SENSEX NIFTY
Jul 09, 2013, 07.28 PM IST | Source: Moneycontrol.com

Revenue expected to be subdued in Q1FY14: KRChoksey

According to KRChoksey research revenue is expected to be subdued in Q1FY14 on the back of slowdown in key sectors i.e. fertilizer, capital goods, metals, telecom and real Estate.

KRChoksey research earning estimates for Q1FY14:

Revenue is expected to be subdued in Q1 FY14 on the back of slowdown in key sectors i.e. fertilizer, capital goods, metals, telecom and real Estate. Moreover net profit margin are to be under pressure led by metal (on pricing pressure and rupee depreciation), FMCG (pricing pressure and higher AD spend), auto (weak two wheelers and domestic CV biz earnings) in Q1 FY14; whereas sectors such as IT, pharma and banking are expected to deliver reasonably better earnings. Companies are having foreign debt would report foreign currency loss due to rupee depreciation (~ 8.4 percent Q-o-Q) impacting adversely net profits during the quarter.

View & Outlook: The market participants has turned into risk off mode by end Q1FY13 because of flight of safety, increase political uncertainty and risk of missing fiscal deficit target in FY14E due to food security bill. However, recent correction in equity market leading to reasonable valuation and gradual improvement in business sentiment provides good bargain in select pockets, going forward. At 19,495 Sensex is trading at 15.7x FY14 earnings (Rs1241/ 16.2 percent y-o-y) and 13.5x FY15 earnings (Rs1440/ 16.0 percent y-o-y), below long term average multiple. We expect sensex to reach 21,000 levels by Dec 2013, implying upside 7.7 percent.

Auto - We expect a dull quarter for the auto sector mainly driven by slack in demand which led to lower volume growth. Higher Interest rates coupled with weaker economic situations has affected the overall consumption story of the country. Higher crude prices on back of falling rupee led to further downfall in the sector. We believe the sector would revive once the interest rates take the downward journey coupled with normal monsoons. However we believe H2FY14 would be better as compared to H1 in FY14 as we expect the lull in demand to continue in the first 2 quarters of FY14.

Banks- Our BFSI universe earnings to grow 9.1 percent y-o-y on the back of strong private sector banks and NBFCs earnings. Private sector banks continue to report healthy and consistent operating performance with earnings growth of 25.4 percent y-o-y. HDFC Bank, Yes Bank and Indusind Bank will outpace private sector banks’ aggregate earnings growth. While we expect PSU banks to report (-) 4.1 percent y-o-y earnings growth mainly due to lower margins, slowing loan book growth and increasing NPA provision. We expect PSU banks are likely to report strong trading due to fall in bond yields. Net interest margin of the sector is likely to improve Q-o-Q due to decline in cost of deposits, lower interest rate reversal and stable asset yields. Slippage quarter run rate will come down from Q4FY13 levels due to increased focus on NPA management but we expect PSU banks continue to report higher stress asset addition in Q1FY13.

Capital Goods- We expect single digit sales growth of for capital goods sector companies as customers are deferring payment/deliveries on account of financial stress. Lull in order inflows in the BTG segment as well as projects delays has also slowed execution. Further lower operating margins on account of intense competition in the industry coupled with higher interest expense on account of stretched working capital requirement are expected to lead to a decline in earnings.

Fertilizer - Better-than-expected early arrival of monsoon will help to clean-up the piling inventories. Demand and volume to remain decent on y-o-y with improving farmers sentiment. However, lower RM prices for complex fertilizers will result in softening selling prices. New & fresh sales volume will remain a key challenge for fertilizer players and therefore, we expect mixed earnings both on y-o-y & q-o-q during current quarter.

FMCG - FMCG sector had a reasonably decent quarter as compared to other consumption sectors. Most of the companies recorded a positive double digit growth in the volumes as well as sales. We expect Margins to improve slightly due to stable or decrease in Raw material cost & ad spend coupled with price hikes taken up by the companies. Decrease in inflation rate will help the sector perform better going forward, which we believe will happen once the overall economy improves at higher rates.

Information Technology - We believe the key concern of investors in coming earning season will be impact of US immigration bill on future prospect of Indian IT companies. However, we expect INR depreciation against the major global currencies will assist the company to partially mitigate impact of restriction on visas in US, Australia and Canada by increasing locals as percentage of onsite workforce and setting up new onsite Development centers. Taking the same into account, we believe investors should be selective while investing in IT stocks especially structural challenges faced by industry as whole and mitigating steps taken by individual companies. Out top pick among Tier I Indian IT companies continues to be HCL Technologies especially considering around 50 percent of its staff in US are locals.

Infrastructure- CMIE project investment data for the March quarter indicate continued deterioration in investment activity. New investment proposal fell sharply by 32 percent (YoY) and 66 percent on QoQ basis. We believe infra ordering will be supported by flattish ordering in metros, highways & Dedicated Freight Corridor. Elections could also impact order prospects in FY14. BOT developer’s aggregate revenue would de grow by 4.9 percent in Q1FY14E, primarily led by low construction revenue and traffic. The aggregate profitability is expected to grow by 4.9 percent YoY due to other income in spite of high interest and depreciation costs. Order Inflows are expected to be moderated due to slower pace of reforms & upcoming elections.

Media - We expect ad revenue to be muted over Q1FY13 as ad environment still remains subdued. Broadcasters will outperform the industry and continue to grow at a healthy single digit YoY. We expect print segment to witness pressure on ad revenue front considering slower than expected ad spend revival. Digititsation had played a major role for DTH and digital cable companies and we expect Dish TV to continue its growth trajectory on both revenue and margins front and remains our top pick.

Metals (Ferrous) - Another disappointing financials for metal sector is likley to be for Q1 FY14. Subdued demand, no sign of revival in industrial activities & infra spending coupled with falling steel prices on the back of softening RM prices will act as a culprit for overall steel sector. The steel prices in US, China and CIS declined by 4.3 percent, 10.4 percent and 7.4 percent q-o-q, respectively, during 1QFY2014. In India, prices fell by 1.7 percent q-o-q. Furthermore, despite the government initiatives, there is no sign of infra spending & faster execution of projects - a headwind in near term. "MTM fever" can also act as a culprit for few companies due to sharp decline in rupee against dollar. We believe higher portion of foreign debt will see significant MTM impact on the financials during the quarter. Our top-pick will remain Tata steel.

Oil & Gas - Overall fuel subsidy burden is expected to be Rs 30796 cr lower than Q4FY13 (Rs 41228 cr) mainly on account of fall in Indian Crude basket and monthly diesel price hikes, however towards the end of the quarter the per unit under-recovery started increasing mainly due to sharp depreciation of rupee . We will see pressure on refining margins due to sharp fall in gasoline, LPG and inventory losses (due to correction of crude prices), light heavy differential also declined QoQ. Petrochemical deltas are expected to remain stagnant on Q-o-Q basis. Falling gas output from KG-6 is a major concern for the Gas sector, Gas transmission also show a downward trend and City gas distribution companies are facing problems of higher import of LNG with depreciating rupee impact.

Real Estate - We do not expect significant traction in real estate market despite the recent cooling down of interest rates. Furthermore, strategy of changing accounting policy for recognizing revenues and recent introduction of regulatory body to examine the black money transactions and improve project viability for investors in future will act as a culprit and hurt the sentiment of players. Further, lack of money supply, no new launches, most awaited price correction in the mind of investors will restrict absorption rate during the quarter.

Telecom - We expect Q1FY14 to show healthy growth in subscriber addition, particularly after decline in subscribers which industry witnessed in Q3FY13. Withdrawal of freebies and hike in tariff will drive growth in ARPM. Data revenue to increase as a combination of increase in data subscribers and higher data revenue per user.

Pharma - We expect 15-18 percent Y-o-Y growth of pharmaceutical sector companies. This growth is from strong revenue growth from the export market and muted growth in domestic market. Further Operating profit margin positively impact by 2-4 percent due to rupee deprecation but we need to watch impact of new pricing policy on drugs (NPPD) from Drug Price Control Order (DPCO) which may equalize the base. We see the bottom line the companies shows subdued growth 8-12 percent due to higher base line last year which is reflect into lower net profit margin.

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