IDFC Sec - Earnings Preview (July - September 2011)

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India Inc’s performance in Q2FY12 is expected to moderate yoy due to input cost pressures and repeated interest rate hikes by the RBI. We expect Sensex earnings to slump to a two-year low of 7.5% on the back of weak earnings momentum in Metals. Earnings of commodities are expected to be flat as 17% growth in Oil & Gas is likely to be offset by an 18% decline in Metals. Companies that are expected to clock strong bottom-line growth are L&T (26.9%), BHEL (20.9%), RIL (17.1%), ICICI Bank (21.7%) and Coal India. While Sensex top-line growth (ex Metals) is likely to remain strong at 21.5% yoy, higher commodity prices are expected to drag down margins by ~130bp. For the broader IDFC universe, earnings growth is expected to be 5.4% yoy.

While profitability of Indian corporates has nose-dived, demand drivers remain intact as reflected by strong top-line growth for the IDFC universe. We see commodity prices cooling off in H2FY12 due to the weakening global macro-economic environment. This should provide a much-needed respite in inflation and result in a more sanguine interest-rate environment. Lower commodity prices and a manageable interest burden should enable corporates to lever up their margins and bolster profitability. We believe these factors, coupled with policy triggers from the government, would trigger a revival in investment spend in H2FY12. Our revised Sensex EPS stands at Rs1130 and Rs1350 for FY12 and FY13 respectively. Given the global uncertainties, we believe Sensex is likely to remain range-bound in the near term. But expect a bounce-back once inflationary pressures recedes leading to a reversal in the interest rate cycle. Our index target is in the range of 19000-20000 (15x FY13E earnings) for the next 12 to 18 months.

Sectors likely to exhibit strong performance:

·         Cement: Strong revenue growth on the back of a 10-20% yoy increase in average realizations.

·         Consumer goods: Price increases and lower A&P spends have mitigated most of the commodity pressures.

Sectors likely to witness weaker earnings:

·         Metals: Weak earnings due to price correction, rising input costs and sluggish demand.

·         Real estate: Slower construction activity (monsoon quarter) and limited new launches expected to drag performance.

·         Petrochemicals and Oil & Gas: A weak quarter expected, with OMCs and Cairn India dragging down an otherwise robust performance from upstream, RIL and the natural gas universe.

Utilities Pre-Result Buys in Sector: JP Power :: 2QFY12 Preview: BofA Merrill Lynch

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Utilities
Pre-Result Buys in Sector: JP Power
Pre-Result Underperform: Adani Power, Neyveli, NTPC
In the Utility sector, markets would be focused on extent of fall in merchant power
rates and progress on future plans such as expansion in generation capacity,
update on new IPP projects, impact of coal on PLFs and AT&C loss reduction in
New Delhi JVs of Reliance and Tata Power.


We expect the Indian Utility Sector, represented by Adani Power (APL), NTPC,
Reliance Infra, Tata Power, Neyveli, GIPCL and JP Power to report sales growth
of 20%YoY, EBITDA growth of +31%YoY and PAT growth of 22%YoY mainly led
by APL, GIPCL, JP Power and Tata Power – key driver coal not power.
􀂄 Adani Power: We expect APL to report +56%YoY (flat QoQ) growth in
2QFY12 Rec. PAT led by 120%YoY (+3%QoQ) growth in generation on 2x
capacity (1.98GW vs 990MW). However, APL may disappoint markets on shutdown
in its 6th unit of 660MW (33% of capacity) in 2Q on commercial dispute
with GUVNL on its ability to sell merchant power ahead of PPA start date.
􀂄 We expect NTPC’s 2QFY12 to report 15%YoY growth in rec. PAT on grossup
of tax at peak-rate v/s MAT last year and addition RoE on 2GW of
additional capacity. However, the generation fell by 2% during 2Q on
problems in plants like Kaniha, back-down by clients, fuel shortages and
annual maintenance shut downs. Fuel cost savings remain on-track in 2Q but
the sales from its high margin spot market may slow due to cap on realization
from UI market.
􀂄 Reliance Infra: We expect a 12% growth in 2Q12 rec. PAT led by pick-up in
E&C business and higher treasury income of Rs589mn vs Rs42mn in 2Q10.
We expect 21%YoY growth in sales led by impact of new tariff offset by lower
electricity volume, high cost of power purchased and 60%YoY growth in E&C
revenues and flat EBITDA.
􀂄 Tata Power: We expect Tata Power to witness recurring PAT (consol.)
growth of 40%YoY led by 10% higher coal volume and ASP growth of
30%YoY despite higher interest and depreciation.
􀂄 Neyveli: Expect 2Q12 rec PAT to be flat on muted generation +2%YoY
despite capacity +5% on start of 2x125MW Barsingsar station.
􀂄 GIPCL: We expect GIPCL to report 9x growth in Rec PAT led by incremental
RoE of commissioning of 2x125MW units of Surat Lignite II, which had
impacted profits last year due to technical faults.
􀂄 JP Power: We expect JP Power to report 108%YoY growth in rec PAT on
84% growth in 2Q generation led by start of 4x300MW of Karcham Wangtoo
hydro project.
􀂄 Reliance Infra remain our preferred pick in the sector based on inexpensive
valuations, expansion in its development portfolio & generating capacity,
distribution franchise and reduction in T&D losses at its Delhi JVs. Maintain
buy on JP Power, as the stock yet to factor-in improving execution of its
12GW pipeline and UPF on Neyveli and NTPC on continued delay in capex
& coal mines. Neutral on Tata Power and GIPCL.

Infra Developer --Pre-Result Buys in Sector: MSEZ :: 2QFY12 Preview: BofA Merrill Lynch

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Infra Developer
Pre-Result Buys in Sector: MSEZ
Pre-Result Underperform: ADE
􀂄 JPA: JPA likely to report 19%YoY fall in 2QFY12 rec PAT on weak E&C
execution, realty sale and higher fixed costs of cement expansion offset by
20%YoY growth in cement dispatch to 4.1mmt vs 3.4mmt. We expect E&C
revenue to fall by 15%YoY on farmers’ agitation on Yamuna Expressway,
higher base led by execution at Karcham HEP and slower realty build-out for
JP Infra. We expect 2%YoY growth in revenue, 2%YoY growth in EBITDA
while Rec. PAT would be fell by 19%YoY.
􀂄 Adani Enterprises to report a Rs6.8bn of Cons. Rec. PAT +58%YoY on
start of 1.98GW (vs 990MW) of Power plant at Mundra and a strong growth
of 60%YoY in coal trading volume.
􀂄 Mundra Port and SEZ to have 15%YoY growth in 2QFY12 Rec PAT on
higher depreciation, lower treasury income and higher tax on applicability of
MAT on SEZ. While sales to grow by 34%YoY on +24%YoY port traffic led
by coal and container. However, MSEZ may report a higher PAT if it
assumes MAT credit, which we have not yet factored-in.

Industrials : Pre-Result Buys in Sector: Suzlon :: 2QFY12 Preview: BofA Merrill Lynch

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Industrials
Pre-Result Buys in Sector: Suzlon
Pre-Result Underperform: ABB, L&T, IVRC, NJCC
E&C
�� We expect a 48%YoY growth in rec. PAT of Indian Engineering &
Construction (E&C) majors mainly led by turnaround at Suzlon and improved
execution (L&T) despite a) weak margin - IVRC, L&T, NJCC, and b) higher
fixed costs (interest and depreciation) – ABB, IVRC, L&T, NJCC. We expect
Suzlon to report rec. profit of Rs220mn (vs Rs3.8bn of loss in 2Q11) on
rebound in domestic wind markets and that represents 26% of the YoY swing
required to report PAT of Rs5.2bn for FY12E.
�� We expect double digit growth in order backlog for most E&C companies.
The key issues to watch-out for in the E&C sector is likely improved
execution and impact of on-ground execution challenges such as land
acquisition.
�� We expect the Indian E&C Sector, represented by L&T, Suzlon, ABB, IVRCL
and NJCC to report sales growth of 17%YoY, EBITDA growth of 26%YoY
and Recurring PAT growth of 48%YoY.
�� L&T: In 2QFY12, L&T’s has announced orders of Rs79bn down 14% vs orders
announced in 2Q11 on lack of captive order, which were 23% of inflows last
year. Key order wins in 2Q a) big ticket international project wins in electrical
and oil & gas domains from customers such as ADMA-OPCO (Rs20bn), Qatar
General Electricity & Water Corp (Rs12bn), Abu Dhabi Gas Industries

(Rs8.4bn) Petroleum Development Oman (Rs7bn), and b) balance Rs32bn
order in building & factories. We expect L&T to post one of the better financials
with rebound in sales growth (18%YoY) and PAT (15%YoY) in our universe.
Markets would also be more focused on any change in the guidance for new
orders in FY12E, which could be key reason for disappointment.
�� ABB: Meanwhile, in 3QCY11 ABB could report rec. PAT of Rs569mn vs loss
of Rs204mn in 3QCY10 on a) exit costs on rural electrification business last
year, and b) 25%YoY sales growth on a low base 3Q10 (-8%YoY). However,
the deteriorating visibility and rich valuation drive our Underperform rating.
�� Suzlon – turnaround story: With early turnaround in 1Q12, we expect Suzlon
to maintain momentum in 2QFY12 by reporting consolidated rec. profit of
Rs220mn vs rec loss of Rs3.8bn on +30%YoY domestic sales volumes. Mix
change in favor of India should drive 241%YoY growth EBITDA.
�� IVRC: We expect IVRCL to report a weak 2Q12 with rec. PAT -80%YoY and
a flat EBITDA on slow execution sales +8%YoY accompanied by high
depreciation and interest costs. It has announced Rs22.3bn of orders
including Rs14.9bn Nechipu-Hoj Annuity based road project won by IVRCL
Assets and Sushee Infra consortium (26:74).
�� Expect NJCC’s to report a slow growth in sales at 6%YoY and flat EBITDA in
2QFY12. This along with high depreciation and interest would lead to a
37%YoY fall in rec. PAT.

Telecom - Result Outperformers: Idea Cellular:: 2QFY12 Preview: BofA Merrill Lynch

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Telecom
Potential Result Outperformers: Idea Cellular
Potential Result Underperformers: Reliance Com
Result Expectations – Key Highlights
All eyes on margins post tariff hikes: We expect investors to focus on strength
in 2Q FY12 margins as a key indicator for future potential. We expect 20-30bps
QoQ uptick in wireless margins led by lower distribution expenses and ~1% QoQ
improvement in voice-revenue per minute, but dragged by higher diesel prices.
Seasonal weakness and slower net adds to drag topline growth: Against an
improving price environment, the telecom majors have witnessed sharply slower
subscriber growth. This coupled with seasonally slower traffic patterns in 2Q
implies that topline growth (~2-3% QoQ) in 2Q FY12 will be slower than 1Q FY12
(~3-4%).
MTM forex losses likely for Bharti & RCom: The rupee has depreciated ~9.5%
versus the USD over the last quarter. Consequently, we expect MTM losses for
Bharti (~Rs5bn; 19% of 2Q EBIT) and RCom (~Rs8bn; ~120% of 2Q EBIT).
Bharti’s total forex loan exposure is ~US$12bn but MTM hit on loans for the Africa
acquisition will be routed via the balance sheet.
Idea seems well placed but regulatory risk is a swing factor: Operationally,
Idea seems well-placed and its single-country operations offer better visibility. A
key swing factor could be the new telecom policy NTP -2011 that is expected in
October. Potential changes in spectrum pricing and roaming in this policy could
hurt Idea’s market-capitalisation more than Bharti’s.

Real Estate - Result Outperformers: Sobha :: 2QFY12 Preview: BofA Merrill Lynch

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Real Estate
Potential Result Outperformers: Sobha
Potential Result Underperformers: DLF
Result Expectations – Key Highlights
We expect muted performance in 2Q from most of the real estate developers
given the monsoon months and limited launches in Mumbai and NCR. We expect
the volume to be strong for the South India players given slew of launches since
June 2011. The debt levels are expected to remain flat given the benefits of non
core asset sales (DLF and HDIL) likely to flow in from 3Q while for other muted
volumes is unlikely to help deleveraging. Since the festive season starts from 3Q,
we expect to see host of launches in October which should set the tone for rest of
the fiscal.
DLF - We expect DLF to report muted pre sales at ~2mn sq ft given lack of new
launches in this quarter. But we do expect the volume to pick pace in the festive
season as it prepares for new launches in North India. Therefore for 2Q we
expect revenue to drop by 10% QoQ to Rs22bn. The EBIDTA margin is expected
to inch up further to 47% given the focus on plotted development. The drop in
revenue and high interest and taxes will lead to drop in earnings to Rs3.4bn.
Unitech –Unitech continued on its aggressive launch strategy in 2Q as well
and we expect it to manage another ~2mn sq ft of bookings. But we expect the
earnings to remains muted given execution challenges. But we do expect the
margin to improve from the subdued 20% in 1Q to normalized levels of 28%. This
should lead to sharp jump in earnings to Rs1.37bn from Rs983mn in 1Q.
HDIL –HDIL earnings will be substantially dependent on the FSI sale. Our
estimate of Rs6bn of sales includes Rs4.5n from FSI sale in Goregaon project
and Virar while the remaining from TDR sales. The revenue from the
development projects are expected to kick in from 2HFY12.
Sobha –We expect strong volume performance from Sobha given strong pace
of new launches including Gurgaon. Sobha launched its north Bangalore project
in late June while the Gurgaon project was launched in July. Also due to its
increased stake in one of the Bangalore residential project we expect the revenue
to increase by 20% QoQ to Rs3.8bn leading to 34% increase in earnings. But we
expect the debt levels to remain flat in 2Q given dividend payout and continued
investment in new launches.

Pharmaceuticals- Result Outperformers: Divis, Glenmark :: 2QFY12 Preview: BofA Merrill Lynch

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Pharmaceuticals
Potential Result Outperformers: Divis, Glenmark
Potential Result Underperformers: Ranbaxy, Aurobindo
Weak domestic business, MTM hits to hurt profitability
We expect 2Q results to be weak for most companies under our coverage as
MTM hits pertaining to forex fluctuation is likely to hurt profit growth. Moreover,
slower domestic formulations business (especially acute therapy segments) is
likely to affect companies with higher exposure to acute therapies. However,
presence/lack of some limited competition products may affect some companies
US business (DRL, Sun Pharma), affecting comparison.
Since much of currency movement happened towards late September, operating
profits for companies are unlikely to be affected significantly. However, uncovered
forex loans (Aurobindo, IPCA, Cadila) could result in high MTM losses. Also,
interest costs may see a rise due to depreciated rupee value. Overall for the
sector, we expect average adjusted profit growth (ex-MTM losses) to be restricted
at 1% even as we expect sales growth of 12%, EBITDA growth of 10% YoY,
mainly on higher depreciation and taxation compared to last year.
Result Expectations – Key Highlights
Dr. Reddy’s
Impact of Allegra OTC launches and generic Fondaparinux would help strong
growth in US generics (up 35%). Russian business to sustain strong growth
driven by increased push in prescription sales. Domestic formulations growth
would still lag industry averages, hence a drag. Base margins launch to sustain at
last quarter levels, despite weak domestic business due to stronger US sales.
Sun Pharma
Consolidation of Taro during 2Q would hinder YoY comparability. However, we
expect Sun’s base business to remain strong on the back of recent new launches
in the domestic market. Lack of limited competition product Eloxatin sales would
however result in lower profitability, somewhat salvaged by launch of generic
Taxotere. We expect Taro’s financials to reflect improvement in margins post
Sun’s takeover, in line with last two quarters.
Lupin
We expect strong US generic business aided by recent approvals and RoW
markets to sustain strong march. Pick up in Antara sales would be critical for
revival in US branded business. Stable domestic formulations growth would help

modest increase in margins QoQ . We do not expect impact of forex fluctuations
to affect Lupin’s 2Q results as most of it is actively covered through hedges. We
expect EBITDA to grow by 11%, behind sales growth of 15% due to unabsorbed
costs at Indore SEZ.
Divis
We expect strong momentum in topline growth to continue in 2Q, reflecting robust
order book. Moreover, commercialisation of Vizag SEZ in 1Q and gradual pick-up
over time would further improve revenue visibility. We expect EBITDA margins to
sustain at 38-40% levels. We expect Divis to report strong 2Q results with profits
growing 54% YoY, thanks to 40% growth in topline, thanks to higher margins (on
YoY comparison).
Cadila
We expect Cadila to post robust 18% growth in topline, largely driven by strong
domestic formulations growth (16%+) as well as US generics business. Zydus
Wellness would continue to grow at ~20% while the JV’s scale-up would continue
to add positively to profitability. However, reported profits would be suppressed
due to ~Rs400mn MTM losses due to forex fluctuation.
Glenmark
We expect commercialisation of ANDAs approved over last 3 quarters to show
traction in US generic sales. While domestic formulations would continue to
outpace industry growth, RoW/Latam market sustaining healthy growth would be
critical for overall growth. Impact of Sanofi’s licensing income of US$25mn would
mask the MTM losses on forex denominated loans (to the tune of Rs350mn).
However, we expect reduction in gross debt to be marginal, but improving
operating cashflows would help reduce D/E gradually.
Ranbaxy
Lack of niche product (Aricept) in US as well as few new products would limit
growth in US markets. Moreover, with sluggish improvement in RoW markets, we
expect improvement in base business profitability to be gradual. While Project
Viraat would help improve growth in domestic market, impact on profitability
would come with a lag. Ranbaxy has over US$750mn outstanding derivative
contracts along with ~US$400mn forex loans which would result in MTM losses
(Rs2.5bn est). Expectations of forex losses due to rupee depreciation this year
(vs forex gain last year) would further affect comparison on reported profits..
Aurobindo
Impact of ongoing issues with USFDA on Unit VI would continue to put strain on
profitability. While we would see improvement in margins QoQ at 14.4% on better
product mix (lower ARV sales), it would still be short of last year’s margins of
17.7%. We expect 25% decline in EBITDA, despite expectations of 12% growth in
sales as a result of weaker margins. Moreover, MTM losses (Rs1200mn est.) on
forex loans (~US$300mn) would result in marginal profits at reported levels.

Oil & Gas:: :: 2QFY12 Preview: BofA Merrill Lynch

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Oil & Gas, Petrochemicals
Sector Highlights
􀂄 Brent at US$112/bbl and Indian market crude Bonny light at US$115/bbl:
Brent price at US$112.4/bbl is up 47% YoY but down 4% QoQ in 2Q FY12.
In 2Q FY12 Bonny Light, which is marker crude for several Indian oil
producers, at US$115.3/bbl is up 48% YoY (US$78.1/bbl in 2Q FY11) but
down 4% QoQ (US$119.7/bbl in 1Q FY12).
􀂄 Singapore complex GRM at US$9.2bbl highest in 17 quarters: 2Q FY12
Reuters’ Singapore complex GRM is up 116% YoY and 7% QoQ at
US$9.2/bbl. Singapore GRM was US$8.5/bbl in 1Q FY12 and US$4.2/bbl in
2Q FY11. Singapore GRM in 2Q FY12 is at the highest level in 17 quarters.
􀂄 Rupee stronger 2%YoY but 2% weaker QoQ: The rupee at Rs45.8 in 2Q
FY12 has appreciated by 2% YoY from Rs46.5 in 2Q FY11 but is 2% QoQ
weaker from Rs44.7 in 1Q FY12. A stronger rupee means lower refining and
petrochemical margin in rupee terms, and vice versa. Also, weaker rupee
means higher subsidy and a strong rupee implies lower subsidy.
􀂄 2Q subsidy estimated at Rs236bn (up 109% YoY but down 46% QoQ):
We estimate 2Q FY12 subsidy on diesel, LPG and kerosene, which is shared
by the government, upstream and R&M companies at Rs236bn. 2Q subsidy
is up 109% YoY. 2Q subsidy is down 46% QoQ despite oil price being just
2% QoQ down in rupee terms (Brent down 4% QoQ but rupee up 2% QoQ).
The QoQ decline is mainly due to price hikes and duty cuts made in June
2011, which cut subsidy. We estimate 2Q diesel subsidy at Rs106bn and
LPG and kerosene subsidy at Rs131bn.
􀂄 Sharing assumed at government 42%, upstream 44% & R&M 14%:
Upstream companies had to bear 38.7% of FY11 subsidy. We have assumed
that upstream companies would bear 33% not just of 2Q subsidy but also
33% of subsidy cut due to excise and import duty cut on diesel. This would
mean upstream bears Rs104bn, which is 44% of 2Q subsidy. We have
assumed that the government would contribute Rs100bn to R&M companies
as compensation, implying 42% share in 2Q subsidy. Thus R&M companies
are assumed to bear 14% of diesel, LPG and kerosene subsidy (Rs32bn) in
2Q FY12. They will also bear the entire petrol subsidy, estimated at Rs3bn.

Metals - Result Outperformers: JSPL :: 2QFY12 Preview: BofA Merrill Lynch

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Metals
Potential Result Outperformers: JSPL
Potential Result Underperformers: JSW Steel, Tata Steel
In the September Q on a QoQ basis, we expect aggregate profit to decline 23%;
EBITDA to decline 19% and sales to decline 4%. On a YoY basis, we expect
profits to grow 17% and EBITDA to grow 20% on YoY basis. In Sept Q, base
metal prices were flat QoQ for Zinc, Cu and lead, but Al LME was down 7%QoQ.
Weaker INR should support higher realizations. In steels, we expect marginal
improvement in volumes and flat ASP on a QoQ basis. But domestic margins for
most steel cos will likely be lower due to full impact of higher coking coal prices.
􀂄 Sterlite – We forecast PAT to decline 3%QoQ to Rs14.8bn. Zinc LME was
flat QoQ in September Q but INR was marginally weaker (-1.5%QoQ). We
forecast refined zinc volumes of 192.4kt (flat QoQ) and Al volumes of 60.7kt
(flat QoQ) in Sept Q. We estimate Sterlite Energy to contribute Rs802mn to
2QFY12 EBITDA.
􀂄 Hindalco – We forecast profits to decline 10%QoQ to Rs5.3bn and EBITDA
to decline 6%QoQ. We forecast Al volumes to increase 4%QoQ and Cu
volumes to be flat QoQ. We expect full impact of higher coal costs to kick in
this quarter.
􀂄 Nalco – We expect profits to decline by 10%QoQ to Rs3.4bn. We expect Al
LME to decline 7%QoQ. Also full impact of coal price revision in June Q will
start coming thru Sept Q onwards in our view. We forecast alumina volumes
to increase 2%QoQ and aluminum volumes to decline 14%QoQ.
􀂄 Tata Steel – We forecast consol. PAT to decline 29%QoQ to Rs10.4bn in
September Q led by lower margins at TSE (Corus, -US$34/t QoQ). We
expect TSE margins to decline QoQ led by lagged impact of higher input
costs. We expect TSE volumes to decline 2%QoQ led by softer demand in
Europe owing to macro headwinds. In India, we expect EBITDA to be flat as
we expect 7%QoQ increase in volumes to be negated by lower margins
owing to higher coking coal costs. We forecast standalone PAT of Rs18bn
(+3%QoQ) in India.
􀂄 SAIL – We expect profits to increase 7%QoQ to Rs9.0bn mainly led by 9%
increase in volumes. We expect margins to decline by US$3/t to US$103/t
led by higher coking coal costs, though this will be partly cushioned by
absence of Rs2.3bn LTA related charges taken in 1Q FY12.
􀂄 Jindal Steel and Power – We expect consolidated PAT to increase 4%QoQ
to Rs9.7bn in 2Q. We forecast steel volumes to increase 8%QoQ and ASP to
increase 6%QoQ. We expect blended power tariff of Rs3.80/kwh (+1%QoQ).
However we expect power sales volumes to decline 3%QoQ due to
announced maintenance shutdowns at two of the power units. Our
standalone PAT forecast for JSPL is Rs5.9bn, up 26% QoQ.
􀂄 JSW Steel – We forecast profits (standalone) to decline 39%QoQ to Rs3.5bn
in 2Q. We expect realizations to be marginally lower in 2Q. Also costs are
likely to increase as impact of higher coking coal costs starts coming thru. In
addition impact of Karnataka mining ban will partially come thru in Sept Q.
We expect EBITDA/t to decline to US$137/t in 2QFY12 from US$181/t in 1Q
FY12.


􀂄 Coal India: We forecast PAT of Rs27.4bn, down 34%QoQ (+61%YoY). We
forecast dispatches to decline 6%YoY to 94mt due to disruptions led by rains
and logistic bottlenecks. However, we expect ASP to be flat QoQ at
Rs1365/t.We assume CIL starts providing for wage cost hikes Sept Q
onwards. We expect employee costs to increase by 9%QoQ in Sept Q.
􀂄 Sesa Goa – We expect profits to increase 9%YoY (decline 55%QoQ) to
Rs3.8bn. Given strong seasonality in iron ore volumes, YoY comparison is
more meaningful. This is led by 9%YoY increase in ASP due to higher iron
ore spot prices. We expect volumes to decline 59%QoQ and 2% on a YoY
basis led by closure of Orissa mines, export restrictions and mining ban in
Karnataka.

Media - Result Outperformers: Sun TV :: 2QFY12 Preview: BofA Merrill Lynch

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Media
Potential Result Outperformers: Sun TV
Potential Result Underperformers: Zee TV, DB Corp
Result Expectations – Key Highlights
Check with media planners indicate muted ad spends for months of July, August
and pick up in September. Consequently we believe 2Q likely to be another
muted quarter. Expect strong ad growth from DB Corp in Print and Sun TV in
broadcasting space. Ad growth likely to challenging for zee, could report yoy
declines. Margins likely to be under pressure for print driven by new launches
and circulation increases.
We now see downside risk to our estimates for the sector. However, contrary to
expectations we believe demand for 3Q is robust. We expect muted performance
from all key players except Sun TV.
􀂄 Zee: Forecast decline of 6% yoy in ad revenue during the quarter, led by
lower revenues from sports. Revenues ex sports likely to be flattish. EBITDA
margins likely to remain muted at ~23% down 400bps yoy. Forecast flattish
growth yoy in net profits for the quarter.
􀂄 Sun TV: Forecast 5% yoy growth in ad revenues. Pricing hikes implemented
during the year and higher ad growth on two key channels – Surya
(Malayalam GEC) and Kiran (Malayalam Movies) should help drive strong
top line growth. Expect margins to be stable. PAT likely to grow 12% yoy.
􀂄 DB Corp: Forecast 16% yoy growth in ad revenues led by 15% growth in
print and 25% growth in radio business. EBITDA margins likely to be
impacted by higher newsprint cost and recent launches in Nashik (July 2011)
and Jalgaon (Sept 2011) we forecast EBITDA margins of 25% vs. 32% last
year. PAT likely down ~14% yoy driven by lower margins and forex losses
from MTM of creditors (imported new print costs).
􀂄 Jagran Prakashan. Forecast 10% yoy growth in ad revenues. EBITDA
margins at 26% down 600bps, impacted by higher newsprint cost and
increase in circulation for Dainik Jagran/ recent launch of Punjabi Jagran..
PAT likely down 16% yoy.

IT - Outperformers: Infosys, Hexaware :: 2QFY12 Preview: BofA Merrill Lynch

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IT
Potential Result Outperformers: Infosys, Hexaware
Potential Result Underperformers: Persistent
Result Expectations – Key Highlights
We expect a reasonably strong 5-6%qoq USD rev growth in 2Q for IT majors, net
of 0.5-1% cross-currency impact. Depreciation of INR vs. USD to help Infy, TCS
post op. margin expansion while Wipro, HCLT, TechM, Persistent and Rolta are
likely to show qoq margin decline on account of wage hikes. Hedging loss is likely
to lower other income for vendors this qtr, especially TCS.
Commentary on demand outlook is likely to be cautious (on account of macro health)
but optimistic as customers continue to spend on optimizing business. While Infy
could narrow full-yr US$ rev guidance towards lower end of range, EPS guidance
could be raised by 5%. We see heightened risks to guidance for Persistent.
􀂄 Infy: Expect strong rev growth from Infy (5.6%qoq in US$), with some large
ramps in telecom. We believe Infy could maintain or narrow the FY12 USD
terms revenue guidance of 18 to 20% toward the lower end, if it wants to be
cautious. However, this is already factored into consensus. On the other
hand, it should raise FY12 EPS guidance by at least 5%, even if it reinvests
part Rupee gain in the business and could push consensus up by 2-3%.
􀂄 TCS: We forecast strongest rev growth led by all round volume growth and
positive outlook commentary. However, while margins would expand led by
Rupee, this could be overshadowed by a significant loss on account of forex
hedging through options.
􀂄 HCLT: Co will have a relatively muted quarter given its their wage hike
quarter. However, margin hit of ~150bps qoq likely lower than guided since
wage hike for senior employees pushed to Dec qrt and given Rupee
depreciation. Key to watch rev trends in enterprise solutions, which has more
consulting work in case of HCLT & hence is more cyclical. Annuity streams
like IT infra mngmnt services should do well. Deal pipeline likely robust.
􀂄 Wipro: Wipro’s margins also likely to be hit by ~250bps on 2months impact
of wage hike given in June & limited upside from Rupee depreciation, given
they account revs at realized rate and had a higher realized rate vs peers in
1Q. While deal funnel has likely improved, we are still cautious given recent
management churn, greater proportion of tech clients in mix & limited upside
from Rupee given higher hedging.
􀂄 Mid-tier vendors: Expect strong revenue growth and commentary from
Hexaware. Commentary on demand outlook is likely to be weak for
Persistent along with risks to its annual guidance given deal closures for the

company has been seeing delays. Tech Mahindra likely to report
disappointing quarter led by decline in BT revenues and margin impact from
salary hikes. Satyam likely steady quarter with stable margins. A steady
quarter with margin expansion is expected for Firstsource, coming off a low
base in the previous qtr.

India Financials- Outperformers: ICICI Bk :: 2QFY12 Preview: BofA Merrill Lynch

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India Financials
Potential Result Outperformers: ICICI Bk
Potential Result Underperformers: Union Bk, BOB
Result Expectations – Key Highlights
Growth intact, but margins/asset quality could see pressure
Banks loan growth will likely still notch +19-20% yoy, but we do expect to see
margins remaining under pressure as past deposit rate hikes catch-up. While loan
growth, per se, could well be over +19-20% for banks, incremental LDRs have
cooled-off from 84% in 1HFY11 to 56% in 1HFY12. Moreover, on the asset
quality front, we expect to see asset quality remaining under pressure for most
govt. banks owing to final quarter of system based NPL recognition. Private
banks should see asset quality trends remaining status quo qoq.
2Q12 PAT: Most Govt. banks on weak foot on topline / NPLs
Most govt. banks (ex SBI) may show decline in net profit owing to a) weaker
topline growth driven by margin pressure and b) higher provisions due to last leg
of system based NPL recognition. SBI net profit growth est. at ~10% yoy.
Operating earnings for most to range in a decline of 8% to a modest growth of
15% yoy. Contrary to street expectations, SBI is the only bank that is expected to
show operating profit growth, of ~19-20% yoy. Union Bank is set to show net
profit growth of +34% largely on base effect (higher provisions and tax rate), but
PPOP earnings are estimated to be <2-3% yoy.
Private Bk: Growth (profit) at +16-22%, ex HDFC BK (30%)
Private banks, barring HDFC Bk that will continue to show +30% net profit growth,
should see net profit growth at +16-22%. ICICI Bk net profit growth expected at
+16% partly owing to fee pressure. Axis Bk and Kotak Bk to see net profit growth
of ~22%. Amongst smaller names, Yes Bk likely to report +16% yoy growth.
Federal Bank is the only bank that should see net profit growth of ~5-6% yoy on
<3-4% yoy NII growth and non-int. income weakness.
Topline growth under pressure, as margins under pressure
We estimate govt. banks to report topline (NII) growth of -5 to15%. The weakness
in topline would be a function of margin pressure as deposit rate hikes of the past
catch-up and lower incremental LDRs. We still expect loan growth to sustain at
+18-20% for most govt. banks. ICICI Bk and HDFC Bk stand out with +17-18%
yoy topline growth. Axis Bk should deliver >14-15% yoy topline growth, as
margins will likely decline by +25bps yoy, although qoq they could be up +5-7bps.
NPLs: ‘key to watch’; credit cost high
NPL slippage likely to remain elevated in 2QFY12, partly due to the residual
impact of online NPL recognition (~10-20% of loans not yet covered for most
govt. banks). ICICI Bk and HDFC Bk to still have best asset quality (though may
also see qoq NPL rise).


NBFCs: volume growth strong, but margins under pressure
We expect most NBFCs to show +20-30% yoy volume growth. But margins may
be down +20-30bps on rise in costs. HDFC Ltd. likely to maintain 2.3% spread,
but STFC may see a margin decline of +10bps qoq. LIC Hsg. will likely see
margin decline of +5-10bps qoq. Power Finco’s will likely see MTM on forex
borrowings due to +7-8% depreciation of INR vs. USD during the quarter (+30%
of PFC 2Q PPOP earnings; ~10% of REC’s PPOP earnings).

Consumer - Outperformer: ITC :: 2QFY12 Preview: BofA Merrill Lynch

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Consumer
Potential Result Outperformer: ITC
Result Expectations – Key Highlights
We expect strong volume growth for the consumer companies under coverage.
While ITC’s growth will be led by robust volume growth in cigarettes, HUL will see
its personal care business mainly contributing to growth.
ITC - We expect ITC to report over 7% volume growth in cigarettes. Backed by
this and by already effected price hike of ~5% on blended basis we see margins
expanding 115bp yoy. See revenue growing 18%yoy due to robust performance
in cigarettes and FMCG. Expect 20% growth in recurring PAT as losses in FMCG
decline.


HUL –We expect HUL post another quarter of robust volume growth at ~10%.
Led by ~4% growth in blended pricing we see revenue growth at 14%. Revenue
growth will mainly be led by personal care segment but impacted negatively by
soaps & detergents. As raw material prices remain high yoy, expect margins to
decline 20bp. Led by this we see PAT growth at 10%.

Cement -Result Outperformers: UltraTech, India Cements :: 2QFY12 Preview: BofA Merrill Lynch

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Cement
Potential Result Outperformers: UltraTech, India Cements
Potential Result Underperformers: Ambuja, Shree
Result Expectations – Key Highlights
􀂄 Margins to drop QoQ, but stay better YoY: For Jul-Sep ’11 (2Q FY12), we
expect sector EBITDA to rise YoY helped primarily by south-India. Cement
prices in south India stayed flat QoQ implying 41% YoY price rise. This
contrasts with an average 8-13% QoQ price drop in most regions. On a pan-
India basis, cement prices fell ~7% QoQ but were up 8% YoY.
􀂄 Volume growth recovers in 2Q but big regional disparities: For the
industry as a whole, cement demand in Jul-Aug ’11 grew ~9% YoY. Growth
was largely driven by north and west India that grew over 20% YoY. South
and east India remained weak with +/-3% volume growth. Volume growth for
sector majors in our coverage was ~6.8% YoY, tad lower than industry
􀂄 Costs likely to be stable or lower: Recent downward bias in energy prices
has brought some respite to the inflation pressure on input costs. Our
industry feedback indicates partial pass-through of the 9% hike in
administered prices of diesel implemented in Jun ’11. A key upside risk is
potential seasonal spike in overheads during 2Q due to maintenance
shutdowns etc.
􀂄 UltraTech, India Cements to outperform; Ambuja to underperform:
Among pure cement majors, companies like UltraTech and India Cements
with relatively large exposure to south India will likely post both YoY & QoQ
EBITDA growth as cement prices in south are up strongly YoY & stable QoQ.
Ambuja, that has high volume exposure to north & east India (regions with
steep QoQ price drops), is likely to be a relative underperformer.

Autos - Potential Result Underperformers: Maruti Suzuki :: 2QFY12 Preview: BofA Merrill Lynch

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Autos
Potential Result Underperformers: Maruti Suzuki
�� We expect double digit YoY growth in sales for the sector, driven by strong
growth in two wheelers. However on a sequential basis, sales are expected
to be flat, despite seasonally strong quarter due to decline in passenger cars
as well as production issues at Maruti. Also, we expect profit to decline due
to inflationary cost pressures impacting margins as well as higher interest
and depreciation charges.
�� Two wheeler companies will likely register the strongest yoy growth rates
followed by tractors/commercial vehicle majors. Car industry, mainly Maruti
will be impacted by production loss.
�� We expect Tata Motors’ consolidated sales to grow 18% YoY, driven by 26%
increase in JLR sales. However, standalone sales would be a drag, up just
8% yoy. EBITDA growth at 7% to Rs. 44.9bn to be restricted by 130bps yoy
decline in margins at 13.2%. Standalone margins are expected to register
80bps decline at 8.9% due to losses in small car business. JLR margins
would largely be flat qoq as favourable currency movement counters weaker
mix. We expect consolidated profit to decline 6% at Rs19.7bn, reflecting 10%
decline in standalone operations due to high depreciation expenses.
�� Amongst other commercial vehicle companies, we expect Ashok Leyland’s
EBITDA to increase by just 1% yoy, despite 8% growth in sales due to
margin contraction on lower volumes. Net profit is expected to decline 22%
yoy on negative operating leverage. On the other hand, we expect Eicher
Motor to register 84% increase in EBITDA due to higher sales and improved
efficiencies in both the two-wheeler business and the commercial vehicle
business post-integration with Volvo, leading to margin recovery of 330 bps
yoy. Profit will grow similar 85% to Rs718mn.
�� We expect Maruti’s sales to decline by 10% qoq (16% yoy), due to similar
decline in volumes on labour unrest at Manesar plant. Margins are expected
to decline 145bps yoy and 50bps qoq due to higher input costs, discounts
and negative operating leverage. We therefore expect EBITDA to decline by
28% yoy and net profit by similar 28% yoy to Rs.4.3bn.
�� We expect M&M to register 33% yoy growth in sales, driven by 30% increase
in volumes. EBITDA to grow 14% yoy (8% qoq) due to 230bps decline in
margins on worsening mix, higher input costs and vat drawback. We expect
profit to grow 8% yoy to Rs.7.7bn, restricted by increase in depreciation and
tax expense. On a sequential basis profit are expected to grow 27%, due to
seasonally high other income of Rs.2.0bn as compared to Rs.0.25bn in
Q1FY12.
�� In two wheelers, despite strong sales for both Hero MotoCorp and Bajaj
Auto, EBITDA growth will be slower due to yoy margin comparison. On a
sequential basis, we expect slight improvement due to top line. TVS Motor
should be the strongest performer with 24% EBITDA growth, also due to
lower comparable base. Profit should grow by 28% yoy due to lower lower
interest expense.

􀂄 Apollo Tyres standalone operations to benefit from price hikes and ramp up
at Chennai radial plant. Therefore, we estimate profit to grow 10% yoy to
Rs 411mn, albeit lower than EBITDA growth of 26% yoy, due to higher
depreciation and interest charges. On a consolidated basis, we expect sales
to grow 26% yoy to Rs 24.6bn, EBITDA at Rs 2.3bn (up 25%) and profit at
Rs 588mn (up 10% yoy).

India Strategy 2QFY12 Preview: Weak earnings; Downgrades continue �� BofA Merrill Lynch

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India Strategy
2QFY12 Preview: Weak
earnings; Downgrades continue
�� Different quarter same story; Results expected to be weak
The Sensex companies are expected to mirror the previous quarter with weak
headline profit growth of 10.8% on a consolidated basis and 14.6% on a
standalone basis. This is the weakest forecast in the last 8 quarters. Second,
even the sales growth at 16.9% is expected to be the slowest in the last 8
quarters. Third, margins on an aggregate basis are expected to continue
declining. Lastly, we continue to expect downgrades to our Sensex EPS from
1140 currently to 1100-20 levels. We see bigger risk to FY13 estimates of Rs1340
(our expectation is Rs1250).
Margin pressure continues; Energy, IT & Autos worst hit
Aggregate Sensex EBITDA margins are expected to show a drop of 90bp. This is
largely led by Energy (-210bp YoY), Software (-200bp YoY) & Auto (-130bp YoY).
While input cost pressures are likely to ease off, we think slowing topline growth
will continue to drag earnings growth.
Energy, Pvt banks lead growth; Autos, Telecom & Tisco drag
Among Sensex cos, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite & ITC
are expected to be key contributors of growth. On the other hand Autos (Maruti,
Tata Motors), Telecom (Bharti) & TISCO are expected to drag down growth.
Rupee depreciation could cause earnings volatility
The depreciation of the rupee will likely cause volatility in earnings. On the
positive side, rupee EPS for IT companies (Infosys) should be upgraded. On the
negative side companies like Ranbaxy, Power Finance, Sintex are likely to report
losses on forex borrowings (most companies don’t route this through the P&L).
Strong Results: Ultratech, Suzlon, Eicher Motors
Weak Results: Tata Steel, Ranbaxy, L&T (guidance cut)