1QFY12 earnings preview -- CLSA

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1QFY12 earnings preview
CLSA’s coverage universe 1QFY12 earnings growth will be a subdued
14% YoY – but this should not come as a surprise given the trend from
4QFY11. Earnings growth for domestic plays will be softer at 9% - but
inline with that seen in FY11. While the impact of higher costs is already
visible in margins and in the expectations, revenue growth expectations
continue to be strong at c.20% and would be a key to watch for. Our top
picks remain ICICI Bank, Dr Reddy’s, M&M, JPA and Reliance Industries.
Expect earnings growth of 14% YoY for 1QFY12
􀂉 CLSA’s coverage universe (pre-exp and ex-state owned oil & gas) earnings are
expected to grow by 14% YoY – a tad higher than 13% in 4QFY11. However, it’s a
slowdown from 24% seen in FY11.
􀂉 Earnings growth for the domestic plays would 9% YoY, inline with FY11 earnings
growth numbers but higher than 6.5% seen in 4QFY11.
􀂉 The sectors that would be a drag on overall earnings growth would be pharma,
telecom and property – all expected to report an earnings decline.
􀂉 Capital goods will witness earnings acceleration as the losses for Suzlon come off.
􀂉 At the company level, we see YoY growth decelerating for 47/97 companies.
Lower margins in the numbers but revenue impact not yet
􀂉 Over the last couple of quarters, we have seen, pressure on margins coming
through – which has been a key reason for the earnings downgrades. We have
downgraded FY13 Sensex EPS estimate by 5% ytd.
􀂉 We expect Ebitda margins to be lower by 1 ppts for the coverage universe (ex state
owned oil&gas and financials). For domestic plays, it would be down 60bps.
􀂉 The trend on the revenue growth, however continues to be robust and we expect
20%+ revenue growth. Even for domestic plays, we expect a c.20% revenue
growth. A potential disappointment on revenue growth would be a key to watch for.
Numbers build-in 2H recovery
􀂉 We expect FY12 earnings growth to be 25% YoY, to be driven equally by domestic
plays and global plays. Keeping in mind the expectations for 1Q, these numbers
imply an earnings growth recovery in the second half, more so in the domestic
plays – and a potential for disappointment exists.
􀂉 We continue to prefer stocks with earnings growth visibility and reasonable
valuations to protect downside risks and our top picks remain ICICI Bank, Dr
Reddy’s, M&M, Reliance Industries and JPA.


Sector Key trends Positive Negative
Autos • Earnings of auto companies will come under pressure in 1QFY12 due to moderating volume growth
and rising cost pressures
• 4W stocks – Maruti, Tata Motors, M&M – will report flat to low-single digit YoY profit growth in 1Q.
Bajaj Auto Ashok
Leyland
Banks/FIs • We see 6.8% YoY growth in profit for the financial sector with private banks reporting much higher
earnings growth than PSU banks
• Credit growth will moderate for most banks and margins will contract QoQ, but margins may
expand on YoY basis.
Cap goods • L&T should report 25% E&C revenue growth low base. Margin decline extent will be watched
• JPA profits weaker YoY on lower cement margins. Property revenues/profits strong, construction flat
We expect BHEL’s 1QFY12 revenues to increase by 15% YoY and PAT by 13% YoY.
• We expect Crompton’s consolidated revenues to rise by 15% YoY.
BHEL, L&T
Cement • Demand trend continued to remain weak as we estimate a ~1% YoY rise in industry despatches
during 1Q.
• Average realisations up 2-5% QoQ though cost have also moved up.
Consumers • We expect HUL to report a moderate 6% YoY growth in net earnings; momentum in topline should
continue with higher contribution from realisation.
• ITC’s 1Q earnings should rise 20%+ YoY; cigarette volumes should rise by a strong ~8% YoY driven
by low base; New FMCG losses should be down 30% YoY/8% QoQ.
ITC Dabur
Media • Our talks with a cross section of the industry reveal softness in the advertising market in 1QFY12.
• In 1QFY12 results, we expect our media coverage universe to register a 7% QoQ drop in adspend.
• Due to seasonality and higher newsprint prices print media results need to be compared on YoY
basis
Dish TV
Metals • Steel: JSW and JSPL will report strong 50% and 28% YoY profit growth in 1Q driven by higher
volumes in case of JSW and both higher volumes and margins in case of JSPL. Tata Steel and SAIL
are likely to report a YoY drop in net profit.
• Base Metals: Both Sterlite and Hindalco will report strong profit growth in 1Q
• Mining: Coal India will report a strong 45% YoY growth in net profit
Coal India Sesa Goa
Oil & gas–
State
owned
• While we build in 55% as government share and one-third for upstream for full year FY12, we do
not expect any government support in 1QFY12.
• Given the large US$9bn of gross under-recoveries in 1Q, no government support will force the R&Ms
to report highest ever quarterly losses.
• However, reversion of upstream sharing to one-third for 1Q and 11%QoQ rise in crude price will
allow OIL and ONGC to show a significant improvement in reported profit on QoQ basis.
OIL
Oil & gas–
Private
• Lower KGD6 production and a QoQ decline in petrochem margins would be more than offset by
higher refining (US$10.2/bbl, + $1/bblQoQ) resulting in a 17%YoY/6%QoQ increase in Reliance’s
net profit to Rs56.7bn.
• Full Rajasthan volume of 125kbpd and 11%QoQ higher crude price should allow Cairn to report a
6%QoQ rise in net profit even as tax rates rise QoQ.
• A 5%QoQ increase in regas volumes will be offset by a reset in tax to the marginal rate, keeping
Petronet’s net profit largely flat on a QoQ basis.
PLNG
Pharma • Pharma companies reported earnings for the quarter are likely to be see declines in most large
names except Dr Reddy's. This is because of a high base in case of Ranbaxy, Cadila & Sun Pharma.
• Domestic formulations growth should be steady on a YoY basis and strong on QoQ basis due to a
seasonally strong quarter.
Ranbaxy,
Sun Pharma
Power • NTPC’s generation is down 1.1% in April and May due to lower PLFs at its Farakka, Kahalgaon,
Korba and Ramagundem power projects. We expect 10.9% growth in pre-exceptional profit in
1QFY12.
• Tata Power’s standalone profits are expected to increase by 7% YoY in 1Q. For the Indonesian coal
companies we expect 15mt sales and realization of US$90/t.
Property • Expect DLF, Unitech and Sobha to report higher YoY sales on new launches. Mumbai sales down
though. Pricing flat on impact of mortgage rate hikes.
• DLF revenues 10-15% YoY on better sales and rental income. PAT flat on lower margins.
• Unitech sales rate to rise post new launches. Expect flat revenues. Margin trend same as DLF.
IT • While demand environment for Indian Techs remains good, FY12 consensus $-revenue estimates of
23-27%YY growth for Tier-1 stocks already builds in this optimism.
• Within the sector, TCS’ prospects remain the most solid (strong growth, good margins and stable
management) but the stock needs to contend with high expectations and over-ownership.
Telecom • Mobile net addition momentum has slowed in 1QFY12.
• We estimate revenue per minute to remain stable in the current quarter.