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December 2011 quarter earnings preview. We expect the net income of the BSE-30
Index to grow 12.4% yoy and 7.1% qoq. On an ex-Energy basis, we expect the net
income of the BSE-30 Index to grow 11.1% yoy. We expect the net income of the KIE
universe to grow 6.8% yoy on an ex-Energy basis, but decline 8.4% yoy on an overall
basis; yoy comparisons of financial performance of R&M companies are not meaningful
due to fluctuations in the timing and quantum of compensation/subsidy from the
government. We expect the net income of the Energy, Real Estate and Telecom sectors
to decline yoy while the net income of Cement, Industrials, Pharmaceuticals and
Technology will likely improve yoy.
We expect yoy decline in net profits for Energy and Telecom stocks
Sector-wise expectations for December 2011 quarter results
Key points Key points
Automobiles We expect a stable quarter for auto companies, driven by moderating raw material cost pressure and
strong revenue growth. We estimate revenues will increase by 26% yoy and 12% qoq for companies
under our coverage and we expect EBITDA margins to remain flat qoq due to muted raw material
cost pressure. For our coverage universe, we expect adjusted PAT (excluding forex losses on foreign
currency debt) to increase 8% yoy but improve 21% qoq.
We expect Ashok Leyland, Bajaj Auto, Bharat Forge, Hero MotoCorp, M&M and Tata Motors to
report positive yoy earnings growth while Exide Industries and Maruti Suzuki are likely to report a
significant decline in earnings. Raw material costs are likely to remain stable in 3QFY12, which will
result in flat EBITDA margins qoq. Maruti Suzuki will be the worst performer due to a significant
decline in volumes and a sharp depreciation of the INR versus the USD.
Banking We expect NIMs to remain stable during the quarter and a slowdown in loan growth across all
banks. Fee income trends are likely to remain weak while treasury and recovery-related income are
likely to improve qoq. Operating expenses are likely to be stable for the industry. Loan-loss provisions
are likely to decline for public sector banks as they made higher provisions for transition-related NPLs
in 2QFY12 while slippages are likely to be low in 3QFY12. Restructured loans are likely to increase
qoq. Investment depreciation is likely to be restricted to the equity portfolio of banks.
NBFCs are likely to report divergent trends in earnings. While loan growth will remain high, NIMs
will remain under pressure and we expect 50-80 bps yoy decline (10-20 bps qoq decline).
Incremental borrowing costs have declined, especially for short-to-medium-term borrowings.
Lower competitive intensity across products and a likely decline in interest rates in the system from
1QFY13 will result in lower NIMs over the next few quarters.
Cement A strong quarter driven by (1) a sharp rebound in prices after the monsoons though some weakness
was witnessed in December and (2) strong volume growth, driven by a spurt in November. Cement
prices increased by Rs15-20/bag sequentially though they saw some moderation in December. Prices
in South India remained stable despite a sluggish demand environment.
We expect moderate inflation in input cost sequentially as benefits of moderation in international
coal prices are likely to be offset by weaker currency. Freight rates remained stable during the
quarter despite a diesel price hike in June 2011.
Chemicals A decline in global polymer margins qoq is likely to be negative for the profitability of the chemical
segment of Reliance Industries. This will be partly mitigated by improvement in polyester margins.
Consumers We expect robust sales growth for staples, driven by modest volume growth and high price
increases. Decelerating economic growth and weaker consumer sentiment are headwinds for
discretionary consumption—Asian Paints and Titan are likely to have low volume growth. Gross
margin pressure will continue on a yoy and qoq basis (impact of INR depreciation). Savings in ad
spends are likely to help to sustain EBITDA margins. HUL, ITC, GSK Consumer and Jubilant
Foodworks are likely to deliver strong results.
We expect 14% yoy sales growth in ITC's cigarette segment, led by both, pricing and volume
growth. We expect HUL to report sales growth of 16% yoy, driven by volume growth of 8%. An
increase in material costs is likely to be offset by savings in ad spends and we expect EBITDA
margin expansion for HUL. Asian Paints is likely to report ~20% yoy sales growth led by pricing.
Volume growth is likely to be low despite sales during the festive season.
Energy Upstream oil: ONGC and OIL are likely to report a strong yoy increase in revenue 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 is likely to report a qoq decline in EBITDA due to a
higher subsidy burden.
Downstream oil: We expect R&M companies to report huge losses given (1) nil compensation
from the government despite large under-recoveries and (2) high forex-related losses due to the
INR depreciation. We estimate gross under-recoveries of Rs311 bn for the industry for 3QFY12.
We expect refining margins for OMCs to improve qoq led by improvement in diesel and fuel oil
cracks. This will be partly mitigated by inventory/adventitious losses.
Industrials Industrials: Revenue growth and margins may remain disappointing. We may see execution
slippages as some projects slow down due to a weak investment scenario and structural issues such
as coal availability. Industrial capex activity remains weak and will reflect in performance of
companies such as Thermax, Voltas and Crompton. We see risks to margins from higher commodity
prices, competition and mix changes. We expect Suzlon to report sales of about 525 MW in 3QFY12
but high interest and depreciation are likely to lead to a net loss. Order inflows and commentary on
the investment scenario will be the key variables to monitor.
Construction: We expect the existing order backlog to drive moderate revenue growth for IVRCL
and Nagarjuna although higher interest expenses may impact net profits (we expect a yoy decline
in net profits). The execution of large BOT projects in the backlog is expected to drive revenues of
Sadbhav Engineering.
Infrastructure: Stronger port volumes are expected to drive revenue growth for MPSEZ and GPPL.
Media Television: We expect festival season advertising in 3QFY12 to be negated by (1) weak advertising
after the festive season, due to rising interest rates and a weak economy and (2) company-specific
factors, notably Zee's weak ratings and Sun's political overhang. Zee is likely to benefit from
considerable reduction in sports losses yoy. Sun TV is likely to report a further reduction in cable
subscription revenues qoq. Dish TV is likely to report positive operating leverage, led by robust
revenue growth (subscriber volumes, price increases) and lower distribution expenses (partially prebooked
in 2QFY12).
Print: We expect the robust festive season advertising in 3QFY12 and continued support from
local advertisers (more than 50% of regional print media advertising less impacted by the
economic slowdown) to be partially negated by a weak advertising environment after the festive
season due to rising interest rates and a weak economy. HT Media is likely to continue to report
pressure on English print advertising, though market share gains in HT Mumbai and Mint will
provide support. We expect 3QFY12 to be the last quarter of newsprint price pressure (base
effect) except for HT Media (depreciation of the INR).
Metals Ferrous: We expect weak performance from steel companies such as Tata Steel and JSW Steel due
to a marginal increase in raw material prices (due to INR depreciation) and a marginal decline in
average realizations. Performance is likely to be further impacted by forex losses on foreign currency
borrowings. JSPL may be the exception to the weak sector performance since it is likely to benefit
from strong pellet prices, stable long product prices and an increase in merchant power realizations.
JSPL is likely to be the only steel company to report growth in EBITDA and net income.
Non-ferrous: The performance of all non-ferrous companies is likely to be affected by softening
commodity prices during 3QFY12. LME aluminum, copper, lead and zinc prices have fallen 12-
19% qoq. Hindalco’s operating profit is likely to decline due to lower commodity prices and input
cost inflation. Sterlite's earnings are also likely to decline sequentially on weakness in zinc and
aluminum prices and non-availability of coal, impacting the PLF of IPP.
Pharmaceuticals Generics: Yoy and qoq comparisons are not meaningful for DRL and Ranbaxy due to exclusivity sales
of generic Lipitor and Zyprexa. We expect Sun and Cipla to benefit from the INR depreciation and
estimate strong yoy PAT growth. Despite benefits from exclusivity of generic Lipitor, we expect
Ranbaxy's results to be subdued due to large forex losses on foreign currency loans and an
outstanding derivatives position. We expect Cipla, Cadila and DRL to report weak India sales growth
while Lupin, Glenmark and Sun are likely to report above-market India sales growth.
CMO/CROs: We expect 30% yoy PAT growth for Divis due to a low base and we expect it to
benefit from the INR depreciation (no foreign currency loans and hedges). We expect yoy PAT
decline for Biocon as we expect lower licensing income at US$10 mn versus US$17 mn in
3QFY11. We expect yoy PAT decline for Dishman and Jubilant on a reported basis due to forex
losses on outstanding foreign currency debt.
Property We expect subdued growth with select markets (Bengaluru) witnessing robust sales/launches.
Reported financials will also report a sluggish trend due to (1) weaker-than-expected launches over
the past four quarters, (2) lower-than-expected execution delaying revenue recognition, (3) cost
increases and (4) increase in interest rates, which will impact demand. Demand is expected to be
worst hit in Mumbai while Bengaluru is likely to remain the most resilient market.
Demand for India-wide office space/commercial property has rebounded after a dip in CY2009
and it is expected to have grown a further 20% in CY2011. 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 a demand-supply balance.
Technology We expect solid sequential volume growth (3.5-5% for Tier-I names, and 2-6% for Tier-II, barring
Mphasis) across companies. We expect constant-currency pricing to be stable, which should drive
constant currency revenue and volume growth similarly. Adverse cross-currency movements will
exert meaningful pressure on reported US dollar revenue growth numbers, especially for companies
with substantial India exposure. We expect 50-200 bps cross-currency pressure on qoq revenue
growth across companies. Infosys is best placed among Tier-I companies on this score and should
lead the pack in terms of reported US dollar revenue growth.
We expect strong sequential margin expansion across companies with zero or partial wage hike
pressure during 3QFY12. Margin expansion would be led mainly by benefits from sharp INR
depreciation in 3QFY12 (10-12% improved average Rupee realization across companies, the
difference being due to cash-flow hedging for some companies and different average spot
computation methodologies). Among the Tier-I names, we expect Infosys and TCS to report
strong margin expansion—we build in 180 bps and 150 bps qoq improvement, respectively. We
note that Wipro benefits only marginally from the INR depreciation due to its cash-flow hedges at
lower levels. We build in only a 40 bps qoq uptick in Wipro’s global IT margins. Special milestone
payouts to employees would mitigate some Rupee benefit at HCLT—we build in 110 bps qoq
uptick
Telecom The return of volume momentum and modest sequential RPM uptick should aid robust India wireless
KPIs and financials for the three listed Indian wireless names. Strong seasonality and currency
translation benefits are likely to drive particularly strong financial performance from Bharti Africa.
Forex losses will remain high given the INR depreciation. On balance, 3QFY12 should allay minutes
growth/elasticity concerns about the Indian wireless market. An uncertain regulatory environment
remains an overhang.
Key factors to watch out for: (1) India wireless volume growth—to assess whether the recent tariff
hikes have induced negative elasticity and get a sense of whether underlying volume growth has
slowed meaningfully. We expect 3-6% qoq volume growth for various players (2) RPM
trajectory—flow-through of recent tariff hikes and STV rationalization should reflect in modest
RPM uptick (+0.5-1% qoq), (3) India wireless margins—to assess the extent of RPM-uptick-led
leverage benefit on margins. 3G investments are likely to exert pressure on margins as 3G growth
is likely to remain subdued, and (4) India wireless capex—to assess whether slow 3G offtake and
INR depreciation have led to a downward adjustment on capex.
Utilities Merchant tariffs rebound driven by seasonal strength and acute coal shortage in October. Players
with significant merchant exposure such as Adani Power, JSPL, JSW Energy and Lanco Infratech are
likely to benefit from strong merchant rates. Profitability is likely to remain muted for coal importers
(Adani Power and JSW Energy) due to a weak Rupee.
This is a seasonally weak quarter for NHPC (hydro generation). Generation is likely to pick up for
NTPC with PLFs moving above 80%. PLFs showed a secular uptrend in November with most IPPs
operating above 80% PLF. Thus, we expect a significant sequential improvement in PLFs in
3QFY12. We also expect significant forex losses in Tata Power (translation of Mundra foreign
currency debt) and Lanco Infratech (translation of Griffin debt).
Source: Kotak Institutional Equities estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
December 2011 quarter earnings preview. We expect the net income of the BSE-30
Index to grow 12.4% yoy and 7.1% qoq. On an ex-Energy basis, we expect the net
income of the BSE-30 Index to grow 11.1% yoy. We expect the net income of the KIE
universe to grow 6.8% yoy on an ex-Energy basis, but decline 8.4% yoy on an overall
basis; yoy comparisons of financial performance of R&M companies are not meaningful
due to fluctuations in the timing and quantum of compensation/subsidy from the
government. We expect the net income of the Energy, Real Estate and Telecom sectors
to decline yoy while the net income of Cement, Industrials, Pharmaceuticals and
Technology will likely improve yoy.
We expect yoy decline in net profits for Energy and Telecom stocks
Sector-wise expectations for December 2011 quarter results
Key points Key points
Automobiles We expect a stable quarter for auto companies, driven by moderating raw material cost pressure and
strong revenue growth. We estimate revenues will increase by 26% yoy and 12% qoq for companies
under our coverage and we expect EBITDA margins to remain flat qoq due to muted raw material
cost pressure. For our coverage universe, we expect adjusted PAT (excluding forex losses on foreign
currency debt) to increase 8% yoy but improve 21% qoq.
We expect Ashok Leyland, Bajaj Auto, Bharat Forge, Hero MotoCorp, M&M and Tata Motors to
report positive yoy earnings growth while Exide Industries and Maruti Suzuki are likely to report a
significant decline in earnings. Raw material costs are likely to remain stable in 3QFY12, which will
result in flat EBITDA margins qoq. Maruti Suzuki will be the worst performer due to a significant
decline in volumes and a sharp depreciation of the INR versus the USD.
Banking We expect NIMs to remain stable during the quarter and a slowdown in loan growth across all
banks. Fee income trends are likely to remain weak while treasury and recovery-related income are
likely to improve qoq. Operating expenses are likely to be stable for the industry. Loan-loss provisions
are likely to decline for public sector banks as they made higher provisions for transition-related NPLs
in 2QFY12 while slippages are likely to be low in 3QFY12. Restructured loans are likely to increase
qoq. Investment depreciation is likely to be restricted to the equity portfolio of banks.
NBFCs are likely to report divergent trends in earnings. While loan growth will remain high, NIMs
will remain under pressure and we expect 50-80 bps yoy decline (10-20 bps qoq decline).
Incremental borrowing costs have declined, especially for short-to-medium-term borrowings.
Lower competitive intensity across products and a likely decline in interest rates in the system from
1QFY13 will result in lower NIMs over the next few quarters.
Cement A strong quarter driven by (1) a sharp rebound in prices after the monsoons though some weakness
was witnessed in December and (2) strong volume growth, driven by a spurt in November. Cement
prices increased by Rs15-20/bag sequentially though they saw some moderation in December. Prices
in South India remained stable despite a sluggish demand environment.
We expect moderate inflation in input cost sequentially as benefits of moderation in international
coal prices are likely to be offset by weaker currency. Freight rates remained stable during the
quarter despite a diesel price hike in June 2011.
Chemicals A decline in global polymer margins qoq is likely to be negative for the profitability of the chemical
segment of Reliance Industries. This will be partly mitigated by improvement in polyester margins.
Consumers We expect robust sales growth for staples, driven by modest volume growth and high price
increases. Decelerating economic growth and weaker consumer sentiment are headwinds for
discretionary consumption—Asian Paints and Titan are likely to have low volume growth. Gross
margin pressure will continue on a yoy and qoq basis (impact of INR depreciation). Savings in ad
spends are likely to help to sustain EBITDA margins. HUL, ITC, GSK Consumer and Jubilant
Foodworks are likely to deliver strong results.
We expect 14% yoy sales growth in ITC's cigarette segment, led by both, pricing and volume
growth. We expect HUL to report sales growth of 16% yoy, driven by volume growth of 8%. An
increase in material costs is likely to be offset by savings in ad spends and we expect EBITDA
margin expansion for HUL. Asian Paints is likely to report ~20% yoy sales growth led by pricing.
Volume growth is likely to be low despite sales during the festive season.
Energy Upstream oil: ONGC and OIL are likely to report a strong yoy increase in revenue 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 is likely to report a qoq decline in EBITDA due to a
higher subsidy burden.
Downstream oil: We expect R&M companies to report huge losses given (1) nil compensation
from the government despite large under-recoveries and (2) high forex-related losses due to the
INR depreciation. We estimate gross under-recoveries of Rs311 bn for the industry for 3QFY12.
We expect refining margins for OMCs to improve qoq led by improvement in diesel and fuel oil
cracks. This will be partly mitigated by inventory/adventitious losses.
Industrials Industrials: Revenue growth and margins may remain disappointing. We may see execution
slippages as some projects slow down due to a weak investment scenario and structural issues such
as coal availability. Industrial capex activity remains weak and will reflect in performance of
companies such as Thermax, Voltas and Crompton. We see risks to margins from higher commodity
prices, competition and mix changes. We expect Suzlon to report sales of about 525 MW in 3QFY12
but high interest and depreciation are likely to lead to a net loss. Order inflows and commentary on
the investment scenario will be the key variables to monitor.
Construction: We expect the existing order backlog to drive moderate revenue growth for IVRCL
and Nagarjuna although higher interest expenses may impact net profits (we expect a yoy decline
in net profits). The execution of large BOT projects in the backlog is expected to drive revenues of
Sadbhav Engineering.
Infrastructure: Stronger port volumes are expected to drive revenue growth for MPSEZ and GPPL.
Media Television: We expect festival season advertising in 3QFY12 to be negated by (1) weak advertising
after the festive season, due to rising interest rates and a weak economy and (2) company-specific
factors, notably Zee's weak ratings and Sun's political overhang. Zee is likely to benefit from
considerable reduction in sports losses yoy. Sun TV is likely to report a further reduction in cable
subscription revenues qoq. Dish TV is likely to report positive operating leverage, led by robust
revenue growth (subscriber volumes, price increases) and lower distribution expenses (partially prebooked
in 2QFY12).
Print: We expect the robust festive season advertising in 3QFY12 and continued support from
local advertisers (more than 50% of regional print media advertising less impacted by the
economic slowdown) to be partially negated by a weak advertising environment after the festive
season due to rising interest rates and a weak economy. HT Media is likely to continue to report
pressure on English print advertising, though market share gains in HT Mumbai and Mint will
provide support. We expect 3QFY12 to be the last quarter of newsprint price pressure (base
effect) except for HT Media (depreciation of the INR).
Metals Ferrous: We expect weak performance from steel companies such as Tata Steel and JSW Steel due
to a marginal increase in raw material prices (due to INR depreciation) and a marginal decline in
average realizations. Performance is likely to be further impacted by forex losses on foreign currency
borrowings. JSPL may be the exception to the weak sector performance since it is likely to benefit
from strong pellet prices, stable long product prices and an increase in merchant power realizations.
JSPL is likely to be the only steel company to report growth in EBITDA and net income.
Non-ferrous: The performance of all non-ferrous companies is likely to be affected by softening
commodity prices during 3QFY12. LME aluminum, copper, lead and zinc prices have fallen 12-
19% qoq. Hindalco’s operating profit is likely to decline due to lower commodity prices and input
cost inflation. Sterlite's earnings are also likely to decline sequentially on weakness in zinc and
aluminum prices and non-availability of coal, impacting the PLF of IPP.
Pharmaceuticals Generics: Yoy and qoq comparisons are not meaningful for DRL and Ranbaxy due to exclusivity sales
of generic Lipitor and Zyprexa. We expect Sun and Cipla to benefit from the INR depreciation and
estimate strong yoy PAT growth. Despite benefits from exclusivity of generic Lipitor, we expect
Ranbaxy's results to be subdued due to large forex losses on foreign currency loans and an
outstanding derivatives position. We expect Cipla, Cadila and DRL to report weak India sales growth
while Lupin, Glenmark and Sun are likely to report above-market India sales growth.
CMO/CROs: We expect 30% yoy PAT growth for Divis due to a low base and we expect it to
benefit from the INR depreciation (no foreign currency loans and hedges). We expect yoy PAT
decline for Biocon as we expect lower licensing income at US$10 mn versus US$17 mn in
3QFY11. We expect yoy PAT decline for Dishman and Jubilant on a reported basis due to forex
losses on outstanding foreign currency debt.
Property We expect subdued growth with select markets (Bengaluru) witnessing robust sales/launches.
Reported financials will also report a sluggish trend due to (1) weaker-than-expected launches over
the past four quarters, (2) lower-than-expected execution delaying revenue recognition, (3) cost
increases and (4) increase in interest rates, which will impact demand. Demand is expected to be
worst hit in Mumbai while Bengaluru is likely to remain the most resilient market.
Demand for India-wide office space/commercial property has rebounded after a dip in CY2009
and it is expected to have grown a further 20% in CY2011. 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 a demand-supply balance.
Technology We expect solid sequential volume growth (3.5-5% for Tier-I names, and 2-6% for Tier-II, barring
Mphasis) across companies. We expect constant-currency pricing to be stable, which should drive
constant currency revenue and volume growth similarly. Adverse cross-currency movements will
exert meaningful pressure on reported US dollar revenue growth numbers, especially for companies
with substantial India exposure. We expect 50-200 bps cross-currency pressure on qoq revenue
growth across companies. Infosys is best placed among Tier-I companies on this score and should
lead the pack in terms of reported US dollar revenue growth.
We expect strong sequential margin expansion across companies with zero or partial wage hike
pressure during 3QFY12. Margin expansion would be led mainly by benefits from sharp INR
depreciation in 3QFY12 (10-12% improved average Rupee realization across companies, the
difference being due to cash-flow hedging for some companies and different average spot
computation methodologies). Among the Tier-I names, we expect Infosys and TCS to report
strong margin expansion—we build in 180 bps and 150 bps qoq improvement, respectively. We
note that Wipro benefits only marginally from the INR depreciation due to its cash-flow hedges at
lower levels. We build in only a 40 bps qoq uptick in Wipro’s global IT margins. Special milestone
payouts to employees would mitigate some Rupee benefit at HCLT—we build in 110 bps qoq
uptick
Telecom The return of volume momentum and modest sequential RPM uptick should aid robust India wireless
KPIs and financials for the three listed Indian wireless names. Strong seasonality and currency
translation benefits are likely to drive particularly strong financial performance from Bharti Africa.
Forex losses will remain high given the INR depreciation. On balance, 3QFY12 should allay minutes
growth/elasticity concerns about the Indian wireless market. An uncertain regulatory environment
remains an overhang.
Key factors to watch out for: (1) India wireless volume growth—to assess whether the recent tariff
hikes have induced negative elasticity and get a sense of whether underlying volume growth has
slowed meaningfully. We expect 3-6% qoq volume growth for various players (2) RPM
trajectory—flow-through of recent tariff hikes and STV rationalization should reflect in modest
RPM uptick (+0.5-1% qoq), (3) India wireless margins—to assess the extent of RPM-uptick-led
leverage benefit on margins. 3G investments are likely to exert pressure on margins as 3G growth
is likely to remain subdued, and (4) India wireless capex—to assess whether slow 3G offtake and
INR depreciation have led to a downward adjustment on capex.
Utilities Merchant tariffs rebound driven by seasonal strength and acute coal shortage in October. Players
with significant merchant exposure such as Adani Power, JSPL, JSW Energy and Lanco Infratech are
likely to benefit from strong merchant rates. Profitability is likely to remain muted for coal importers
(Adani Power and JSW Energy) due to a weak Rupee.
This is a seasonally weak quarter for NHPC (hydro generation). Generation is likely to pick up for
NTPC with PLFs moving above 80%. PLFs showed a secular uptrend in November with most IPPs
operating above 80% PLF. Thus, we expect a significant sequential improvement in PLFs in
3QFY12. We also expect significant forex losses in Tata Power (translation of Mundra foreign
currency debt) and Lanco Infratech (translation of Griffin debt).
Source: Kotak Institutional Equities estimates
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