Angel Q1FY14 Preview: Subdued revenues to weigh on earnings

Angel Broking expect the Sensex as well as their coverage companies to report a muted revenue performance. The research firm expects Sensex companies to report a 2.4% yoy growth in revenues. For their coverage universe, they expect growth in revenues to come in at 4.1% yoy.

July 06, 2013 / 03:06 PM IST
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Angel Broking has come out with its earning estimates for Q1FY2014:

The slowdown in economic activity is expected to continue reflecting in the subdued revenue performance for corporates. For 1QFY2014, we expect the Sensex as well as our coverage companies to report a muted revenue performance. We expect Sensex companies to report a 2.4% yoy growth in revenues. For our coverage universe, we expect growth in revenues to come in at 4.1% yoy. On a sequential basis, revenues are likely to decline for both, the Sensex and our coverage companies by 8.5% qoq and 6.9% qoq respectively. We expect oil and gas (owing mainly to ONGC) and metal companies to weigh down the revenue growth of our overall coverage universe.

As a result of the deceleration in revenues, we expect only a modest earnings growth for the Sensex and our coverage companies, ie 5.6% yoy and 1.3% yoy, respectively. On a sequential basis, the earnings performance for the Sensex as well as our coverage companies is likely to decline by 11.1% and 7.2% qoq respectively. Overall, we expect earnings during the quarter to be supported by the performance of BFSI, IT, FMCG and pharmaceutical companies.

We believe that margins have bottomed out. As against a decline in operating margins for the past few quarters, we expect an improvement in margins on a yoy basis, during 1QFY2014.  We expect the Sensex and our other coverage companies to report a margin growth of 78bp yoy and 35bp yoy respectively. But on a sequential basis, we expect a slight contraction in margins for both the Sensex and our coverage companies by 8bp qoq and 2bp qoq, during the quarter.

Outlook and Valuation:

We are positive in our outlook for equities owing to factors such as the bottoming out of economic growth, moderation in inflation and narrowing of fiscal and current account deficits. We also believe that any further INR depreciation is likely to be stemmed and we expect the currency to stabilize owing to factors such as moderating concerns in global markets regarding impact of the US Fed’s QE exit and domestically a decline in gold imports. We expect that over the medium-term the sharp depreciation is also likely to boost growth in exports, especially as economic revival in the U.S gains ground. At the same time owing to our growth as well as real interest rate differentials, the economy is expected to continue attracting healthy capital inflows. We expect the Sensex' EPS to grow by 14.5% to Rs 1,384 in FY2014 and by 14.4% to Rs 1,583 in FY2015, implying a CAGR of 14.5% over FY2013-15. We maintain our 12-month Sensex target of 22,000, with a target multiple of 14x FY2015E earnings. The target implies an upside of 13.4% from the present levels and is likely to be back-ended.  

Sectoral Analysis
Automobile - Margins to support moderate earnings growth

For 1QFY2014, we expect our coverage automobile companies to report a modest revenue growth of 5.5% yoy. This would largely be driven by strong growth in net average realizations backed by superior product-mix and price increases. Volumes, however, are expected to decline 4% yoy due to continuous slowdown across most of the segments. The top-line growth is expected to be driven by strong growth at Mahindra & Mahindra (M&M; led by the tractor segment) and Tata Motors (led by Jaguar-Land Rover [JLR]). We expect margins to improve by about 80bp yoy mainly due to easing of commodity prices, favorable exchange rate movement for the sector and lower levels of discounting. We expect Maruti Suzuki (MSIL), Tata Motors (TTMT) and M&M to drive the sector's earnings (of 8.7% yoy) during the quarter. Excluding Tata Motors, our coverage automobile universe is expected to post a modest top-line growth of 1.0% yoy; nevertheless, earnings are likely to register a strong growth of 13.9% yoy as margins are likely to swell by about 120bp yoy.

We maintain our positive view on Ashok Leyland, Maruti Suzuki and Tata Motors.

Banking - New Private Banks to continue their outperformance

We expect our coverage new private banks to continue outperforming their nationalized counterparts and older private banks and report a robust earnings performance. Aided by strong NII growth of 26.4% yoy and healthy non-interest income growth of 22.3% yoy, new private banks are expected to report a strong 24.9% yoy growth in operating profit and 26.6% yoy increase in earnings. On the other hand, our coverage PSU banks and older private banks are expected to register moderate operating performance, with operating income growth of 7-8% yoy each. Despite modest growth of 5.1% yoy in operating profit, PSU banks are expected to report an earnings decline of 3.1% yoy, primarily dragged by an 18.2% yoy increase in provisioning. Older private banks are expected to report a 1.7% decline in operating profit and a subdued 2.1% yoy growth in earnings.

We recommend a Buy on Bank of Maharashtra, Syndicate Bank, IndusInd Bank, Corporation Bank, Allahabad Bank and United Bank of India.

Cement - Lower realization to weigh on earnings
We expect our cement universe to report a substantial 26.2% yoy decline in earnings, impacted by lower realization and a substantial increase in operating costs. We expect the top-line to decline marginally by 1.2% yoy, impacted by both lower volumes and weak realizations. The operating margin is expected to decline steeply by 504bp yoy and this sharp contraction can be attributed to lower realization and increase in freight and raw material costs.
FMCG - Healthy revenue performance to drive earnings
We expect our FMCG universe to post a healthy 13.2% yoy top-line growth owing to higher volumes, better realizations and superior mixes. On an average we expect a reasonably healthy volume growth (in high single digits) in the domestic market for these companies. The FMCG coverage universe is expected to post a strong 15.6% yoy earnings growth driven by healthy top-line performance. On the margins front, we expect some companies to report a contraction owing to the impact of INR depreciation on imported raw materials and higher advertising and sales promotion expenditure.
Infrastructure - Challenging environment to weigh on earnings
For the infrastructure sector, subdued revenue performance, along with high interest cost and pressure on margins, are expected to result in a muted performance at the earnings level. Against this backdrop, we expect a decline in the earnings of companies under our coverage, with L&T being the only exception. There has been no respite for infrastructure companies from persistent headwinds such as high interest rates and slower-than-anticipated revival in industrial capex. Further, stretched balance sheets and working capital on the back of investment in subsidiaries and delay in payments from clients continue to pose a problem. This has resulted in execution slowdown and shrinking bottom-lines for most infrastructure companies. We believe that a stock-specific approach would yield higher returns, given the disparity among the companies in our coverage universe and changing dynamics, affecting them either positively or negatively. Hence, we remain positive on companies having 1) a comfortable leverage position; 2) superior return ratios and 3) lesser dependence on capital markets for raising equity for funding projects.
Capital goods - Headwinds continue to affect earnings
Amid slowdown in the Indian economy, investments across various sectors have substantially decelerated. The headwinds in the power sector have limited order visibility further for companies in boiler turbine generator (BTG) space, especially from private utilities. Although some orders are expected from state and central utilities, tough competition in BTG space is likely to result in margin contraction and finalization of these orders is also likely to witness delay due to ongoing headwinds (such as fuel crisis, constraints in land acquisition and poor health of state electricity boards [SEBs]). Although transmission and distribution (T&D) companies are comparatively better placed due to steady ordering, they are still facing execution risks due to delay in clearances and revenue deferrals.  
IT - INR depreciation and moderate volume growth to drive earnings
Traditionally, 1Q of a financial year is a strong quarter for IT companies as client budgets on discretionary, operational and capital spending, which are frozen by 4Q, witness a flush in this quarter. We expect 1QFY2014 to be better than 4QFY2013, but not as good as 1Q is traditionally, due to economic uncertainty across developed economies, leading clients to delay their incremental budget flush from their end. We expect revenue growth in 1QFY2014 to be volume driven and pricing to remain stable. On the back of INR depreciation and moderate volume growth, profitability of tier-I companies such as Infosys, TCS and HCL Tech is expected to increase by 6.5%, 0.4% and 3.0% qoq, respectively. The profitability of Wipro is expected to decline by 6.0% qoq due to hiving off of non-IT businesses along with negative impact of wage hikes. Amongst mid-tier IT companies, earnings growth is expected to be a mixed bag.
Metals - Earnings to remain under pressure
We expect our overall coverage metal companies to report a steep 18.3% decline in earnings performance. Our coverage steel companies are faced with decline in revenue as well as pressure on margins due to lower prices on a yoy basis. Our coverage non-ferrous companies are expected to continue facing a double whammy of declining product prices coupled with higher input costs. We expect non-ferrous companies to report lower bottom-lines on a yoy basis owing to a decline in LME prices coupled with sticky costs.
Oil and Gas - ONGC to weigh on earnings performance
We expect a mixed performance on the profitability front for our coverage oil and gas companies. Overall, we expect Sensex and our coverage oil and gas companies to report an almost flat earnings performance, weighed down by ONGC's numbers. We expect earnings for ONGC to decline by 9.0% yoy, largely due to a yoy increase in other expenses. Excluding ONGC, our coverage oil and gas companies are likely to post an improved earnings growth of 7.0% yoy and Sensex oil and gas companies are likely to report a healthy 12.5% yoy growth in earnings.
Pharmaceuticals - Robust revenue growth but margins under pressure
The Indian pharmaceutical sector is expected to post a robust revenue growth for 1QFY2014. We expect our coverage pharmaceutical universe to register a growth of 18.2% yoy in the top-line. But on the operating front, we expect margins to decline by 137bp. With pressure on margins coupled with a higher tax rate, we expect our coverage pharmaceutical companies to report an earnings growth of 11.1% yoy during the quarter.
Telecom - Expect modest revenue growth 
For 1QFY2014, we expect a modest revenue growth for the industry on the back of increase in MOU, inch up in voice ARPM and increasing share of VAS in revenues. We expect our coverage telecom companies to post a revenue growth of 7.9% yoy and 2.0% qoq. On the margins front, we expect the EBITDA margin of Idea Cellular and Reliance Communications (RCom) to decline by 70bp and 27bp qoq to 26.9% and 30.6%, respectively, while EBITDA margin of Bharti Airtel is expected to inch up by 49bp qoq to 32.2%, aided by a low base effect. In our view, the telecom industry can improve structurally only after data revenues start picking up. We are currently Neutral on the telecom sector and will refrain from taking any call till financial clarity on the stocks emerges.

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