Re: {LONGTERMINVESTORS} Earnings preview : Thread
Rajesh Desai
SHAREKHAN SPECIAL
Q2FY2014 IT earnings preview
Rupee's weakness aiding growth in a seasonally strong quarter
Key points
A seasonally strong quarter further aided by rupee's depreciation: In the September 2013 quarter, which is seasonally strong, the performance of all four leading information technology (IT) services companies is expected to be aided by both a better demand environment and currency gains. Unlike in the past several quarters, which saw vast polarisation of performance of the top four IT companies, for the upcoming September 2013 quarter we expect a strong sequential growth of 2.5-5.0% in the revenues of these companies. On a constant-currency basis, the growth will be higher at 3.3-6.0% (we expect a cross-currency impact of 75-110 basis points on their reported revenues). Specifically, Tata Consultancy Services (TCS) will continue to lead the pack with a quarter-on-quarter (Q-o-Q) top line growth of 5%, followed by HCL Technologies (HCL Tech; 3.3%), Infosys (3%) and Wipro (2.5%). Among the mid-cap companies under our coverage, we expect a strong top line growth from Persistent Systems Ltd (PSL) and CMC. We expect a soft performance from NIIT Technologies (NIIT Tech).
Windfall gains on margins driven by rupee's weakness: The rupee has on an average depreciated by close to 11.3% in the last three months and by 15% in the last two quarters. Most of the IT companies will see currency benefits flowing to their margins, but the quantum of the impact will be vendor specific (around 130-260 basis points quarter on quarter [QoQ]). In the quarter HCL Tech had its annual wage hikes, Wipro had two months' wage hikes and Infosys had a wage hike for its technical employees as well as for its global sales force with effect from Q1FY2014. We expect TCS to report the highest margin gains to the tune of 263 basis points QoQ among the tier-1 IT companies. It will be imperative to gauge the company's strategy pertaining to re-investment of the currency gains in the coming quarters. A strong margin performance coupled with a decent top line growth will translate into an impressive net income growth of 12.7-18.0% QoQ.
Management to maintain positive demand commentary: On the back of the recovery in the USA and some pockets of the euro zone, we expect positive demand commentary from the managements of the IT companies to continue in this quarter as well. Though discretionary spending remains soft (as indicated by the Oracle and Accenture numbers), but there have been signs of improvement in the overall IT spending. The improving demand environment will be reflected in the increased revenue guidance from Infosys (9-11% vs 6-10% earlier) whereas TCS and HCL Tech will maintain optimism on the demand environment. Further, we also expect Nasscom to revise its industry growth estimate upward after the announcement of the September quarter's report card from 12-14% currently.
Valuation: In the last three months with a 23% return the CNX IT Index has smartly outperformed the broader market indices, which have remained flat. The outperformance in the IT counters was led by the rupee's depreciation and a recovery in the operating environment following an improvement in the USA and the euro zone. Further, delay in the impending US immigration bill following its rejection in the US Senate has boosted sentiment for the Indian IT incumbents. Going forward, pertinent signs of improvement in the demand environment and currency tail winds will lead to upward revisions in the consensus earnings estimates for the IT companies. We maintain our positive stance on the IT sector and remain positive on TCS and HCL Tech among the large-caps and on CMC and PSL in the mid-cap space.
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CA. Rajesh Desai
Rajesh Desai
Q2FY2014 Auto earnings preview
Earnings in slow lane
Auto universe (ex Tata Motors) to report low single-digit growth in earnings
Sharekhan's automobile (auto) tracking universe (consisting of coverage and non-coverage automobile companies) is expected to report a 7.7% growth in earnings for Q2FY2014. Excluding Tata Motors, the Q2FY2014 earnings are expected to grow in low single digits of 3.8% year on year (YoY). The Sharekhan coverage universe is expected to report a revenue growth of 1.8% and a profit after tax (PAT) growth of 2.1%.
Maruti Suzuki and TVS Motor to outperform OEMs, Exide Industries to lead ancillary space
The original equipment manufacturers (OEMs) are expected to report an 8.3% year-on-year (Y-o-Y) earnings growth for the quarter. Maruti Suzuki would register an earnings growth of 149% on a low base whereas TVS Motor Company (TVS Motor) would record an earnings growth of 52%. Exide Industries would outperform the ancillary space showing an earnings growth of 42%.
Festive season and rural demand to boost sales in the near term
The upcoming festival season is expected to lead to a recovery in the automotive volumes. Also, given the good monsoon this year, the crop output is expected to be higher which would boost rural incomes. Apart from the strong tractor demand, we expect two-wheeler sales to surge, given the relatively higher proportion of sales from the rural areas.
M&M remains preferred pick in the automotive space
The tractor demand for Mahindra and Mahindra (M&M) remains strong, given the expectations of higher crop output due to a good monsoon. Apart from the strong tractor demand, we believe the automotive volumes would recover with the onset of the festive season. M&M remains our preferred pick in the space.
Q2FY2014 Pharma earnings preview
Strong Q2 performance aided by rupee's depreciation
Key points
Exports to drive growth: We expect our pharmaceutical (pharma) universe to report a 19.5% year-on-year (Y-o-Y) growth in revenues for Q2FY2014. The growth would be mainly led by the formulation exports (up 24%) which were aided by the rupee's depreciation. However, the Indian formulation business is likely to see a slower growth due to uncertainties that prevailed over the new pricing policy during the quarter.
OPM to remain flat for our universe: We expect the operating profit margin (OPM) of most players to expand for the export-driven pharma companies like Dishman Pharmaceuticals and Chemicals (Dishman Pharma) and Lupin (also aided by the launch of new products in the US market). However, Cadila Healthcare (Cadila Health) is likely to witness a decline in the margin due to the competition in key products and the absence of new launches, while Cipla would record a decline in the margin due to the absence of exclusivity (it supplied generic Lexapro to Teva Pharmaceutical Industries [Teva] in Q2FY2013).
Lower effective tax rate to boost our universe's profit growth to 22.4%: The effective tax rate for the pharma universe stood at 19.1% during the quarter as compared with 23.0% in Q2FY2013. This is likely to boost the adjusted net profit to grow at 22.4% year on year (YoY) during the quarter. The earnings growth would be mainly led by Aurobindo Pharma (Aurobindo; 80.4% YoY) followed by Sun Pharmaceutical and Industries (Sun Pharma; 43.7% YoY) and Lupin (34.2% YoY). Cipla would witness a 15.4% Y-o-Y decline in the adjusted net profit on loss of revenues from the supplies of Lexapro generic to Teva.
Outlook-positive stance retained: We expect the pharma companies in our coverage to continue to maintain a strong growth in the subsequent quarters, despite head winds in the domestic market and the higher research and development (R&D) expenses by players to keep up with the international quality norms. The growth would be mainly driven by the growth in the base business of the key players, currency benefits and the key launches in the US and European markets. We are especially positive about Aurobindo (it has witnessed a ramp-up in the US supplies), Lupin (a ramp-up in the oral contraceptive portfolio, launch of low-competition products and potential inorganic expansions) and Sun Pharma (consolidation of the newly acquired entities and loss of competition in generic Doxil in the US market).
Q2FY2014 Retail earnings preview
Festive-led demand
The Q2FY2014 earnings performance of the retail companies under our coverage would be decent on account of increased demand in the festive season. The retail companies under our coverage (Kewal Kiran Clothing Ltd [KKCL], Raymond) are brand-oriented following the traditional distributor-led model, where primary sales account for the major chunk. Titan Industries is expected to post a 15.3% revenue growth (led by a growth in the sales of watches and higher demand for gold jewellery). We expect Jubilant Foodworks to report muted growth of 6% in the same-store sales but a double-digit growth of 27% in the revenues driven by new store addition.
Kewal Kiran Clothing Company Ltd (KKCL): KKCL is expected to post a 20.4% growth in revenues led by brands Killer and Integriti. We expect Killer and Integriti to post a growth of 20% and 25% year on year (YoY) in revenues respectively. More than 70% of KKCL's revenues comes from the traditional distribution (multi-brand) mode. This is the primary sales channel for which the festive season sales are largely marked in two months before the actual festival. Hence the Q2FY2014 revenues for KKCL shall be driven by the festive demand. On the margin front, we expect KKCL to sustain its margin at the Q2FY2013 level, with a minor 10-basis-point reduction to 27.6% in Q2FY2014. The earnings after tax are expected at Rs20.8 crore, showing an 18% increase over Q2FY2013.
Raymond Ltd: Raymond's consolidated earnings are expected to grow at 5% YoY, largely led by a growth in the textile and garment segments (the Q2FY2013 base for Raymond was high). The sustenance of the margin of the textile segment, a possible improvement in the margin of the garmenting segment (largely led by the rupee's depreciation) and a minor margin improvement as a result of supply chain initiatives are likely to aid the overall margin growth, despite a contraction in the margin of the branded apparel business. We expect Raymond to report a 14.8% margin for Q2FY2014. This would result in a 2.1% year-on-year (Y-o-Y) growth in the earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs172.8 crore. The reported profit after tax (PAT) is expected at Rs50.7 crore (flat, a 0.9% growth YoY). Excluding the extraordinary items (on account of foreign exchange and inventory write-off for Autumn-Winter 2011 collection), we expect the adjusted PAT at Rs54.2 crore.
Relaxo Footwears: The company is expected to post a 20% revenue growth, largely led by an improvement in product prices (in keeping with its move towards premiumisation). The benefit of soft rubber prices visible in the last five quarters will be missing, hence we estimate the margin at 10.1% (vs 10.3% in Q2FY2013). The margin is likely to hold owing to the improvement in the product profile and premiumisation. The net earnings are expected to yield a 16% growth YoY.
Others: For Titan Industries we expect a 15.3% top line growth, a 9.9% margin and an 8.9% decline in the profit. The profit is expected to decline owing to an increase in the financing cost and contraction in the margin of the jewellery business. For Jubilant Foodworks Ltd we expect a 26.9% growth YoY in the revenues, largely led by store addition (the company is expected to have added 30 stores during the quarter). The same-store sales growth is expected at 6% for the quarter. Led by raw material price inflation and the expenses of the Dunkin Donuts format, we expect Jubilant Foodworks's operating profit margin to decline by 88 basis points YoY to 16.8% in Q2FY2014, resulting in a 21.3% Y-o-Y growth in the operating profit. For Page Industries, we expect the revenues to grow at 23% YoY (a 16% volume growth, 6% realisation growth). The margin is expected to be flat at 22.6%, resulting in a 25% Y-o-Y growth in the operating profit. The PAT is expected to grow at 19.8% YoY to Rs36.9 crore for the quarter.
Q2FY2014 Cement earnings preview
Weak demand and cost pressure to weigh down earnings
Key points
Seasonally weak quarter: During Q2FY2014, the earnings growth of the cement companies would be dented due to a sluggish demand environment, a seasonal slowdown in the construction sector (due to the south-west monsoon) and the continued cost pressure on the margins (the higher freight charges and a continuous increase in the prices of diesel). Hence, the cumulative earnings of Sharekhan's cement universe are expected to decline by 27.8% on an annual basis. Among the companies under Sharekhan's cement universe, the south-based cement companies like India Cements and The Ramco Cements are expected to witness a sharp erosion on margins and a relatively higher dip on earnings.
Flattish growth in revenues aided by marginal growth in volumes and non-cement businesses:The cumulative revenues of Sharekhan's cement universe are expected to largely remain flat on a year-on-year (Y-o-Y) basis. On the volume front, Shree Cement is expected to post a flat volume growth, whereas UltraTech Cement (UltraTech) is expected to post a marginal growth in the volume. On the other hand, the south-based companies are expected to post a volume growth of 2-8% on account of a low base effect. Further, the non-cement businesses like viscose staple fibre (VSF) in Grasim Industries (Grasim) and power in Shree Cement will offset the negative impact of a lower realisation in the cement division.
Margins dented by lacklustre demand and lower average realisation: Though the volume growth was largely flattish to marginally positive in Q2 (as compared with that of Q1), the average realisation declined by 3-4% sequentially. Even when compared on an annual basis, the all-India average realisation is down by close to 7-7.5% as compared with that of Q2FY2013. The worst affected region is north India with a decline of close to 12-13% in the average realisations over the last one year. With the cost pressure also affecting the margins, we expect the cement companies under our coverage to report a 300-850-basis-point decline in the operating profit margin (OPM) during the quarter (as compared with that of Q2FY2013).
Outlook-earnings to remain under pressure with recovery still some time away: Given the poor demand environment and the rising cost pressure, the weak financial performance of the cement companies is likely to persist in the coming quarters also. However, the valuations have corrected significantly and there is hope of some recovery in demand in the busy season (H2FY2014). In line with our cautious view on the sector, we prefer UltraTech due to its pan-India presence and a relatively stronger balance sheet.
Rajesh Desai
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CA. Rajesh Desai