India Strategy QE Jun-13 Earnings Preview: Another Dreary Quarter :: Morgan Stanley Research

India Strategy
QE Jun-13 Earnings Preview:
Another Dreary Quarter
Quick Comment: For QE Jun-13, MS analysts’ forecast
an earnings decline of -1% YoY for 111 MS covered
companies (ex-Oil PSUs) vs. 1% YoY growth in the QE
Mar-13. They expect Sensex companies’ profits to
decline by 1% YoY against the 7%YoY growth seen in
QE Mar-13.
Excluding the Oil PSUs, revenue growth for MS
coverage likely to be at record lows: Our analysts
expect revenue growth to decelerate to 3%YoY vs.
6%YoY growth in the previous quarter. Excluding Oil
PSUs, EBITDA margins are likely to expand by
42bpYoY. However, Financials, Materials, Industrials,
Technology, Healthcare and Consumer Discretionary
are likely experience margin contraction. Analysts
expect the strongest earnings growth for Energy,
Healthcare and Consumer Staples, whereas Materials,
Industrials and Consumer Discretionary will see most
fall in earnings.
Key observations about our analysts’ forecasts:
1) Depreciation expenses are set to rise by 5% YoY and
taxes will likely decline by 1% YoY. 2) Net financial
income estimated at Rs17.2 billion in 1QF14, up 8%
YoY for the MS coverage universe.
Bottom line: 1QF14 earnings season is likely to be
another quarter of consolidation for earnings around
trough levels. EBITDA margins are likely to be expand
for the fourth quarter running, albeit by a small amount.
The dispersion in earnings is still high and aggregate
earnings may not reveal this. Our macro corporate
profitability proxy suggests broad market earnings
growth in the range of -7% to 19% with a likely print of
7.2% for the quarter, compared with -3.7% in the
previous quarter and 4.1% a year ago.

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Earnings Commentary from Our Analysts
Sector Jun 13-Earnings Preview Comments
Autos We expect gross margins to be under pressure this quarter as volume growth decelerated and continued rupee weakness will increase raw material costs.
Banks
We expect asset quality differentiation between private and SOE banks to continue. We expect core earnings progression at SOE banks continue to remain
under pressure on muted loan/fee income growth and higher operating costs. Capital gains, though will provide some respite. Gross impaired loan creation will
remain elevated. For private banks, we expect core trends to be broadly stable.
Cement We expect volumes to remain flat and realizations to decline, leading to weak core EBITDA and earnings growth.
Energy
F1Q14 was characterized by weaker GRMs and Crude oil prices, whereas Petchem netback are up 10% sequentially. Also, INR depreciated against USD,
which helped private players to partially mitigate the weakness in oil pricea and GRMs. We expect mixed bag for Oil PSUs, with PSU upstream likely to report
sequential improvement in results, whereas OMCs are likely to report losses assuming government does not announce any subsidy support for the quarter.
FMCG
We expect further moderation in volume growth especially across discretionary product categories. We expect gross margin expansion across companies and
most of such expansion to be re-invested in brands (higher ad-spends). Earnings growth will likely moderate for the sector. ITC, Dabur and GCPL to be report
solid results. JUBI will likely disappoint.
Healthcare
We expect revenue growth to continue driven by US (base business and niche pipeline), domestic market (could face some supply chain constraints due to
new pricing policy) and other Emerging markets. Weak INR will be beneficial, subject to outstanding hedges.
Industrials (Infra)
We expect revenues growth across the board (developers, constructors and capital goods companies) to continue to be poor in the quarter leading to
continued pressure on margins. Given the high fixed costs though (interest and depreciation), we expect net profits performance to continue to decline, with
few exceptions.
Media
We expect good sequential increase in the top line of broadcasting companies as the beneficial impact of digitization on subscription revenues continues.
Margins, though, could be lower sequentially on the back of increased content costs. Distribution companies could report trends similar to that in last quarter
and numbers in line with our expectations. While cable companies could report good subscriber additions, it is important to watch out for the subscriber
additions of DTH players, given the STB price hikes effected last quarter.
Metals
Steel: Expect Steel realization to decrease by 1-1.5% QoQ and production levels to remain largely flat on a YoY basis (down QoQ). Benefits of lower iron ore
and coking coal prices to protect downside to earnings. Non-ferrous: Lower benchmark price and lower production levels due to plant shutdowns in copper
and zinc to drive earnings down sequentially and YoY. Coal: Realizations expected to be up on a YOY basis due to recent price hikes, production and dispatch
levels are largely lack luster. Iron ore: realization to remain flat sequentially but earnings to trend down QoQ mainly to due to lower production levels.
Real estate
We expect flat to single digit growth in Q1 earnings on a sequential basis for mid-caps, driven by execution of older projects and new projects getting
recognised. Operationally, for mid-caps, pace of new launches appears steady and new sales should be growing while for large-caps operational scale-up
visibility remains poor. B/S improvement should continue.
Technology
We expect larger vendors to report flat to 2% qoq US$ revenue growth with lower EBIT margins qoq. We expect large cap stocks to absorb the tailwind, due
to rupee depreciation in Jun-13 quarter, whereas it is likely to flow through for small and mid cap companies.
Telecoms
F1Q14 to witness ARPM improvement, driven by voice ARPM growing 1.3% QoQ and data ARPM growing 2.8% QoQ. We expect some early signs of
seasonal slowdown in voice traffic; however, data traffic to remain robust. Overall EBITDA for the industry should increase by 4%.
Utilities
We expect thermal power PLFs to be lower sequentially, as early rains have meant the substitution of thermal generation by hydro has kicked in sooner than
normal. Merchant realizations are expected to be broadly stable, although realizations on the power exchanges have been softer. Global spot coal prices are
down 2-4% QoQ and could lead to some savings in fuel cost for companies dependent on imported coal. The sharp depreciation of the rupee against the
US$ in the latter half of the quarter will lead to forex losses for companies with outstanding forex debt. We expect IPPs to report mixed trends while regulated
players could largely report in-line numbers.
Source: Company data, Morgan Stanley Research