Q3FY13 Results Preview
Challenging Quarter, Promising Future
m Automobiles: We expect auto companies under our coverage universe to register overall volume growth of 6.3% YoY and 8.7% QoQ. While two-wheeler companies are likely to register a growth of 6% YoY and 8% QoQ, four-wheeler companies are expected to register a YoY growth of 6% and 9% QoQ. On the back of this, we expect our auto universe to register overall revenue growth of 12% YoY (and 14% QoQ) in Q3FY13, largely driven by 6% volume growth and 5-6% increase in realizations. We expect EBITDA margins to contract 126bp YoY but expect margin expansion of 38bp QoQ driven by Hero MotoCorp and Maruti Suzuki. We expect PAT growth to remain flat YoY and register a growth of 27% YoY largely driven by Maruti Suzuki. While, we continue to remain positive on Tata Motors and Maruti Suzuki, we are downgrading Bajaj Auto to Neutral from Buy and upgrading Ashok Leyland to Buy from Neutral. We continue to remain Neutral on Hero MotoCorp, M&M and Eicher Motors.
m Banking: Even though broad sentiments improved after reform announcements, Q3FY13 results are expected bring out the continued tough operating environment faced by banks. With business growth moderating further during Q3FY13, core financial performance should continue to remain weak even as NIMs are sustained sequentially. However, bottom-line growth (YoY basis) is likely to be better driven by softer yields (treasury gains, MTM write-backs) and favorable base effect in provisioning costs. While core business performance (PPP) should continue to remain divergent for private vs PSBs, the favorable base effect in provisioning cost should help PSBs report healthy bottomline growth. We expect private banks under our coverage to report PPP growth of 18.2% and PAT growth of 20.2% while PSBs are likely to report 7.3% and 22.1% growth respectively.
m Cement: Cement companies under our coverage universe are expected to post weak numbers in the quarter due to sequential decline in cement prices across India and sluggish sales volume. Aggregate sales volume of our coverage universe is expected to grow marginally at 1.7% YoY to 29mt. Though, on average cement realization is expected to improve 2.1% YoY to Rs3,993/tonne on a sequential basis, we are expecting 3-4% QoQ realization drop for our coverage universe. Led by sluggish volume growth and higher operating costs (freight and energy), average operating margin of our coverage universe is expected to contract 2.8pp YoY to 17.1%. Among our coverage universe, Shree Cement is expected to post profit growth of 205.6% YoY to Rs1.8bn and JK Cement 4.6% YoY growth to Rs455mn. We are expecting profit of India Cements and Orient Paper to decline by 60.4% and 61.5% YoY respectively during the quarter.
m Consumer/FMCG: We expect sales growth to be price led for most consumer companies. Nestle is likely to report negative to low volume growth while Colgate should report double digit volume growth in the toothpaste category. GSK is expected to report 7% volume growth. CSD demand has normalised from Q4FY12 but is still down on YoY basis which would further dampen volumes. Raw material prices have remained soft during the quarter and will benefit most companies. We have modeled margin expansion for all companies under coverage. PAT for our coverage universe is expected to grow by 13% YoY. PAT for Colgate and GSK Consumer is expected to grow by more than 14% while for Nestle by 3%.
m Oil and Gas: Devoid of any key triggers like geopolitical tensions, demand surge etc. crude traded in a very narrow band during Q3FY13 (between US$106-115/bbl) which is likely to stay at about US$110/bbl in the medium term. Pressure on gasoline-crude, diesel-crude and FO-crude cracks led to a decline in MoM GRMs from an average of US$8.3/bbl to US$6.4/bbl. We believe under-recoveries will remain high at about Rs410bn in Q3FY13 on the back of high crude prices and relatively high average rupee-dollar exchange rate of Rs54.1/US$. News flows from the media remain in favour of the sector with recent reports suggesting that the government may consider raising diesel price by Rs1/lit./month thus wiping out under-recoveries on diesel in the next ten months. We believe the sector will benefit only when the government acts on its policy. Also, the Rangarajan committee recommendations have been submitted to the government with a uniform gas pricing formula for all domestic producers. If the government acts on its policies, we believe the sector will regain momentum. We expect Petronet LNG and IGL to report good numbers but predict weak set of numbers for OMCs and RIL.
m Metals & Mining: We expect better operational performance in coming quarters and see Q3FY13E as the last of several weak quarters of recent past due to i) slow pick up in volumes on account of lackluster domestic demand continuing in Q3FY13 ii) stable to marginally positive QoQ realizations with no major signs of revival as yet and iii) no substantial decrease in raw material costs due to the lag effect. We expect continued pressure on margins for steel players but see improvements for miners. We maintain our cautious stance on the ferrous space but remain positive on the mining space on account of volume growth, better pricing, low costs and attractive valuations. We expect marked improvement in margins from the next quarter onwards due to better product pricing, higher volumes and lower raw material costs. We expect good set of numbers from Coal India and GMDC, but expect it to be weak for NMDC, Sterlite Industries and JSW steel.
m Media: Ad environment remained buoyant on the back of festive season demand across sectors. Broadcasting companies continued to grow at a faster pace than print players. Digitization benefit of Phase-I is expected to benefit all players. ZEEL is expected to post strong growth sequentially in subscription revenues whereas Sun TV is expected to grow analog subscription revenues sequentially on the back of the deal with Arasu. Dish TV subscriber addition is expected to be 0.7mn following digitization in metros. Margins are expected to expand 17bps YoY for our coverage companies. We expect positive surprise from ZEEL, Jagran Prakashan and Balaji Telefilms.
m Pharma: We expect the 14 pharma and one pharma packaging company under our coverage to post lower revenue growth of 3%YoY during the quarter. We expect Dr. Reddy’s Labs (DRL) and Ranbaxy Labs (RLL) to report revenue growth of 4%YoY and (-)31%YoY due to 180-days exclusivity for generic olanzapine and generic Lipitor respectively in Q3FY12. We expect MTM losses on foreign borrowings due to 4% depreciation of rupee during the quarter.
m Cement: Cement companies under our coverage universe are expected to post weak numbers in the quarter due to sequential decline in cement prices across India and sluggish sales volume. Aggregate sales volume of our coverage universe is expected to grow marginally at 1.7% YoY to 29mt. Though, on average cement realization is expected to improve 2.1% YoY to Rs3,993/tonne on a sequential basis, we are expecting 3-4% QoQ realization drop for our coverage universe. Led by sluggish volume growth and higher operating costs (freight and energy), average operating margin of our coverage universe is expected to contract 2.8pp YoY to 17.1%. Among our coverage universe, Shree Cement is expected to post profit growth of 205.6% YoY to Rs1.8bn and JK Cement 4.6% YoY growth to Rs455mn. We are expecting profit of India Cements and Orient Paper to decline by 60.4% and 61.5% YoY respectively during the quarter.
m Consumer/FMCG: We expect sales growth to be price led for most consumer companies. Nestle is likely to report negative to low volume growth while Colgate should report double digit volume growth in the toothpaste category. GSK is expected to report 7% volume growth. CSD demand has normalised from Q4FY12 but is still down on YoY basis which would further dampen volumes. Raw material prices have remained soft during the quarter and will benefit most companies. We have modeled margin expansion for all companies under coverage. PAT for our coverage universe is expected to grow by 13% YoY. PAT for Colgate and GSK Consumer is expected to grow by more than 14% while for Nestle by 3%.
m Oil and Gas: Devoid of any key triggers like geopolitical tensions, demand surge etc. crude traded in a very narrow band during Q3FY13 (between US$106-115/bbl) which is likely to stay at about US$110/bbl in the medium term. Pressure on gasoline-crude, diesel-crude and FO-crude cracks led to a decline in MoM GRMs from an average of US$8.3/bbl to US$6.4/bbl. We believe under-recoveries will remain high at about Rs410bn in Q3FY13 on the back of high crude prices and relatively high average rupee-dollar exchange rate of Rs54.1/US$. News flows from the media remain in favour of the sector with recent reports suggesting that the government may consider raising diesel price by Rs1/lit./month thus wiping out under-recoveries on diesel in the next ten months. We believe the sector will benefit only when the government acts on its policy. Also, the Rangarajan committee recommendations have been submitted to the government with a uniform gas pricing formula for all domestic producers. If the government acts on its policies, we believe the sector will regain momentum. We expect Petronet LNG and IGL to report good numbers but predict weak set of numbers for OMCs and RIL.
m Metals & Mining: We expect better operational performance in coming quarters and see Q3FY13E as the last of several weak quarters of recent past due to i) slow pick up in volumes on account of lackluster domestic demand continuing in Q3FY13 ii) stable to marginally positive QoQ realizations with no major signs of revival as yet and iii) no substantial decrease in raw material costs due to the lag effect. We expect continued pressure on margins for steel players but see improvements for miners. We maintain our cautious stance on the ferrous space but remain positive on the mining space on account of volume growth, better pricing, low costs and attractive valuations. We expect marked improvement in margins from the next quarter onwards due to better product pricing, higher volumes and lower raw material costs. We expect good set of numbers from Coal India and GMDC, but expect it to be weak for NMDC, Sterlite Industries and JSW steel.
m Media: Ad environment remained buoyant on the back of festive season demand across sectors. Broadcasting companies continued to grow at a faster pace than print players. Digitization benefit of Phase-I is expected to benefit all players. ZEEL is expected to post strong growth sequentially in subscription revenues whereas Sun TV is expected to grow analog subscription revenues sequentially on the back of the deal with Arasu. Dish TV subscriber addition is expected to be 0.7mn following digitization in metros. Margins are expected to expand 17bps YoY for our coverage companies. We expect positive surprise from ZEEL, Jagran Prakashan and Balaji Telefilms.
m Pharma: We expect the 14 pharma and one pharma packaging company under our coverage to post lower revenue growth of 3%YoY during the quarter. We expect Dr. Reddy’s Labs (DRL) and Ranbaxy Labs (RLL) to report revenue growth of 4%YoY and (-)31%YoY due to 180-days exclusivity for generic olanzapine and generic Lipitor respectively in Q3FY12. We expect MTM losses on foreign borrowings due to 4% depreciation of rupee during the quarter.
We expect these companies to report 7%YoY decline in EBIDTA and 220bps decline in EBIDTA margin from 23.8% to 21.6% due to the absence of 180-days exclusivity opportunities. We expect 44%YoY improvement in net profit due to margin improvement for the majority of companies. Bilcare and Dishman Pharma continue to be our best picks in the sector on account of Bilcare’s global leadership in pharma packaging and Dishman’s marked improvement in performance over last two quarters.
Overall, pharma companies should report excellent performance for the quarter except for DRL. However, the National Pharmaceutical Pricing Policy (NPPP) will have an adverse impact on the sector performance.
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