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Summary
of Contents
SHAREKHAN SPECIAL
Q4FY2007 earnings preview
Key points
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The Sensex
earnings are expected to grow by 37% year on year (yoy) for
Q4FY2007. However, excluding oil the earnings are expected to grow
by 34% driven by the earnings in the software, cement and banking
sectors. These three sectors are expected to contribute 42% of the
Q4FY2007 Sensex earnings excluding oil. On a quarter-on-quarter
(q-o-q) basis the expected growth is only 1.2%, which indicates
expectations of some slowdown in the earnings momentum.
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Strong
earnings growth is expected in the pharma sector mainly due to a
very low base. On the other hand information technology (IT)
earnings will be affected due to the sharp appreciation in the
rupee. Auto numbers are not expected to be great due to margin
pressure and a slowdown in the volumes.
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Strong
year-on-year (y-o-y) earnings growth is expected from Reliance
Communications, Bharti Tele, Ranbaxy, Dr Reddy's Laboratories,
Grasim and Tata Steel.
-
Two-wheeler
majors Hero Honda and Bajaj Auto are expected to report a y-o-y
decline in the profits.
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Some of the
non-Sensex companies where high growth is expected are Dabur
Pharma, Syndicate Bank, Polaris and India Cements.
-
In the absence
of any major surprises, the fourth quarter results of the Indian
companies may not be a trigger for the market, but the market will
keenly await the guidance on the FY2008 prospects of the corporate
sectors, especially automobiles, banks and the other interest rate
sensitive sectors.
Q4FY2007 Auto earnings preview
Automobile
companies reported a mixed performance in terms of sales volumes for
Q4FY2007, maintaining the trend of the past two quarters. The growth
in four-wheelers has outpaced that in two-wheelers. Rising interest
rates and tightening liquidity have taken their toll on the
automobile sector, as the growth rates are beginning to slow down.
Competitive pressures continue in the two-wheeler segment even as
volume growth has slowed down. Among the heavyweights, Bajaj Auto
Ltd (BAL) has reported a sales growth of a meagre 1% whereas Hero
Honda Motors has reported a rise of 10.8% in its sales for the
fourth quarter. The four-wheeler segment has continued on its growth
path, with the commercial vehicle (CV) segment reporting a growth of
25% for the quarter (with the exception of March). The passenger car
segment has grown by 20% in the quarter. The segment is expected to
see a flurry of activity with a number of new launches planned in
this fiscal. Maruti Udyog's car sales have grown by a strong 29.6%;
the overall sales of Mahindra & Mahindra (M&M) are up by
18.8% and Tata Motors' commercial vehicle sales have increased by
22.4%.
The operating
profit margins (OPMs) are expected to have been under pressure for
the whole sector considering the high raw material prices. The
margin pressure would be most evident in the two-wheeler segment due
to the intensified competition as well as various sales promotion
activities and discounts being offered by the major players during
the period.
We expect
M&M, Tata Motors, Ceat, Ahmednagar Forgings and SKF India to be
among the lead performers in the sector for Q4FY2007.
STOCK UPDATE
Hyderabad
Industries
Cluster: Apple
Green
Recommendation: Book Profit
Current market price:
Rs230
Book
profit
Result
highlight
-
Hyderabad
Industries Ltd (HIL) has delivered a disappointing performance yet
again in Q3FY2007. Lower than expected sales, the company's
inability to pass on the costs to the consumers and higher raw
material costs affected its performance during the
quarter.
-
In Q3FY2007,
the net sales rose by 4.7% to Rs100 crore. Not only was the
company unable to pass on the higher costs to the consumers, but
it also faced a lot of competitive pressures, leading to a loss in
its market share. The operating margins have come down drastically
from 11.7% to 3.5% due to the very high cement prices, as cement
is the key raw material. Consequently, the operating profit for
the quarter declined by 69% to Rs3.46 crore.
-
With all the
asbestos majors adding capacity, there is overcapacity in the
industry, leading to more competitiveness. This has capped the
pricing power of the companies, and they are unable to pass on the
impact of the higher raw material costs to the consumers. We
expect this scenario would continue to adversely affect the
company going forward, and expect the margin pressure to continue
as all the players gun for a higher market share.
-
At the current
levels, the stock discounts its FY2008E earnings by 10x and quotes
at an enterprise value (EV)/earnings before interest,
depreciation, tax and amortisation (EBIDTA) of 6x. At these
levels, the stock does not look attractive and hence we are
closing our recommendation on the stock. We had initiated the
stock at a price of Rs163, and the stock has given a return of
41%. |
