Strategy: December 2014 quarter earnings preview::Kotak Sec report

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December 2014 quarter earnings preview. We expect the net income of the KIE
universe to increase 7.9% yoy, led by banking and consumer products sectors,
while metals & mining and real estate sectors are likely to pull down earnings. On an
ex-energy basis, we expect the net income of the KIE universe to grow 9.4% yoy and
6.5% qoq. We estimate gross under-recoveries of `155 bn and assume 50:50 sharing
between the government and upstream companies. We expect the net income of the
BSE-30 Index to remain flat on a yoy basis. On an ex-energy basis, we expect the net
profits of the BSE-30 Index to grow 5.8% yoy and 10.7% qoq. We estimate the
BSE-30 Index FY2016 ‘EPS’ at `1,742 and FY2017 ‘EPS’ at `2,051

A YOY DECLINE IN NET INCOMES OF THE METALS & MINING AND REAL ESTATE SECTORS
Exhibit 1:We expect the net income of the KIE universe to grow 7.9% yoy
Sector-wise expectations for the December 2014 quarter results
Key points Key points
Automobiles We expect auto companies to report a muted 3QFY15 with revenue growth of
5% yoy, EBITDA growth of 10% yoy and PAT growth of 2% yoy. We expect
companies under our coverage to report 60 bps yoy improvement in EBITDA
margin, aided by the positive impact of currency movement and a richer
product mix.
Bajaj Auto and Mahindra & Mahindra are likely to report a sharp decline in net
profits while Hero Motocorp and Maruti Suzuki are likely to report strong
earnings growth in he large-cap. space. In the mid-cap. universe, Eicher Motors,
Wabco India and Bharat Forge are likely to report strong earnings growth.
Banks/Financial
Institutions
We expect net profits of banks to grow by a strong 28% yoy mainly due to a
higher contribution of treasury income. We expect public banks to report
strong earnings growth, 40% yoy, and private banks to report 18% yoy
earnings growth. Most of the other metrics will be sequentially unchanged
(loan growth will be tepid, NIM flat with a few banks benefitting from lower
funding costs and similar trends in impairment). We expect fresh impairments
to remain broadly similar to those in 2QFY15 with a large share of slippages
coming from the restructured-loan portfolio. Recoveries from the stressed
asset portfolio would be the key trend to monitor.
NBFCs: Trends in 3QFY15: (1) weak operational performance of the commercial
auto segment, (2) strong loan growth for most other NBFCs and (3) a sharp
decline in bulk borrowing costs (40-80 bps qoq). The decline in interest rates
will largely benefit high-rated and large NBFCs and housing finance companies
(HDFC and LICHF). Auto finance companies such as Shriram Transport and
Mahindra Finance will continue to report weak performances. Our preferred
stocks among NBFCs: HDFC, LICHF, IDFC and Max India.
Cement Cement prices been on the downtrend in 3QFY15, barring South India, where
prices have been more resilient. We expect pan-India players to report a Rs7-
10/bag sequential decline in cement prices and South-based players such as
India Cement will likely show marginal improvement in realizations over
2QFY15. North-based players such as Shree Cement may see realizations drop
sequentially by more than Rs10/bag.
We build modest volume growth for most players (4-5% yoy) barring Ultratech
(12% yoy), which will benefit from a low base and the acquisition of capacities
of Jaiprakash Associates.
Consumer
products
For 3QFY15, we estimate revenue growth of 11% yoy for KIE consumer
universe, similar to the past several quarters, as we expect volume growth to
remain soft. At the EBITDA level, we build in 120 bps yoy aggregate
expansion; we expect 15 out of 20 companies under our coverage to post
EBITDA margin expansion, led by higher gross margins and a cut in A&SP
(high base). We model 96 bps yoy aggregate gross margin expansion for our
universe, led by strong RM tailwinds and a high base. Overall, we expect
EBITDA growth of 17.6% for our consumer universe and 17.4% growth in
PAT for the quarter—the strongest in the past 6-8 quarters, aided by strong
RM tailwinds.
ITC: We expect cigarette volumes to decline 5% yoy and model 12.5% topline
growth in the FMCG business. We model 15% cigarette EBIT growth and expect
the FMCG business to post positive EBIT of Rs120 mn.
HUL: We expect HUL's domestic FMCG business to report ~11% revenue
growth yoy, driven by volume growth of 6% and 5% price/mix-led growth. We
model 15% growth in net income, lower versus 17% EBITDA growth, due to
higher ETR (up 500 bps yoy).
We expect Britannia, Asian Paints, Pidilite, Colgate and Bajaj Corp. to post good
earnings growth while Titan, Jubilant Foodworks and SRL are likely to post
muted earnings (weak discretionary spending and company-specific factors).
Energy Upstream: We expect ONGC and OIL to report higher EBITDA qoq, led by (1)
higher net crude price realizations and (2) an increase in domestic gas price
from November 1. We assume upstream oil companies will share 50% of the
subsidy burden. We expect GAIL to report lower EBITDA qoq due to (1) a
decline in profitability of LPG and the petchem segments, given lower product
prices and (2) accounting of Rs5 bn subsidy, pertaining to the previous quarter.
We expect lower profitability for Cairn due to a decline in crude prices.
Downstream oil: The profitability of OMCs will be impacted by large
adventitious losses and adverse movement in inventory. However, we expect
BPCL and HPCL to report modest profits, assuming nil under-recoveries and
higher core refining margins; IOCL will report losses due to higher write-down
on inventory. We estimate gross under-recoveries of Rs155 bn and assume
50:50 sharing between the government and upstream companies. We expect
RIL to report lower profitability qoq as robust conversion margins will be offset
by adventitious/inventory losses.
Industrials Industrials: We expect modest revenue growth for L&T as we expect material
contribution from recently won large orders in FY2016. We expect L&T to
report steady margin. For BHEL, we expect modest revenue growth on
improved execution of power projects. We expect EBITDA margin of 8-9% on
contained employee costs and normalized cost provisions. Margin trends,
order inflows and commentary on the investment scenario will be main
variables to monitor.
Construction: Sadbhav Engineering’s (standalone) revenues may continue their
strong growth due to pick-up in implementation of recently started road projects
and start of execution for recent mining project wins.
Infrastructure: We build in some growth moderation for GPPV, based on a high
base and stable pricing (August 2013 hike now in the base), while noting a
strong underlying sector trend. For Concor, we build benefits of strong volume
growth and increase in pricing. Lower gross margins from December will impact
overall profitability for the quarter.
Internet For Just Dial, we expect strong revenue growth to continue and we await
clarity on progress of its search-plus program. Margins will benefit from
operating leverage benefits. For Info Edge, we expect strong recruitment
growth, driven by improved hiring (expect better spread of contribution to
growth beyond IT). Margins may not show full benefits as investments in
99acres will increase.
Media Broadcasting and distribution: We expect ~12% yoy growth in Zee’s nonsports
ad revenues. Overall ad revenues would decline 1% yoy as 3QFY14 ad
revenues were boosted by India-centric cricket. Zee’s EBITDA margins will
expand 450 bps yoy due to lower sports losses. Sun TV’s ad revenue growth
would be weak at about 4% yoy despite a low base. We expect 425,000 net
subscriber additions for Dish TV and 2.2% qoq increase in ARPU driving about
22% growth in EBITDA.
Print Media: We expect 6-8% yoy growth in ad revenues of print media
companies—DB Corp. and Jagran. We note that the base is high due to one-off
billing in 3QFY14, pertaining to state elections. The improved business
sentiment has not translated into higher advertisement spending yet. Newsprint
prices corrected 1-2% qoq and raw material costs will be flattish yoy and qoq.
EBITDA margins will expand 200-450 bps yoy; we expect both companies to
report their highest EBITDA margin since FY2011.
Source: Kotak Institutional Equities estimates

We expect the net income of the KIE universe to grow 7.9% yoy
Sector-wise expectations for the December 2014 quarter results
Key points Key points
Metals Ferrous: Steel companies will report weak numbers due to a 3-4% decline in
domestic steel realizations, led by (1) an increasing pressure from imports and
(2) a decline in global prices. In addition, about 50% yoy increase in steel
imports amid muted domestic demand (+1% for April-November 2014)
impacted sales of domestic steel makers, leading to build-up of inventories.
We expect 3-23% qoq EBITDA decline for domestic steel companies. Tata
Steel's EBITDA will be impacted most by (1) external iron ore purchases after
temporary mine shutdowns, (2) suspended Ferro chrome operations and (3)
weak realizations.
Non-ferrous: Base metal prices of aluminum and zinc were flat qoq in rupee
terms. Hindustan Zinc will benefit from recovery in mined metal production from
higher waste mining in previous quarters; we estimate 5% qoq EBITDA increase,
led by higher volumes. Lower EBITDA from Cairn (-28% qoq) will be a drag on
Sesa Sterlite's EBITDA (-6% qoq) despite improvement in the aluminum, power
and zinc businesses. We expect Hindalco's EBITDA to increase (+24 % qoq)
from higher volumes from Mahan and Aditya smelters and lower external coal
costs.
Pharmaceuticals We expect domestic formulation growth to be strong across the industry. US
sales will continue to drive overall revenue growth due to launch schedules
and a benign pricing environment with Sun benefitting from Taro's price
increases, which will be partially offset by increasing competition for products
like doxycycline, repaglinide and sumatriptan auto-inj.. We expect Lupin to
continue its scale-up in the US, driven by seasonality for its core
cephalosporins portfolio as well as recent Celebrex launch. We expect Dr
Reddy's to report muted growth due to competition in Dacogen, which will be
partially offset by the Valcyte launch; Cipla is expected to benefit from the
recent Xopenex launch (through Dr Reddy's) and Baraclude's 180-day
exclusivity (through Teva), which we believe will be booked in the API
division. Given a US$2.2 bn exposure to cross currencies for the sector, we
expect currency movements to be critical with DRRD likely to have the biggest
impact, given its Russia/CIS and Venezuela exposures and LPC facing
headwinds from yen depreciation.
We expect EBITDA margins to remain stable across the sector with Sun likely to
have a 130 bps qoq contraction due to lack of launches in the US and
competition in its existing ex-Taro products. We expect Lupin's EBITDA margin
to stabilize at ~27% (+70 bps qoq). We expect Dr Reddy's margins to contract
by 115 bps qoq due to impact from Russia/CIS and Euro cross-currency hits.
Real estate Financials: Construction progress could result in projects achieving revenue
recognition for Prestige, Sobha, Godrej and DLF. For Oberoi, Esquire may hit
revenue recognition in 4QFY15. New projects may result in better reported
margins. We expect debt to increase for DLF on weak operations. Debt may
also increase for Godrej due to weak operations and low sales in BKC,
Mumbai and its other commercial projects. For Sobha, we expect debt to
marginally decline on no new land acquisitions. Collections will increase for
Prestige, Oberoi and Sobha in 3QFY15.
Operations: Demand in the NCR has continued to be weak. DLF soft launched
projects for pre-sales at a lower price than in the past. Despite the festive
period, launches were limited from listed developers under our coverage--
Prestige (large launches in 1HFY15, launches usually slow down in the second
half), Sobha (one big launch in Pune), GPL (no launch) and Oberoi (one soft
launch towards the end of 3QFY15) and Sunteck (no new launch). Residential
sales were flat in Gurgaon and with low launches, under-construction inventory
is beginning to dip. Bangalore and Pune showed stable sales while Mumbai saw
some uptick and more projects were offered for sale.
Commercial: Few big deals were announced during 3QFY15 and enquiries
picked up.
Technology The December quarter is seasonally weak and impacted by holidays and
furloughs across many verticals. The Euro, British Pound and Australian Dollar
depreciated 5.9%, 5% and 7.7% against the US Dollar in 3QFY15. Crosscurrency
headwinds will impact US Dollar revenue growth by 160-220 bps,
resulting in muted 0-1.2% US Dollar revenue growth. TCS, HCLT and Wipro
will be hit hardest by currency movements. Benefits at the margin level from
currency movements will be limited to 30 bps. Year-on-year net profit growth
for the big three will slow to mid-single digits. Commentary on the magnitude
of increase and timely closure of IT budgets and deal pipelines will be
important—we expect 2015 to be similar to 2014, if not better, in terms of
growth.
Infosys—We forecast sequential c/c revenue growth of 2.8%, USD revenue
growth of 1.2%, flat EBIT margin and net income on yoy basis. We expect
Infosys to narrow guidance to 7%, in US Dollar terms, for FY2015. TCS—We
expect TCS to deliver c/c revenue growth of 2.2% and flat revenues in US Dollar
terms. TCS indicated that USD revenue growth would be impacted by usual
seasonal weakness, softer demand and cross-currency impact of 220 bps.
Wipro—We expect US Dollar revenue growth of 1% and c/c revenue growth of
2.8%. Performance will be marginally below the mid-point of 2-4% guidance
range. HCLT—guidance indicates a 220 bps cross-currency impact on US Dollar
revenue growth. We expect c/c revenue growth of 3.4%. We forecast a decline
in EBITDA margin due to the impact of wage hikes and investments in business.
Tech Mahindra—will lead the industry on growth again. We forecast c/c revenue
growth of 4.8% and US Dollar revenue growth of 2.8%. On an organic basis,
we expect c/c revenue growth of 3.5% with an additional 1.3% accruing from
consolidation of the MES acquisition.
Telecom We expect Bharti and Idea to report strong 23% and 31% yoy growth in pure
India wireless EBITDA in the December 2014 quarter, led by robust voice
revenue growth, strong data momentum and solid yoy margin expansion.
BHIN is expected to report a strong quarter too, on the back of R-Jio tenancies
and the typical 2H capex acceleration by incumbents. Currency movements
will be a tailwind for TCOM and a headwind for Bharti. We remain positive on
the wireless incumbents (Bharti and Idea) and on TCOM.
Voice business: We expect wireless voice volumes to rebound sequentially for
Bharti and Idea after the seasonally weak September 2014 quarter. We expect
Idea to lead large players on growth yet again with 4.5% qoq and 17.4% yoy
growth in voice volumes. Bharti’s voice volume growth is expected to report 2%
qoq and 5.5% yoy growth in voice volumes.
Data business: We expect strong momentum to be sustained and estimate 14-
15% qoq data revenue growth for Bharti and Idea. This would translate into
roughly 72% yoy growth in data revenues for Bharti and 95% for Idea.
Margins: We expect a modest 20-30 bps qoq improvement; diesel price cuts
and operating leverage are key tailwinds; however, we expect accelerated
network expansion and associated increase in network opex to take away some
of the benefits. This would translate into meaningful 260 bps yoy margin
expansion for Bharti and 170 bps for Idea, driving strong 23% and 31% growth
in pure India wireless EBITDA for Bharti and Idea, respectively
Utilities NTPC will continue to report weak earnings (-16% yoy) due to the impact of
revised CERC regulations as well as Rs6 bn of prior period sales a year earlier.
Merchant IPPs, such as JSW Energy, will continue to benefit from lower prices
of imported coal as well as stable realizations.
Power Grid will report strong earnings (+25% yoy), owing to capitalization of
Rs96 bn in 1HFY15 that will accrue to earnings as well as Rs58 bn of asset
capitalization estimated by us for 3QFY15.
Source: Kotak Institutional Equities estimates
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily06012015av.pdf