MSFL - IT Q3FY12 Preview | Automobile Monthly | Metals & Mining – Q3FY12 Preview
Deepak Vaishnav
IT Q3FY12 Preview
Moderating growth but rupee the savior
CNX IT made its 2011 low during August and has since then given 20% index return following the rupee depreciation rally from low of ` 44 in August to ` 53.4 on 29th Dec 2011. Rally in rupee depreciation was led by increase in global risk and hence USD outflow and got elongated on back of domestic concerns. While the rupee rally is definitely beneficial for Indian IT, as 1% change in rupee results in 30-50bps margin impact, the same also indicates concerns on IT demand which is significantly dependent on exports. We expect H2FY12 to register slower growth on back of seasonality and as apprehensions on growth inhibit any last minute budget flush in Q3 (as witnessed sometime). Also H2 is seasonally weak compared to H1 because of lower working days, time for closure of old budgets and new budgets coming on table only by January end. On good side, improving data from US is positive but Europe still seems to be under woods. We have moderated our USD growth assumption for FY13 to 13.5-15% for large cap and 10-11% for mid-cap. However change in rupee estimates from ` 48/ ` 45.5 to ` 51.2/ ` 48.5 for H2FY12/FY13 have more than offset the moderation in growth. We maintain ‘HOLD’ on the sector.
USD growth to be in low single digit; strong rupee growth: We expect USD growth to be in low single digit in 1-3% range for our coverage universe on back of seasonality. However 11% average rupee depreciation q-o-q will benefit INR growth which we expect at 11.4% q-o-q for our coverage space.TCS in large cap space and KPIT in mid cap are expected to be revenue frontrunners. Cross currency is expected to impact USD revenue growth by 100 bps.
Margins to benefit from rupee: EBITDA margins are expected to expand by 100-400bps for our coverage universe. Infosys is expected to benefit the most among large cap on back of higher USD revenue and lower cross currency impact. HCL Tech will see lower expansion because of slower wage hike normalization of last quarter and business investments. Wipro will record lower realized rate because of impact of cash flow hedges on top line itself and hence lower margin benefit. Mid cap is expected to see 300-400 bps margin expansion. Profitability will be impacted by losses on hedges with average quarterly realized rate in ` 45- ` 46 range. TCS will record highest hedging loss.
Guidance and management commentary: Since rupee has depreciated sharply, we do not expect lowering of FY12 EPS guidance by Infosys. However USD revenue guidance for FY12 could be lowered to 16-18% from 17-19% earlier. Outlook on pricing and budgets will be key things to watch for in commentary in addition to spending by banking clients.
Outlook and Valuation: We expect USD revenue growth to moderate to 13-15% in FY13 compared to 17-19% earlier. Rupee will however offset the impact. We maintain our ‘HOLD’ rating on the sector. ‘TCS’ and ‘HCL Tech’ continue to remain our sector preferred picks.
Automobile Monthly - December 2011
Slowdown creeping
Indian automobile players recorded tepid growth (except M&M & TTMT) in December which is seasonally the weakest month for the industry before the end of calendar year. New launches in the PC segment, increasing discounts and attractive financing scheme supported dispatches for several unlisted players, however we believe sales volume to remain under pressure in the later part of the year. Tata Motors recorded strong growth as PC sales grew on the back of new launches while M&M continued its strong traction in the UV & CV segment. The two wheeler companies painted a mixed bag with Hero delivering strong volumes while Bajaj and TVS Motors showed first signs of slowdown. So while M&M, Tata Motors, Hero Motocorp and Bajaj Auto clocked growth on y-o-y basis Maruti Suzuki & TVS Motors reported a decline.
|
Company |
Dec FY12 |
Dec FY11 |
% y-o-y |
% m-o-m |
FY12 |
FY11 |
% y-o-y |
|
Bajaj Auto |
305,690 |
276,803 |
10% |
-18% |
3,332,393 |
2,875,707 |
16% |
|
TVS Motors |
170,428 |
171,790 |
-1% |
-3% |
1,670,040 |
1,512,896 |
10% |
|
Hero Motocorp |
540,276 |
501,111 |
8% |
1% |
4,663,158 |
3,948,013 |
18% |
|
M&M |
59,150 |
50,396 |
17% |
2% |
531,714 |
423,710 |
25% |
|
Tata Motors |
82,278 |
67,494 |
22% |
7% |
626,767 |
567,004 |
11% |
|
Maruti Suzuki |
92,161 |
99,225 |
-7% |
0% |
773,361 |
927,665 |
-17% |
Source: Company data, MSFL Research
Bajaj Auto: Bajaj Auto’s December sales stood at 305,690 units represents growth of 10% on y-o-y basis and down 18% sequentially. The sales represent the slowest during the current year FY 2012. The export market grew 10% y-o-y to 119,708 units again the lowest in FY 12.
TVS Motor: TVS reported negative sales growth of 1% y-o-y to 170,428 due to high base effect and lower than management guidance.
Hero MotoCorp: Hero MotoCorp recorded another month of robust sales, we however expect competition to further intensify in FY13.
Mahindra and Mahindra: Mahindra & Mahindra continues to grow across segments, with total vehicle sales up 17% y-o-y to 59,150 units driven by higher automotive segment (especially LCV segment).
Tata Motors: Total vehicle sales grew the strongest 22% to 82,278 units driven by higher LCV and passenger car sales (positive surprise).
Maruti Suzuki: Total vehicle sales were down 7% y-o-y at 92,161 units due to multiple headwinds faced by the passenger car segment and diesel engine capacity constraints. Domestic passenger car sales number came in at 77,475 units down 13% y-o-y
We list vehicle sales of other unlisted players to just give an idea of how competition is shaping up in the Indian automobile industry.
We remain positive on 2W industry on the back of rising rural demand, shift in consumer preference, new launches and expect Bajaj Auto to be primary beneficiary. Tata Motors (not rated) trades at favorable valuations with JLR recording strong volumes and domestic CV sales perform better than the peers. We remain cautious on passenger segment as macro uncertainties still persists and higher competition to impact MSIL sales. CV players especially in the M&H segment will face pressure due to general slowdown in the economy (especially in the construction & mining segment)
Metals & Mining – Q3FY12 Preview
Problem of Plenty!!!!!
Q2FY12 ended with many problems and almost all the problems have increased further in Q3FY12. Companies have found it extremely tough to maintain their utilization levels and to manage the extremely volatile currency. However Q3FY12 numbers would be better than anticipated earlier as companies are able to hold on higher prices inspite of lull demand due to rupee depreciation.
Stable realization lessen contraction of EBITDA/ton for ferrous players
Inspite of lull demand, steel prices remained more or less stable during the quarter due to ongoing mining crisis in Karnataka. Stable realizations will help companies to somewhat mitigate higher raw material prices. EBITDA/ton of ferrous players are expected to fall by ` 1000-1500/ton during Q3FY12.
LME and cost blues for Non Ferrous
Base Metals prices have significantly corrected during the quarter due to credit crisis in Europe and credit tightening in China. Lower LME price would be somewhat mitigated by higher volume however margins is set to fall for all companies due to higher input cost and adverse movement in currency.
Mining segment would be better
Mining segment is set to do better in this quarter due to higher production and favorable currency movement. CIL is set to increase its volume and firm prices will help the company to deliver better numbers. Rupee depreciation will provide cushion for Sesa Goa and will help the company to somewhat offset impact of lower volume and realization.
Outlook
Slowing global economy has taken a serious toll on Metal and Mining companies and the conditions are expected to remain tepid at least in next two quarters. However except Tata Steel, all other Indian companies have been impacted by India specific issues. The shadow of global slowdown is yet to come in Indian metals and mining space. We believe that ongoing issues like mining mess, policy paralysis and slowing economy are structural in nature and the condition are going to remain stressed at least in next two quarters. Thus we continue to maintain our negative stance on sector. However Inspite of directly exposed to Europe, Tata Steel remains our prefer pick due to structurally changing business model.
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