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Muted earnings growth likely in Q1FY14: Nirmal Bang

Nirmal Bang research expects the companies in their coverage universe to post a 4.4% YoY revenue growth, a 1% decline in EBITDA and a 7.2% fall in net profit. The performance reflects demand slowdown in the economy amid a depreciating Indian rupee.

July 11, 2013 / 03:02 PM IST
 
 
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Nirmal Bang's earnings estimates for Q1FY14:

We expect the companies in our coverage universe to post a 4.4% YoY revenue growth, a 1% decline in EBITDA and a 7.2% fall in net profit. The performance reflects demand slowdown in the economy amid a depreciating Indian rupee. Banks (especially, private banks), information technology (IT) and pharmaceutical companies are likely to be the highest contributors to top-line and earnings growth. Metal, cement, oil and gas, infrastructure and capital goods companies are expected to witness a decline in profits. 

The steep rupee depreciation raises concerns over the foreign exchange liabilities of companies in our coverage universe. We have revised our average rupee-US dollar estimate to Rs58.45/US$ for FY14E from Rs52.00/US$ earlier. This is mainly on account of the fears of tapering off of the quantitative easing (QE3) or bond purchase programme by the US Federal Reserve. The surge in gold imports in the wake of falling prices of the yellow metal ballooned India's trade deficit and thereby exerted downward pressure on the rupee in April and May 2013. However, the recent restrictions imposed by the Reserve Bank of India (RBI) on gold imports along with a hike in import duty to 8% would put a lid on gold imports and thereby ease the downward pressure on the rupee going forward. We expect the rupee to appreciate slightly to Rs56.49/US$ in FY15E on account of lower trade deficit (primarily because of lower gold imports) and subdued global commodity prices. 

Muted corporate performance expectations

On account of demand slowdown in the economy, rupee depreciation and adverse global economic developments, market expectations on Indian corporate sector's performance are muted and we believe this would continue until 2QFY14. We expect better corporate performance in 2HFY14.

Sector-wise snapshots
Automobile/Automobile ancillary:
We expect the companies in our coverage universe to report a 2% YoY fall in revenue for 1QFY14E because of ongoing slowdown in the automobile sector. However, on the margins front, we expect most of the companies to report QoQ expansion led by favourable currency movement (Japanese yen- Indian rupee) during the quarter, fall in raw material costs and product price hikes. In 1QFY14, most OEMs (originial equipment manufacturers) reported single-digit YoY drop in sales. However, on QoQ basis, sales of two-wheelers witnessed some improvement in demand led by festive/marriage seasons. In the two-wheeler space, Hero MotoCorp, Bajaj Auto and TVS Motor Company reported 5%/9%/5% YoY drop in sales, respectively, while Maruti Suzuki India (MSIL) posted a 10% YoY decline. Overall, we expect the PAT of companies in our coverage universe to improve by 8% YoY.
Banking:
India's economic enviorment remains challenge amid weakening demand and greater risks emanting from a deteriorating external sector. While easing inflation and policy measures towards curbing gold consumption may offer a short-lived breather, a falling rupee and status quo on key rates by the Reserve Bank of India (RBI) continues to suppress the sentiment. For 1QFY14, we expect the banks in our coverage universe to clock earnings growth of 7.6% YoY and 0.9% QoQ aided by net interest income (NII) growth of 13.6% YoY and 3.9% QoQ amid a 10.0% YoY growth in total provisioning. Private banks would continue to outperform public sector peers with NII/PAT growth of 22.3%/25.1% YoY, respectively.
Capital goods:
We expect the capital goods sector to report a subdued performance for 1QFY14 following weak order inflow, tepid execution and sustained compression in margins. New order inflow - key growth driver for the industry - remained lukewarm as industrial capex activity is yet to pick up in the economy. Revenue growth of companies in our capital goods coverage universe is expected to taper off because of declining order book, execution slippage and project deferral by clients. We project a 2.6% YoY decline in the combined revenue of companies in our coverage, at Rs186.2bn. Profitability is likely to be under pressure as price under-cutting to win orders, high input costs and interest charges will keep margins suppressed. Combined EBITDA of companies in our coverage is poised to fall by 7.8% YoY to Rs16.7bn, while PAT is likely to decline 9.9% YoY to Rs11.2bn. Operating and net profit margin is expected to decline by 50bps YoY each.
Cement:
We expect cement companies in our coverage universe to report a weak performance for 1QFY14 because of sluggish sales volume (up 1.2% YoY) and decline in cement prices (4% YoY). Consequently, total net sales of companies under our coverage are expected to decline 2.2% YoY, EBITDA to fall 24.2% and net profit to slip 35% YoY. EBITDA margin is likely to decline by 560bps YoY and EBITDA/tn to fall by Rs350/tn following lower realisation and cost inflation. While 2QFY14 would continue to be weak quarter in the wake of poor demand during the monsoon season, we believe the underperformance by cement stocks largely factors in the subdued performance. We expect a gradual recovery in cement demand in 2HFY14 and therefore we have retained our positive view on the sector.
Information technology:
We expect US dollar revenue of information technology (IT) companies in our coverage universe to grow 0%-3% QoQ in 1QFY14, while rupee revenue is likely to grow 3%-7% QoQ. We expect volume growth of 1%-3% QoQ. Cross-currency movements will negatively impact reported billing rates, with the US dollar appreciating 1% QoQ each against the euro and British pound, and 4.9% QoQ against the Australian dollar. However, the weakness of the Indian rupee (3.3% QoQ depreciation) will have a positive impact on margins. We expect this to offset wage hikes by companies like Tata Consultancy Services (TCS), while companies like Hexaware, which did not award wage hikes during the the quarter, should benefit. Forex losses on hedging will, to some extent offset gains in margins at the net profit level. We expect Infotech Enterprises (IEL) to post highest net profit decline of 13.1% QoQ, while we expect Mindtree to report highest growth of 10.5% QoQ. FY14 commentary/conversion of client budgets into revenue and company views on the US immigration bill are key factors to watch out for. We revise upwards our target prices for all IT companies under our coverage by 11%-15% owing to currency re-set, from Rs52.0/$ to Rs58.5/$ for FY14E and from Rs 51.0/USD to Rs 56.5/USD for FY15E. Stockwise, we upgrade HCL Technologies to Buy from Hold with a target price of Rs960 (Rs 840 earlier).
Infrastructure:
For 1QFY14E, we expect infrastructure companies in our coverage universe to post a muted growth in revenue by 2% YoY because of slower project execution following headwinds like high debt, stretched working capital and a fall in order backlog. However, operating profit is expected to increase by 15% YoY, primarily driven by completion of projects. We expect the net profit to decline by 24% because of high interest costs and slowdown in project execution. Despite the poor performance, we remain positive on the sector considering the deleveraging efforts, a gradual improvement in order execution on the back of a likely cut in interest rates, improved working capital scenario and the recent reforms in the power sector.
Metal & mining:
The companies in our coverage universe are expected to report colossal 22% YoY and 28% QoQ drop in EBITDA for 1QFY14 following lower realisation. The decline is likely to be across the board as only Hindustan Zinc (HZL) is expected to report positive EBITDA growth on YoY basis, while JSW Steel may report positive EBITDA growth on QoQ basis (due to merger of Ispat Industries with the company) from our universe of 12 companies. Our coverage universe aggregate PAT is likely to post a 43% QoQ jump due to goodwill impairment at Tata Steel in 4QFY13. A steep 9.4% depreciation in the rupee against the US dollar during the quarter will result in huge forex losses for players with foreign debt. However, the steep rupee depreciation would enable improvement in realisation, despite the fall in international metal prices, in 2QFY14.
Mid-caps:
We expect Arvind to post healthy growth for the June 2013 quarter due to additonal woven capacity in the textile division and higher area in the B&R (Brands & Retail) division. With the recent capacity expansion, Supreme Industries is likely to report helathy volume growth, but lower cruide oil price would lead to inventory losses. The growth rate for Bata India would improve QoQ, but still remain below the normal level of 17.0% in 2QCY12. Growth in sales would moderate for Havells India, but due to lower interest costs the net profit would witness a healthy growth. On a low base, Sintex Industries is likely to report healthy revenue growth, but margins would moderate due to challenges in the monoilthic business, while MTM (mark to market) losses would cap net profit growth. With higher capaicty of its joint ventures (JVs), Kajaria Ceramics (KCL) is likely to post volume-driven growth, but higher power costs due to a weak rupee would exert pressure on operating margin. JBF Industries is likely to report better operating profit due to the fall in raw material prices, but MTM losses would exert pressure on its cash flow/net profit.
Oil & gas:
Sharp volatility in the rupee-US dollar rate played spoilsport for the energy sector in India in 1QFY14, which led to tapering down of the benefits from the price reforms undertaken by the government. Brent crude oil averaged US$103/bbl in 1QFY14 (down 8.4% QoQ and 4.0% YoY) and the rupee-US dollar averaged at Rs55.9/$ (up 3% QoQ and 3%YoY). Although soft crude oil prices gave some relief, the sharp depreciation in the rupee took a heavy toll, which led crude oil prices in rupee terms to touch their highest- ever level. The rupee depreciation affected companies across the energy space viz. upstream companies (rising under-recoveries), gas utilities (as gas is priced in US dollar terms, rupee depreciation increases the price for consumers), refineries (higher forex losses) and gas distribution companies (trade-off in volume for margins). We have assumed gross under-recoveries at Rs 277 billion for 1QFY14E and subsidy burden for upstream companies calculated on the basis of USD 56/bbl mechanism - leading to upstream companies bearing ~53.7% of total under-recoveries.
Pharmaceuticals:
Despite the likely slowdown in domestic market growth due to trade rationalisation in anticipation of the NPPP (New Pharmaceutical Pricing Policy) as well as a two-week long strike by retailers in Maharashtra and the absence of blockbuster product launches in the US, we expect the companies in our coverage universe to report a healthy 17% YoY revenue growth on the back of low competition in the products launched over the past few quarters and partly due to a QoQ fall (~3%) in the Indian rupee against the US dollar. Margins may improve QoQ, but on YoY basis we expect them to fall because of lack of product marketing exclusivity in the US. From the companies in our coverage universe, we expect Sun Pharmaceutical Industries (SPIL) and Lupin to report a strong performance, while Cadila Healthcare and Divis Laboratories are likely to report weak earnings. We have incorporated our revised in-house call on rupee-US dollar rate of Rs58.5/US$/Rs56.5/US$ for FY14E/FY15E, respectively, owing to which our EPS estimates for Ipca Laboratories stands revised upwards by 4%/6%, respectively, with TP revised to Rs 702 (from Rs 665 earlier), while Glenmark Pharmaceuticals' TP has been revised to Rs586 (due to a 4% EPS increase in FY15E) though the Hold rating on it remains unchanged. We have upgraded the rating on Divis Laboratories to Buy from Hold because of its attractive valuation.
Telecom:
We expect Bharti Airtel (Bharti), Reliance Communications (RCOM) and Idea Cellular (Idea) to post a combined 5.4% QoQ growth in 1QFY14E revenue at Rs336.5bn. We expect the revenue to be volume-led with better realisation. We expect Bharti to report a 4.4% QoQ rise in India mobile revenue and Idea a 5.2% QoQ growth. RCOM, on the other hand, is expected to report a 4.2% QoQ growth. We expect the margins to rise 56bps- 265bps QoQ, led by revenue growth and operating leverage. Overall, we expect EBITDA growth of 8.9% QoQ. This is likely to aid net profit growth of 25.7% QoQ (low base for Bharti). Revenue per minute (RPM) trend, MoU and data revenue are key things to be monitored. We have upgraded our rating on Bharti to Buy from Hold following a correction in the stock price and reasonable valuation at 4.7x FY15E EBITDA. 

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