Q3FY12 Results Preview A quarter of mellowed expectations ::Emkay

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“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 ·      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 ·      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 ·      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 ·      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 ·      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 ·      Expect good performance from# – Pharma (53%), Cement (33%), IT (23%), Consumers (16%) and Agriculture (17%) ·      Expect poor performance from# – Oil and Gas (-80%), Construction (-55%), Metals (-24%) and Real Estate (-20%) ·      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 ·      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 ·      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 ·      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