockbuster molecules in regulated markets and better export realization due to the rupee depreciation will keep formulation export buoyant, the domestic formulation segment is expected to report a growth of 12-14% despite price competition and macro concerns. Similarly, we expect the CRAMS segment to maintain gradual progress supported by a steady improvement in global pharma outsourcing during the quarter.
Expect margin expansion but currency fluctuation to make earnings volatile: On the profitability parameter, we expect margin expansion for Indian pharma companies mainly due to better export realization caused by currency fluctuation upon buoyant exports. On the contrary, forex loss on derivative positions and on forex loan exposure would make net profits volatile in Q3FY12.
Amongst the pharma stocks under our coverage, we estimate Jubilant Life Sciences will deliver robust earnings growth of 125%, followed by Divis Lab (31%) and Dr Reddy (29%). Dishman Pharma, on low base of Q3FY11, is estimated to report over 5x earnings growth. On the contrary, we expect Ranbaxy to disappoint grossly despite the launch of generic Lipitor and Caduet during Q3FY12. Jubilant Life Sciences: We expect Jubilant Life to see a margin expansion of >800bps (resulting in an 83% rise in EBITDA), led by healthy recovery in CRAMS operation and the rupee depreciation, on sales growth of 19%. In the similar lines, we estimate net profits will more than double (i.e. 124% growth) as notional forex translation losses can be differed (as per the amended AS 11). Divis Laboratories is estimated to deliver over 30% growth in both sales and profits led by continued recovery in the global pharma out-sourcing and the rupee depreciation. We expect Ranbaxy laboratories to continue its disappointing financial performance in Q4CY11 with a loss of ` 2.85bn despite the launch of generic version of Lipitor (the largest drug of the world) and Caduet in the US during the quarter. While the launch of generic Lipitor and Caduet in the US (bringing in incremental sales of ~$45-50mn) and higher sales realizations from the rupee depreciation strengthen the core operating performance, estimated huge forex loss of over $133 mn on its forex loan exposure and derivatives will result in a loss of ` 2.85bn in Q4CY11.
Moreover, we got a hint from the management that Ranbaxy is likely to charge $500mn to the P&L statement in Q4CY11 as a provision for the settlement of ongoing facility issues with the USFDA. Though we have not factored the said charge in our estimates, it would multiply the losses if charged fully for this quarter. Dr Reddy’s Laboratories, supported by the launch of Olanzapine 20mg under 180 days exclusivity and continuing ramp up in its recently launched limited competition products in the US, is likely to deliver 26% growth in sales in Q3FY12. With the exclusive product opportunity and the rupee depreciation, margins are expected to expand by 270bps resulting in a 29% growth in net profits in Q3FY12.
Biocon: Though we estimate a 27% decline in sales and flat in net profit for Biocon in Q3FY12 (primarily due to the divestment of its German trading arm – Axicorp), its core operation (excluding licensing income and Axicorp’s trading sales) is estimated to deliver healthy 27% growth in net profits on sales growth of 13%. Dishman Pharma is estimated to report over 5x growth in net profits in Q3FY12 over a low base of Q3FY11 (which was impacted adversely due to operating loss at Carbogen Amcis). We expect Dishman to report 18% growth in sales.
Top Result Picks: Jubilant Life Sciences and Divis Laboratories
Top Sell: Ranbaxy Laboratories
However, we expect healthy financial performance by Dr Reddy, Biocon and Dishman Pharma during the quarter.
REAL ESTATE
Real Estate Sector We expect real estate companies to report growth in revenues due to higher pace of execution on y-o-y and q-o-q basis after the monsoon. We expect majority of real estate companies to report lower area sold due to lack of new project launches and sluggish demand on account of strong property prices and higher interest cost even being the festive season. Leasing activities are also likely to fall on q-o-q basis due to the prevailing macro-economic environment. We believe demand for SEZ will continue to remain strong. We expect property prices and lease rental in major markets to rise on y-o-y basis but remain flat on q-o-q basis. We estimate margins of the real estate companies will remain under pressure due to inflationary pressure. We expect majority of real estate companies to report a drop in profitability due to higher interest cost and low margins. We expect overall debt level of majority of real estate companies to peak out.
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