Motilal Oswal earning estimates for Q1FY14: Seculars do, cyclicals undo - 4QFY13 action replay | MOSL Universe and Sensex PAT flat YoY; earnings downgrade for FY14
Expect 1QFY14 Aggregate PAT to be flat YoY for the second successive quarter. This quarter's earnings will be reported in the backdrop of low IIP growth, all-time low currency, continued fall in global commodities and volatile interest rates.
In a virtual action replay of 4QFY13, cyclical sectors are likely to undo much of what their secular counterparts are doing.
The top three PAT de-growth sectors are all cyclicals - Cement (-39% YoY), Metals (-24%) and Capital Goods (-20%). In contrast, all six sectors with over 10% PAT growth are secular in nature.
Sensex Aggregate PAT also to be flat YoY for the second quarter in succession.
Within Sensex constituents, top five PAT growth companies are: Sun Pharma (+43% YoY), Maruti (+41%), HDFC Bank (+31%), ICICI Bank (+20%) and Dr. Reddy's Labs (+17%). Top five PAT de-growth companies: Bharti Airtel (-58% YoY), BHEL (-43%), Tata Power (-30%), ONGC (-23%) and GAIL (-18%).
Our current earnings estimates for MOSL Universe of 160 companies (ex-RMs) suggest FY14 PAT growth of 11%. However, a flat PAT in 1QFY14 implies a much higher growth requirement of 14% in the residual 9MFY14.
These high levels of residual growth are a challenge, given several macro and policy uncertainties both on the domestic and global fronts.
Sectoral highlights of earnings trends
- Demand remained challenging in 1QFY14, resulting in record discounts in PVs and CVs. This coupled with volatile Fx and negative operating leverage would put pressure on profitability.
- However, we expect Maruti Suzuki (+41 percent YoY PAT growth led by favorable Fx and SPIL merger partially offset by fall in volumes and continued pressure on discounts) and Bajaj Auto (+7.8 percent YoY PAT growth led by favorable Fx, despite 5.1 percent YoY fall in volumes) to report strong operating performance.
- We have meaningfully downgraded estimates for Tata Motors (15 percent cut for FY14 EPS largely led by downward revision in S/A business), Maruti Suzuki (5 percent cut in FY14 EPS due to lower volumes and increase in discounts), Bajaj Auto (4 percent cut in FY14 EPS due to weak demand in both domestic and exports) and Ashok Leyland (27 percent cut in FY15 EPS led by volume cut).
- Continued headwinds in the capital goods sector impacted by depleting order book and execution constrains due to overall economic slowdown. Management outlook across companies continue to suggest challenging business conditions impacting project inquiries and also the conversion ratio.
- In 1QFY13, we expect EBITDA margins to shrink due to poor fixed cost absorption across companies and revenues to moderate further impacted by depleting order book. However, softening commodity prices are likely to support margins while weakening INR is likely to negate a large part of gain particularly in case of Siemens and ABB.
- Increased focus on working capital cycle by the companies is also likely to impact execution of projects given continued liquidity crunch. In some instances we have noticed that companies have been moving cautiously and slowed down execution to protect cash flows.
- 1QFY14 operating performance would witness double pressures of weak demand and pricing, translating into ~INR5/bag QoQ (-INR19/bag YoY) decline in cement prices and ~INR5/bag QoQ (~INR22/bag YoY) decline in EBITDA/ton.
- We are factoring in INR3/bag decline in FY14, but INR15/bag increase in realizations in FY15. On the back of moderation in cost push and potential demand recovery in 2HFY14, we estimate EBITDA/ton at INR860/1,045 for FY14/FY15.
- We have downgraded our estimates by ~7 percent for Ambuja/UltraTech, and ~4 percent for Grasim. Recovery in demand would be critical for operating and stock performance.
- We are estimating 13.1 percent sales growth for our coverage universe, lowest in four quarters. Slowdown has induced price cuts, promotions and higher ad-spends. Nonetheless, lower raw material cost should more than cushion the impact of the same and drive operating margin expansion for the quarter.
- We expect continued moderation in our FMCG universe - more prominent in Foods and Discretionary segments. MSP hikes announced by government have been muted, removing an important support for rural consumption. However, progress of monsoon, which has been good so far, holds key for rural consumption.
- Given the correction in input costs, we believe it will be difficult for companies to drive pricing growth. Thus, in the absence of inflation, revenue growth for FY14 will be lower than recent trends at 15 percent.
- The recent currency depreciation will impact input costs and we believe pricing levers will materialize in 2HFY14. Also, with elections approaching, government spending in rural geography should pick up, driving consumer spends for FMCG.
- Historically, 1Q has been a weak quarter for banking sector vs 4Q due to higher Agri NPL and lower recoveries / upgrades. We expect pressure on asset quality (rise in net slippages and elevated incremental restructuring) to persists for PSBs in 1QFY14E as well.
- On the other hand private banks are expected to report better asset quality performance, though incremental restructuring may be higher for few of them. In terms of operating performance NIMs are expected to be stable/decline marginally and fee income growth is expected to moderate.
- However higher trading gains is expected to support earnings. We expect PSBs to report earnings decline of 6 percent YoY, while private banks earnings growth would be strong at 25 percent.
- Rupee depreciation will boost revenue realization from new and recent launches in the US generic market, which constitutes between 30-50 percent of the overall revenues for major companies. As such, for the quarter, exports revenues of Biocon, Cipla, Cadila, Divi's Labs, Dr. Reddy's, Glenmark, Lupin and Sun Pharma are expected to grow faster than peers. However, the domestic formulations business for these companies (except Divi's) is likely to be impacted by a temporary de-stocking in the system ahead of the implementation of the new pricing policy. Also, companies with high forex debt and derivatives positions are expected to recognize MTM losses which can offset the topline benefit from a depreciating INR.
- Among our coverage, we expect Dr. Reddy's, Lupin and Glenmark to report strong operational performance for the quarter. Apart from the factors discussed above, EBITDA growth for these companies will be aided by new launches in the US, better sales mix and low base of 1QFY13.
- We have estimated a 20 percent YoY core topline growth for our healthcare coverage universe for FY14E, which will be coupled with a 75-100bp core EBITDA margin expansion YoY.
- Key companies to benefit from all these factors at the same time include Cadila Healthcare, Divi's Labs and IPCA Labs. We are also bullish on Dr. Reddy's due to its strong US pipeline of 65 ANDAs targeted towards the US market and attractive valuations.
- Aggregate earnings expected to grow 16 percent YoY in 1QFY14. Broadcasting cos are expected to report double-digit YoY advertising growth given higher exposure to consumer sector. We expect Zee/Sun TV to clock 15/13 percent YoY ad growth (including broadcast revenue for Sun TV). Print universe ad growth is expected at 10 percent YoY, up from 6 percent YoY in 2HFY13 and 0 percent in 1HFY13. DB Corp is expected to report the highest YoY PAT growth at 28 percent followed by Zee.
- Zee's Adj PAT is expected to increase 22 percent YoY led by 14 percent EBITDA growth. Sun TV and Jagran's earnings growth is also expected to be healthy at 13-14 percent YoY. Dish TV's net loss is expected to decline ~10 percent QoQ driven by EBITDA margin improvement. There have been hiccups in the phase I implementation as cable subscribers are yet to fully transition to "addressable" systems. The regulator TRAI has given directions to MSOs/LCOs operating in phase I to implement "Subscriber management System" to maintain subscriber details and their choice of services.
- We expect 10 percent earnings growth in FY14E for our media sector universe led by ad revenue growth of 11 percent and subscription/circulation revenue growth of 14 percent. Exclusing Dish TV, the earnings are expected to grow by 12 percent YoY. Aggregate EBITDA is expected to grow by 15 percent in Fy14 led by 160bp margin expansion. Ad revenue trends seem to be improving.
Oil & Gas
- We expect most companies to report QoQ decline in 1QFY14 earnings due to lower realizations and volumes. Sales volumes will decline against seasonally strong 4QFY13 where sales was boosted by inventory liquidation.
- Companies such as Hindalco, Nalco and Sterlite will report lower numbers due to company specific shutdowns of certain plants. Realization across product segments is expected to be lower for both steel and non-ferrous metals. Globally, steel prices have corrected 5-9 percent QoQ while base metals have declined 8-11 percent QoQ. However rupee depreciation will cushion INR realization mainly for base metals by ~2 percent.
- Power segment revenues for most companies are expected to be better due to higher volumes. Power volumes will benefit from easing of evacuation constraints and higher onstream capacity.
- For FY14 earnings we believe that non-ferrous players are better placed than steel companies due to rupee depreciation. Most of the non-ferrous players have significant exposure to exports while steel players supply primarily to domestic market.
- On the macro indicators front, 1QFY14 witnessed weaker oil prices (-9 percent QoQ, -5 percent YoY), fall in GRM (-25 percent QoQ, -2 percent YoY); while petchem margins were better, partly helped by the increase in Polymer Customs Duty by 2.5 percent to 7.5 percent from May 9, 2013. Gas transmission companies' volumes are likely to remain low due to subdued incremental gas availability.
- Refiners earnings are likely to be further impacted by crude inventory losses (crude prices are down USD7.1/bbl as on June 30, 2013 in comparison to March 31, 2013).
- Customs duty hike will benefit polymer producers like RIL and Gail India v/s recent dismal margin trend.
- 1QFY14 under recoveries are estimated at 6 quarter low at INR268b (-26 percent QoQ, - 35 percent YoY). Reductions led by continued diesel price hikes, subdued oil prices and lower LPG demand.
- However, since we have assumed absolute upstream sharing at INR600b for FY14, lower subsidies will not benefit upstream companies.
- We have assumed nil govt sharing during 1QFY14 and thus OMC's will be reporting huge losses for the quarter due to high under recoveries.
- For FY14, we expect range bound GRMs and peg the benchmark Singapore GRM's at USD7.5/bbl. Diesel reforms (INR0.45/ltr price hike per month) are set to reduce the under recovery by 24 percent to INR1.2t in FY14E v/s INR1.6t in FY13E.
- We model upstream sharing at INR600b and downstream sharing at nil for FY14/FY15, with the balance being the government's share. While INR/USD depreciation increases under recoveries, continued diesel reforms are a positive.
- We maintain our positive stance on upstream (ONGC/OIL) and BPCL in OMC's for its E&P upside potential. RIL and Cairn are direct beneficiaries of INR/USD depreciation.
- While presales momentum has been weakening over FY12-13 for most companies (barring Bangalore based players), there has been pick up in execution across companies with easing of approval and indiviual liquidity position. Therefore, we estimate a stable to moderate YoY uptick in revenue booking for the companies in 1QFY14.
- Bangalore based developers, however, expected to post strong YoY ramp-up in revenue booking on the back of continued strength in presales. Operating margins are expected to remain subdued, with some developers gaining benefits of improvement in operating leverage and moderation in cost escalation. However signifacant deterioration of operating margin in case DLF (due to budget revision, adjustments) would dent overall margin of MOSL coverage universe. Net profit is expected to decline YoY, given no major de-leverging success in FY13.
- In 1QFY14, overall presales should increase in Mumbai from a low base (with pick up in new launches), remain steady and strong in Bangalore and mixed bag in NCR market. Expect no major reduction in gross debt during the quarter (DLF net debt to decline led by QIP).
- Continued weak macro backdrop (high food inflation, weaker job prospects and salary growth) is resulting in weakness in consumer spends. We see clear divergence in the performance between traditional and specialty retailers. While traditional retailers should be able to deliver high single digit to double digit same store performance, specialty retailers will bear the brunt of slowdown in discretionary consumption.
- However for the quarter Jewellers should do well as sharp price correction in Gold resulted in pent up demand from customers and advanced wedding buying. Recent regulatory changes in the sector will reflect beginning 2Q14.
- We continue to prefer Titan in the sector given the solid long term opportunity that India offers in branded jewellery space. Near term regulatory challenges notwithstanding, our confidence steams from the superior track record, scalable business model and high quality management.
- While 1Q and 2Q are seasonally strong quarters for IT companies, we expect continued polarization of revenue growth rates across the companies. We do not see any changes to the order of growth leadership, with TCS, HCL and Cognizant expected to stay ahead of the pack.
- The industry is expected to be impacted negatively (on USD revenue line) in the June quarter by depreciation in AUD and INR. Across the top tier, we expect USD revenues to be impacted negatively by 50-60bp.
- Despite our assumption of ~3.8 percent sequential depreciation of the INR v/s the USD, gains from the same are expected to be offset across the top-tier due to wage hikes and / or visa-related costs (seasonal), with the only exception of HCLT. PAT, however, should get a fillip from MTM translation gains, as closing currency was further depreciated.
- Infosys, TCS have had wage hikes this quarter which would limit the operational gains from currency. For Infosys, the results come too soon to assess any initial impact from NRN's return. IMS should continue to drive growth at HCL and Wipro's 2Q guidance will be crucial. Growth at TECHM will be soft in 1Q (including Satyam).
- NASSCOM has guided for a growth of 12-14 percent for FY14, after missing its FY13 guidance of 11-14 percent (exports grew at 10.8 percent). The Immigration Bill overhang looms large over the sector, and the lead indicators of Accenture and Oracle results suggest a realistic possibility that the lower end of the guidance may be missed again. Discretionary spending remains weak, if not gotten any weaker. Weaker growth companies in FY13 - viz. Infosys and Wipro continue their efforts to accelerate growth, while the momentum at TCS, Cognizant and HCL Tech is little thwarted.
- The currency depreciated by 20 percent over FY11-13, but industry failed to grow its margins during this period. Post an additional 10 percent weakening of the INR (at current levels), we expect the benefits to be absorbed by various investment efforts by companies - emerging economies (TCS), Sales and marketing team (Wipro), expertise in Products, Platforms & Solutions (Infosys).
- During 1QFY14 we expect average wireless traffic for top-4 operators to grow by ~3 percent QoQ as compared to ~5 percent QoQ growth in 4QFY13. Wireless RPM to increase by ~1 percent QoQ on a blended basis led by lower discounting vs flat RPM for past three quarters.
- We expect 35-55bp EBITDA margin improvement for Bharti/Idea led by operating leverage and cost-control. Our estimates imply 5/7 percent QoQ domestic wireless EBIDTA growth for Bharti/Idea implying strong operating performance. Our 1QFY14 estimates build-in forex loss of INR10b for Bharti and INR225m for Idea at the P&L level. Apart from this impact, there will be additional increase in USD denominated debt/liabilities due to INR depreciation vs USD.
- We expect sharp earnings rebound for the Indian telecom sector in FY14E on a depressed base led by improved pricing and profitability as the industry consolidation progresses. At the industry level we expect revenue growth of 11 percent in FY14 led by 9 percent traffic growth and 2 percent RPM improvement (including 3G data revenue).
- For Bharti, we expect 52 percent EPS growth in FY14 driven by 15 percent consolidated EBITDA growth vs 5 percent EBITDA growth in FY13. Stronger EBITDA growth will be led by better performance in Africa as well as Indian mobile business. We model India mobile traffic to grow by 8 percent, RPM to improve by 2 percent and EBITDA margin to expand by 120bp.
- For Idea, we expect 82 percent EPS growth in FY14 driven by 25 percent growth in EBITDA. EBITDA growth will be led by industry leading traffic growth (14 percent vs 8 percent for industry), 2 percent RPM improvement and ~190bp EBITDA margin expansion.
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- We expect utility companies in our coverage to report aggregate 1QFY14 revenue growth of 7.7 percent YoY and PAT growth of 4.9 percent YoY. PAT growth is mainly lead by JSW energy (58 percent on lower base), PGCIL (28 percent led by higher capitalization in previous year) and CESC (22 percent on account of tariff hike).
- The imported coal prices average during the quarter stood at USD 81/t v/s USD96/ t YoY. However, the price declined to USD76/t in June. The benefit to the generators has been limited as the decline in prices was offset by the depreciation in the INR (4 percent to USD57/INR, vs USD55/INR YoY).
- The short term prices in the day ahead market has remain muted with prices at INR 2.23/unit for June 2013, while average prices for the quarter stood at INR2.7/unit. We expect NTPC's PAT to grow by 4.8 percent YoY led by addition of new capacities.
- Recent approval of FSA with Coal India would help in improving the availability. We expect JPVL PAT to grow by 14 percent YoY.