Q3FY15E: Cyclicals to perform better than defensives… ƒ :: ICICI Securities, report

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Q3FY15E: Cyclicals to perform better than defensives…
ƒ We expect Sensex earnings growth (including oil & gas and financials)
of 1.4% YoY in Q3FY15E. The quarterly growth rate in Q3FY15E may
comparatively be lower than the ~5% YoY growth in Q2FY15 and
~23% YoY in Q3FY14. This can be mainly attributed to the high base of
export oriented sectors and volatile cross currency moves (euro/yen),
which will result in 1.2% YoY PAT decline for the pharma sector and
tepid 6% YoY growth for the IT sector. Elsewhere, profitability of
government regulated sectors like oil & gas may also be impacted by
lower YoY crude realisations and consequent inventory write downs
ƒ Sensex companies are expected to record revenue growth of 4.1%,
which will be one of the lowest over Q1FY14-Q3FY15E. The key
disappointment in revenue growth comes from the oil & gas sector
while moderation of growth in IT and pharma will also hurt the overall
performance
ƒ A key contrasting point in the performance of cyclicals (auto, cement,
capital goods, infrastructure, metals, oil & gas and power) against
others is moderation of growth for defensives (IT, pharma, consumer &
FMCG) while cyclicals are expected to show robust pick-up from the
trough. For Q3FY15E, we expect revenues for defensive sectors to be
up 11.2% YoY, which will be the lowest among many quarters while
cyclicals (excluding oil & gas) may grow 9.2% YoY, which will be one of
the best growth rates in last 16 quarters. In defensives space, revenue
growth will range at 10-13% YoY while that for cyclicals may be in the
range of 9-13% in Q3FY15E. In cyclicals, key performers include auto
(11% YoY), cement (13.4%) and infrastructure (12.7% YoY) while oil &
gas may witness a revenue decline of 24% YoY
ƒ On a sectoral basis, the top 5 performing companies (on the basis of
PAT growth) come each from auto, financials, Pharma and metals.
Hence, the top five companies that top the chart in terms of growth in
profitability include SBI (~44% YoY), Hero MotoCorp (27% YoY), Maruti
(19% YoY), Cipla (20.2% YoY) and Hindalco (~40% YoY)
ƒ Conversely, the bottom five performing companies (on the basis of PAT
growth) come from mining, capital goods, auto, oil & gas and pharma.
Hence, the bottom five includes Bhel (-29% YoY), Coal India (~-26%
YoY), ONGC (~-28% YoY), Dr Reddy’s (-16% YoY) & M&M (~-21% YoY)
What we expect our coverage universe to report and emerging trends
ƒ The I-direct coverage universe is expected to deliver revenue growth of
8.5% (excluding oil & gas, financials). The performance relative to
Q3FY14 and Q2FY15 growth rates looks tepid as the base effect and
cross currency volatility may impact the profitability of export oriented
sectors like IT and pharma that may show weak profitability trends
ƒ From a sectoral perspective, sectors like cement (13.4% YoY), autos
(11% YoY), infrastructure (12.7% YoY) and power (8.6% YoY) are
expected to buck the trend as they are expected to grow above the
overall coverage revenue growth rate estimate of 9%. On the other
hand, defensives like IT, pharma and FMCG may record double digit
growth rates but relatively growth is expected to moderate in Q3FY15E.
However, the bigger drag will be oil & gas, which is expected to decline
29.7% YoY in revenues. The drag will be significant as the oil & gas
sector has ~30% share in overall revenues of the coverage universe
ƒ We observe that comparing revenue growth rates of the I-direct
universe (ex: oil & gas) of 8.5% YoY is greater than that of BSE Sensex
companies (4.1% YoY). This implies that the financial performance of
non-Sensex companies is expected to improve and will exhibit growth
trend in Q3FY15E. This further reiterates that internals/quality of
earnings profile of Corporate India has started showing improvement

EBITDA margins are expected to decline YoY by 30 bps to 20.4%
(excluding oil & gas) while QoQ improvement will be to the tune of 30
bps
ƒ On the positive side, benefits of operating leverage are expected to
accrue to sectors like auto (134 bps YoY expansion), cement (213 bps)
and telecom (135 bps) in the form of better utilisation and lower input
costs. On the flip side, sectors like IT (-145 bps YoY) and pharma (-225
bps YoY) may witness lower margins owing to the high base effect

ƒ On the profitability front, the I-direct coverage universe is expected to
deliver PAT growth of 9% YoY. The PAT growth including the oil & gas
space is expected to decline 4%
ƒ IT, pharma and FMCG companies are expected to exhibit PAT growth
of 6.2%, -1.2% and 9.2% YoY, respectively. The cement sector is
expected to be one of the star performers as revenue growth of 13.4%
and 213 bps YoY margin expansion may lead to PAT growth of 30%
YoY (higher utilisation, lower input costs & low base effect of Q3FY14)

Defensives: Expecting growth moderation
(Sector composition: consumer discretionary, IT, FMCG, pharma)
Key Highlights:
a. Defensives have been doing well on an absolute basis and also
relative to cyclicals in terms of financial performance over the last 12-
16 quarters but the performance is excepted to moderate in Q3FY15E
similar to Q2FY15
b. On an overall basis, revenue growth for defensives is expected to
grow 11.2% YoY (lowest growth rate in last 12 quarters) vs. 19.6%
YoY growth in Q3FY14. In the defensives space, IT and pharma are
expected to post 10.5% YoY revenue growth each. Although volume
growth will remain reasonable in Q3FY15E appreciation of local
currency against euro/yen and high base may moderate overall
revenue growth for IT companies
c. On the other hand, domestic defensives like consumer discretionary
and FMCG may witness 13% YoY each led by both volume and
pricing growth
d. We expect 112 bps margin contraction for the space led by margin
contraction of 145 bps and 245 bps for IT and pharma, respectively
e. On the profitability front, defensives are expected to deliver 5.7% YoY
growth vs. 38% YoY growth in Q3FY14 and 12.4% QoQ growth. On
an individual basis, consumer discretionary and FMCG may witness
19.2% and 9.2% YoY growth, respectively, during Q3FY15E

Cyclicals: Recovery on the way
(Sector composition: auto, cement, capital goods, power, infrastructure,
real estate, oil & gas and telecom)

Key Highlights:
• Benefits of operating leverage in the form of higher utilisation rates
and lower input costs will help cyclicals to recover from a low base
and help register growth rates that will be almost in line with
defensives
• We expect it to deliver revenue growth of 9.3% YoY, which is one
of the strongest quarters of growth in the last five or six quarters
• On an individual basis, the cement sector is expected to stand out
as revenues are expected to grow 13.4% YoY coupled with 213 bps
margin expansion. This may lead to PAT growth of 30% YoY. Other
sectors like auto and infrastructure are expected to see double digit
growth rate of 11% YoY and 12.7% YoY, respectively
• We expect the margin at 13.7% in Q3FY15E, implying an expansion
of 180 bps YoY. On an individual basis, cement, auto, telecom may
see a margin expansion of 213 bps, 134 bps and 135 bps,
respectively. On the negative side, sectors like capital goods may
see a decline of 21 bps
• Over the last six quarters, Q3FY15E will see a modest increase of
3.7% YoY in interests’ costs. Individually, the telecom sector and oil
& gas may see a decline of 1.2% YoY and 13.7% YoY, respectively

LINK
http://content.icicidirect.com/mailimages/IDirect_ConsolidatedPreview_Q3FY15.pdf