Q3FY12 Results Preview A quarter of mellowed expectations ::Emkay

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Q3FY12 Results Preview

A quarter of mellowed expectations

“Hope is itself a species of happiness, and, perhaps, the chief happiness which this world affords: but, like all other pleasures immoderately enjoyed, the excesses of hope must be expiated by pain; and expectations improperly indulged must end in disappointment”        

-Samuel Johnson

n      The earnings expectations for Q3FY12 for Emkay Universe have been toned down vs Q2FY12; Expect mere 5.2%* yoy growth in APAT on the back of healthy 20%* yoy growth in Sales

n      Modest APAT growth for Emkay Universe; Since EBIDTA margins declining by 102bps* yoy and EBIT margins dipping by 111bps; Cost pressures are circling alongside rising intensity of interest costs

n      Revenue pie expected to grow 17.9%*/22.4%*/19.0%* for Large/Mid/Small cap Emkay universe respectively; Growth momentum continues but remains largely price-led owing to inflationary pressures

n      However, large part of the growth to be offset by rising costs – operating as well as financial. Hence, forecast APAT growth of 7.0%/-4.6%/ -8.0% for Large/Mid/Small cap Emkay universe respectively

n      Emkay Mid and Small Cap universe to be worse off than Large Cap universe on all counts; Sharper contraction in Ebit margins and rising intensity of interest costs impacting performance

% yoy growth	Sales		EBIDTA		APAT
	Q2FY12A	Q3FY12E	Q2FY12A	Q3FY12E	Q2FY12A	Q3FY12E
Emkay Universe	19.8%	18.6%	11.6%	12.5%	-0.7%	5.2%
Emkay Large Cap	20.0%	17.9%	11.4%	12.5%	-0.6%	7.0%
Emkay Mid Cap	19.7%	22.4%	13.1%	12.5%	-0.3%	-4.6%
Emkay Small Cap	15.8%	19.0%	10.9%	10.8%	-12.1%	-8.0%

Source: Company, Emkay Research

n      Expect good performance from# – Pharma (53%), Cement (33%), IT (23%), Consumers (16%) and Agriculture (17%)

n      Expect poor performance from# – Oil and Gas (-80%), Construction (-55%), Metals (-24%) and Real Estate (-20%)

n      Cement and Pharma are noticeable out-liers in otherwise mellowed expectations for Q3FY12E. We expect Cement and Pharma sector to report a strong sales growth of 24% and 19% respectively. Also, these are the only out-liers where EBIDTA is expected to grow faster than sales at 33% and 35% respectively

n      For IT sector, INR depreciation to rule the quarterly performance. We expect a revenue growth of 31% yoy and EBIDTA growth of 38% yoy. However, paring of revenue guidance led by lower volume growth, remains a key risk to the sector

n      Poor performance of few sectors has uncanny commonality. The performance to be largely impacted by external factors. E.g., Metals and Mining expected to report (1) 7% growth in sales led by both moderate prices and lower volume and (2) 11% yoy and 24% yoy decline in EBIDTA driven by sharp increase in energy and RM costs

n      Another disappointment will be Oil & Gas as (1) sales expected to grow by 28% yoy (led only by RIL)  and (2) yet report 37% yoy and 80% yoy drop in EBIDTA and APAT due to under-recoveries on sale of HSD, SKO and LPG at Rs.300bn as against Rs.214bn in Q2FY12

      * Note: ex Banks & FS, FS - Others and Oil & Gas # Nos in bracket are % yoy change in PAT

Q3FY12 Strong Results

Large Caps	Mid Caps	Small Caps
Adani Power	Ashok Leyland	Ashoka Buildcon
Dr. Reddy's Lab	Eicher Motors	Dishman Pharma
Ranbaxy Labs	Federal Bank	Gujarat Industries Power
Sun Pharma	Glenmark Pharma
Ultratech Cement	Hexaware Technologies
	Ipca Lab
	Jubilant Life Sciences
	Mahindra Satyam
	Manappuram General Finance
	Mindtree
	Petronet LNG
	Shree Cements
	Tata Chemicals

Q3FY12 Weak Results

Large Caps	Mid Caps	Small Caps
Idea Cellular	Aurobindo Pharma	Bharat Bijlee
Jaiprakash Associates	Bhushan Steel	Essel Propack
JSW Steel	Chambal Fertilisers	Godawari Power
Maruti Suzuki India	IL&FS Transportation	HEG
Reliance Communications	India Cements	IVRCL
Sesa Goa	IRB Infrastructure	JK Paper
Tata Steel	Lanco Infratech	Sterlite Tech
	Madras Cements	Tamilnadu Newsprint
	Oberoi Realty	TRF
	Voltas	TRIL

Possible Surprises – Positives

Name of the company	EPS (Rs)	yoy gr (%)	Reason
Bajaj Auto	29.2	27	Positive surprise in margins led by product mix and currency depreciation
Berger Paints	1.5	18	Argument for margin expansion remains intact; Drive re-rating after significant correction
Cipla	3.5	22	Gross margin expansion led by price hikes and rupee depreciation
Divi’s Laboratories	10	35	Benefit from strong growth and rupee depreciation; Exports is 90% of total revenues
Havells India	5.1	5	Robust growth in domestic business; No deviations in Sylvania performance
Hexaware	2.3	70	Strong operational performance and foreign currency gains
Infosys	41.6	33	Out of woods; Strongest performance on qoq basis amongst IT peers
Larsen N Toubro	13.7	4	Order inflows to hold fort; Support earnings and valuations
Mindtree	14.6	96	Strong operational performance and foreign currency gains
Punjab National Bank	47.1	36	Decline in provisions led by recoveries to trigger healthy APAT growth
Shree Cement	13	89	Surplus power and better product mix to drive earnings performance
Tata Motors	8.8	19	JLR performance to drive earnings upgrades
Titan Industries	1.9	24	Value growth in jewellery to play out; Recent underperformance does not factor the event
United Phosphorous	3.3	32	Global business (Latam & America) to report strong growth

Possible Surprises – Negatives

Name of the company	EPS (Rs)	yoy gr (%)	Reason
Asian Paints	23.6	3	Lower volumes and gross margins could trigger earnings downgrades
Cummins	4.9	-3	Product mix, volume growth and margin to have negative surprise in store
LIC Housing Finance	5.1	-19	Gearing for Flat NII; Margin contraction led by lower spreads
Maruti	7.6	-63	Negative surprise in store due to higher discounts and currency depreciation
Rallis	1.5	-16	Domestic growth to be under stress
Ultratech Cement	18.5	58	Price increase in Coal could elevate cost pressures; But, Q3FY12 expected to be strong quarter