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Mar-12 Quarter Review Macro economic
parameters worsen 4QFY12 earnings one of the
best quarters in recent times; Aggregate PAT up 19% v/s est 7%
Sensex EPS: FY12 upgraded 3%; FY13 downgraded 2%
India Strategy4QFY12 earnings
a bright spot(in the cradle of pessimism)
June 2012
June 2012 2
Discussion points
Macro OverviewMacro economic parameters worsen
Aggregate 4QFY12 ReviewA very strong quarter in a long time
Markets & ValuationFY13 PE at <13x (below long-term averages) are now attractive
Sector Snapshot4QFY12 review, outlook, top picks
AnnexureMOSL Universe – Annual Performance & Valuations
June 2012 3
INDIA STRATEGY: Mar-12 Results Review Aggregate performance above estimates
MOSL Universe 4QFY12 Sales grew 18% (est 19%), EBITDA 12% (est 9%), and PAT 19% (est 7%). Sensex aggregate performance was also above estimates as EBITDA grew 14% and PAT grew 29% YoY (est 17%).
Index companies outperform while broader market growth remains mutedWhile Sensex-30 PAT grew 29%, MOSL Universe ex Sensex (105 companies) grew only 4%.
Large-caps which delivered above estimates are SBI, ICICI Bank, Dr Reddy’s, BHEL, ONGC,M&M, Sun Pharma, Ambuja Cements, Asian Paints, Titan Industries
Major disappointments in earnings were from Tata Motors, Tata Steel, ACC, Nestle, BhartiAirtel, GAIL, Grasim and BoB.
Sensex EPS grew 11% in FY12 (3% upgrade from 4QFY12 preview); FY13 EPS estimate saw a 2% downgrade over 4QFY12 preview levels. FY13 Sensex EPS expected to grow 9% to 1,232.Refer our Mar-12 Quarter Preview
Sensex EPS growth trend
June 2012 4
MACRO OVERVIEW: Period of crisis as growth and currency falterIIP plunges amidst volatility
Taking annual growth closer to decadal lows
IIP plunged to -3.6% in Mar-12 pointing towards near collapse of industrial activitiy.
The 4QFY12 GDP growth estimate at 5.3% was at nine year low.
This is dragging down yearly growth to their decadal lows taking them closer to the pre-boom period lows.
Slowdown in growth is widespread across sectors.
The INR has depreciated nearly a quarter of its value since Jul-11, mimicking trend during financial crisis.
Increased trade deficit and global risk-off situation.
However, INR at 55 corresponds to a REER value of 100, closer to it long term par value.
We expect INR to average 52/USD in FY13.
Quarterly growth has fallen below 6% level
Currency – out of control (USD/INR)
June 2012 5
MACRO OVERVIEW: RBI has taken a few steps, more is requiredInflation likely to hover around 7% level
Bank credit and deposit growth remains stable
After remaining close to double digit level for long, inflation is now closer to 7%.
This has given opportunity for RBI to change stance and support growth.
Simultaneously RBI has started addressing liquidity through CRR and OMOs.
The improved money supply has provided room for deposits and credit growth to remain stable.
We expect RBI to stay on course on easing path in view of changing growth inflation scenario.
We expect at least 25bp cut in June 18th policy along with continued fortnightly OMOs. CRR cut may be done in Jun-12 policy.
Expect at least 25bp cut in policy rates in June 18th
RBI has started addressing liquidity problems
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1QFY
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3QFY
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1QFY
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3QFY
12
Deposit YoY Gr. (%) Loan YoY Gr. (%)
-5
0
5
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15
-2000
-1500
-1000
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0
500
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1500
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Feb-
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Jul-1
0
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-10
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-11
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-11
Mar
-12
LAF balance (net reverse repo) (LHS)
3mth CP rates (RHS)
6.25%
8.50%8.00%
7.50%7.75%
6.00%5.50%
4.75%4.50% 4.25%
3%
4%
5%
6%
7%
8%
9%Ja
n-11
Feb-
11M
ar-1
1A
pr-1
1M
ay-…
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12Fe
b-12
Mar
-12
Apr
-12
May
-…Ju
n-12
Jul-1
2A
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2S
ep-1
2O
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2N
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2D
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2
Repo Rate Cash Reserve Ratio
June 2012 6
MACRO OVERVIEW : Fiscal deficit to be helped by lower Oil prices
Fiscal deficit may be contained by falling oil and lower subsidy
Rapid decline in oil price has provided a ray of hope as it directly affects India’s inflation, external and internal balance.
With every USD10 decline in oil prices, India’s CAD/GDP would improve by 0.5%, fiscal deficit by 0.3% and inflation by 120bp.
Besides oil other commodity prices too are falling rapidly. India’s core inflation would benefit even after adjusting for currency.
Fiscal slippages that looked eminent now appears more credible in view of the oil price trend.
Besides move towards deregulation and austerity measures would also help at the margin.
The external balance may also improve significantly on falling oil and gold imports.
Oil (Indian basket) price provides a ray of hope Very rapid fall in commodities despite currency
-60
-40
-20
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40
60
-4.0
-2.0
0.0
2.0
4.0
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8.0
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-09
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-09
Apr
-10
Aug
-10
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
India's core inflation Rogers USD (RHS)
FY09 FY10 FY11 FY12BE FY12RE FY13BEReceipts 8,399 10,259 11,909 12,577 13,434 14,909
Revenue receipts 5,403 5,728 7,885 7,899 7,670 9,357Net tax revenue 4,433 4,565 5,699 6,645 6,423 7,711Non-tax Revenue 969 1,163 2,186 1,254 1,247 1,646
Capital receipts (net) 2,999 4,531 4,024 4,478 5,764 5,552Of whichNet market borrowings 2,336 3984 3254 3430 4364 4790Disinvestment 6 246 228 400 155 300
Expenditure 8,840 10,245 11,973 12,577 13,187 14,909Of whichInterest payments 1,922 2131 2340 2680 2756 3198Subsidies outgo 1,297 1414 1734 1436 2163 1900
Gross fiscal deficit 3,370 4,185 3,736 4,128 5,220 5,136Fiscal deficit as % of GDP 6.0% 6.4% 4.9% 4.6% 5.9% 5.1%
June 2012 7
Mar-12 Quarter Results Review: Aggregate PAT up 19% v/s est 7%Aggregate performance above estimates: Best quarter after since Mar-10
Aggregate performance was above estimates after several quarters: Sales grew 18% YoY (v/s est of 19%), EBIDTA grew 12% (v/s est 9%) and PAT 19% (v/s est 7%).
Aggregate EBITDA margin (ex RMs & Financials) is down 160bp YoY (v/s est 220bp); Sectors which saw a major drop in EBITDA margins: Oil & Gas (320bp), Metals (350bp), Utilities (500bp).
71 companies in our Universe reported PAT higher than estimate, 29 in-line and 38 below estimate. On the EBITDA front, 48 companies reported above estimate, 44 in-line, and 46 below estimate.
Sector performance: Banks, Auto, Capital Goods and Technology lead PAT growth
Top contributors to Universe PAT growth were Financials (+50% YoY driven by SBI, private banks), Autos (+47% led by Tata Motors), Capital Goods (+36% led by BHEL).
Metals (-18%), Telecom (-14%), Infrastructure (-16%), Media (-29%) and Real Estate (-14%) were negative contributors.
Six sectors have reported their highest ever quarterly earnings in 4QFY12: Financials, Technology, Autos, Capital Goods,Utilities and Healthcare.
Sensex performance: PAT up 29%, above estimates; ex-SBI, growth is 20%
Sensex aggregate PAT grew 29% YoY (est 17%). EBIDTA growth is 14% (est 12%). Ex SBI, PAT grew 20% (est 9%).
15 companies in Sensex reported PAT above estimates; 6 companies reported below estimates; 9 reported in-line.
June 2012 8
Mar-12 Quarter Results Review: Aggregate PAT up 19% v/s est 7%
Fastest growing companies are SBI (Very High), ONGC (+119%), Tata Motors (+79%), BHEL (+74%),Sun Pharma (+44%), Coal India (+44%), ICICI Bank (+31%), HDFC Bank (+30%).
Highest earnings upgrade for FY13: SBI (+13%), L&T (+5%), ICICI Bank (+3%), HDFC (+3%).
Highest earnings downgrade for FY13: Maruti (-20%), Tata Steel (-15%), Tata Motors (-12%), Tata Power (-12%),JSPL (-8%), Bharti (-7%), Sterlite (-7%).
Few other highlights:
Global commodities (Metals, Oil & Gas) earnings declined by 3% in 4QFY12. Excluding them, the MOSL Universe PAT grew 29%, indicating the strength and quality of growth.
No. of companies whose PAT exceeded estimates was highest in last 10 quarters (51% of 138 companies).
In most sectors, the leader’s performance was much better than the rest, indicating its resilience in a down cycle (see table alongside).
4QFY12 has seen a strong performance by few leading PSUs.The combined earnings of SBI / ONGC / Coal India / BPCL / BHEL grew 138%, accounting for 32% of Nifty earnings. Ex them, Nifty earnings grew only 6% (v/s reported growth of 29%).
The 5 global commodity companies (4 metals, Reliance) in Nifty declined by 25%. Ex them, Nifty earnings grew 42%.
FY12 Sensex EPS growth is 11% to INR1,134 (upgrade of 3%). Worsening economic parameters, slowing GDP growth and sustained high interest rates are keeping FY13 Sensex EPS growth expectations low at 9% to INR1,232 (P/E of 13x).
June 2012 9
MOSL Universe: Mar-12 Quarter Performance (INR b)
June 2012 10
MOSL Universe: Mar-12 Quarter Performance4QFY12 SECTOR PAT GROWTH (YOY, %): BANKS, AUTO, CAPITAL GOODS, TECHNOLOGY LEAD THE PACK
SECTOR PAT VARIANCE FROM ESTIMATES (%): INFRASTRUCTURE, REAL ESTATE, METALS DISAPPOINTS
PAT growth was led by PSU Banks (+88% YoY, above
estimates, driven by SBI, Autos (+47%).
Metals, Infrastructure, Real Estate, Telecom were the key sectors that underperformed
over our estimates.
June 2012 11
Sectoral quarterly PAT trend
MOSL Universe Mar-12 PAT at INR804bn is at its all time high. Oil & Gas and Financials contribute 42% to the totalearnings (v/s 38% YoY). Metals has seen a drop in contribution from 16% to 11%.
Note: Comparable Universe, excludes Coal India, NHPC, JSW Energy, Adani Power, Oberoi Realty. Highest ever quarterly PAT.
June 2012 12
4QFY12 PAT at all-time high; Mkt Cap below Dec-07 levels
Note: Comparable Universe, excludes Coal India, NHPC, JSW Energy, Adani Power, Oberoi Realty.
June 2012 13
Sensex Performance: Actual v/s EstimatesTREND IN SENSEX SALES GROWTH (%): ACTUAL V/S ESTIMATES
TREND IN SENSEX EBITDA GROWTH (%): ACTUAL V/S ESTIMATES
28 25 2622
1711
16 19
29 29
11
-3-12
-3
19
31 30
19 17
26 2520 21 21
33 30 32
22
37 36 3844
33 31
6
-7 -12 -7
20
3428
2218
23 26 23 2519
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY07 FY08 FY09 FY10 FY11 FY12
Estimates Actual YoY
2231
2526
1218
1423 21 21
1
-8 -9-4
24
3925 26
19 2317
10 10 1225
3137
2227 29 20 23
2620
-5-12 -11
-4
31
49
26 2721
1016 13
614
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY07 FY08 FY09 FY10 FY11 FY12
Estimates Actual YoY
June 2012 14
TREND IN SENSEX PAT GROWTH (%): ACTUAL V/S ESTIMATES
Sensex Performance: Actual v/s Estimates
4QFY12 PAT GROWTH (YOY, %): SBI, ONGC, TATA MOTORS, BHEL AMONG KEY LEADERS
22 2328
33
18 16 1421
15 17
-6-15 -17 -17
17
33 26 2623 19
13 9 917
31 3043
33 30 2617 19
25 22
-8-16
-24 -18
21
46
24 24 22
110
155
29
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
FY07 FY08 FY09 FY10 FY11 FY12
Estimates Actual YoY
Very high
11979 74
44 44 31 30 29 29 27 27 26 22 22 20 17 17 16 12 8 8 1
-11 -19 -21 -28 -36 -39 -44 -63
SBI
ON
GC
Tata
Mot
ors
BHEL
Sun
Phar
ma
Coal
Indi
a
ICIC
I Ban
k
HD
FC B
ank
Sens
ex
HU
L
Info
sys
M&
M ITC
L&T
TCS
Her
o M
oto
JSPL
Cipl
a
HD
FC
Baja
j Aut
o
Wip
ro
Hin
dalc
o
Mar
uti
NTP
C
Ster
lite
Relia
nce
Inds
.
Bhar
ti
Tata
Pow
er
DLF
GA
IL
Tata
Ste
el
June 2012 15
Sensex Performance for 4QFY12
June 2012 16
Comparison of Earnings Based on Growth Rates
For 4QFY12, 25% of the companies in MOSL Universe reported earnings growth of over 30%. In total, 47% of MOSL
Universe saw growth of over 15%, highest in last 4 quarters.
39% of MOSL universe companies reported negative earnings growth, almost highest in the last decade.
Distribution of PAT Growth: highest no. of companies with PAT de-growth (ex crisis quarters)
June 2012 17
Mar-12 Quarter Results: The Best & The Worst (>$3B Mkt cap)
June 2012 18
Mar-12 Quarter Results: The Best & The Worst (<$3B Mkt cap)
June 2012 19
Highest Earnings Upgrade / Downgrade (>$3B Mkt cap)
June 2012 20
Highest Earnings Upgrade / Downgrade (<$3B Mkt cap)
June 2012 21
Sensex Companies’ EPS Upgrade / Downgrade
June 2012 22
4QFY12 – Top 5 Performing Companies
1. SBI Buy
Strong asset quality performance led by negative net slippages (INR3.4b); Fee income improves , NIM at 3.9%
Guided for loan growth of 16-18% for and NIMs of 3.75% for FY13
Comfort on earnings growth (25% CAGR over FY12-14); stable asset quality and healthy margins will drive RoE to 17%+ over FY13/14.
Top pick in the sector.
2. L&T Buy
Beat estimates given higher other income, lower interest & lower tax rates. Operating perf was marginally below estimates – revenue up 21%, EBITDA up 9%, Adj PAT up 22%
Strong FY13 Guidance – order intake / revenues + 15-20%, margins +/-50bp.
We upgraded FY13 estimates by 5%; downgrade FY14 by 4%
Top pick in the sector.
3. Dr Reddy’s Buy
Core EBITDA up 60% with EBITDAmargins improving by 340bp to 21%
Adj PAT up 14% despite one-timeimpairment charge of INR1b
Guides for 30% topline growth forFY13 led by strong growth in US &PSAI businesses and recovery inIndia formulations
Valuations at 18.6x FY13E and 16.6xFY14E EPS are attractive given thegrowth traction. Upgrade to Buy.
4. M&M Buy
Realizations surprises positively, with growth of 16% YoY (6% QoQ)
EBITDA margins (incl MVML, ex MADPL) flat 13.2% QoQ. PBIT Margins: Auto +60bp QoQ & Tractors +10bp QoQ
MADPL merger resulted in lower tax & ~19% growth in adj PAT to INR8b
Lowers FY13 tractor volume guidance to 5-6% (from 8-10%); maintains UV growth at 12-14%
5. Ambuja Cement Buy
Realizations in-line at INR4,260/ton (+4.7% QoQ & 8.6% YoY)
Lower than estimated energy cost and lower other expenses boosted EBITDA/ton to INR1,204/ton
Adj PAT improved 24% to INR5.07b. EPS upgrade: % for CY12 & 2% for
CY13 EPS Guides for ~8% industry volume
growth for CY12 Upgrade rating to Buy
Stock Performance in CY12
SBI +27%
L&T +18%
Dr Reddy’s +7%
M&M -5%
Ambuja Cement -3%
June 2012 23
4QFY12 – Bottom 5 Performing Companies
1. Tata Steel Sell
TSE (Europe) disappointed with decline in realization eroding gains from lower raw material prices.
Despite strong Indian EBITDA driven by prices, Consol. PAT was mere INR4.3b and was boosted by surprise non-recurring INR2b PAT from an Asian associate.
Stock downgraded to SELL. Demand slow down will de-rate the stock.
Stock Performance in CY12
Tata Steel +20%
Tata Motors +31%
GAIL -16%
ACC 0%
BoB +4%
2. Tata Motors Buy
~530bp QoQ decline in JLR margins (IGAAP) led by ~240bp; S/A margins positively surprises with ~280bp QoQ improvement.
Deferred tax assets boosted consol PAT to INR4.4b
Maintains FY13 JLR volume guidance at 370-380,000 units & EBITDA margins at ~15% (IFRS)
EPS cut: 10% FY13 & 4% FY14
3. GAIL Neutral
PAT down 38% YoY and 56% QoQ to INR4.8b.
Reported numbers marred by a) INR2.5b provisioning for PNGRB tariff cut orders and b) provisioning for doubtful debtors in gas trading business.
FY13/14 estimates cut by 4%. Lower transmission volumes and
higher subsidy are major headwinds in medium term.
4. ACC Neutral
Realizations improved just ~INR50/ton QoQ
Cost savings on fixed cost restricted impact on EBITDA, with EBITDA/ton of INR917 (+INR260/ton QoQ)
Adj PAT grew by 10% YoY (+99% QoQ) to INR3.86b
EPS cut: 9.5% CY12 & 8.7% CY13 Merger of loss making RMC
business to further impact S/A performance
5. BoB Neutral
Operating profits 14% below est. Higher slippages (INR13b vs. 9.5b in 3QFY12) and fresh restructuring of INR53b (1.8% of loans) disappoints.
While valuation has corrected, it should be seen in the context of expected fall in return ratios (RoAand RoE of ~17.5% over FY13/14 v/s 1.2% and 21%+ in FY12).
Top management change in CY12.
June 2012 24
Markets reaction on quarter performance
June 2012 25
Earnings growth expectation quite low despite an upbeat in 4QFY12
TREND IN FY12E SENSEX EPS REVISION TREND IN FY13E SENSEX EPS REVISION
EARNINGS GROWTH CAGR EXPECTED AT 11% OVER NEXT 2 YEARS, SCOPE FOR UPGRADES
New Series of June 11 is inclusion of Coal India & Sun Pharma and of Dec 11 is inclusion of GAIL India in Sensex
81 129 181 250 266 291 278 280 216 236 272 348450 523
718833 820 834
1,0241,134
1,2321,406
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
E
FY14
E
FY93-96: 45% FY96-03: 1% CAGR
FY03-08: 25% CAGR
FY08-12E:8% CAGR
FY12-14E: 11%
June 2012 26
Sensex EPS Revision Contributors (Change over preview estimates)
Stocks contribution to revised FY13E Sensex EPS (INR)Stocks contribution to revised FY12E Sensex EPS (INR)
June 2012 27
Contributors to growth in Sensex EPS for FY12 and FY13Stocks contribution to growth in FY12E Sensex EPS (INR)
Stocks contribution to growth in FY13E Sensex EPS (INR)
June 2012 28
MOSL Universe’ EPS Upgrade / Downgrade
June 2012 29
MOSL Universe’ EPS Upgrade / Downgrade
June 2012 30
MOSL Universe’ EPS Upgrade / Downgrade
June 2012 31
Dividend Yield of MOSL universe stocks (over 2%)
June 2012 32
Sector Snapshots
June 2012 33
Positive/Negative surprises and Guidance highlights by sectorAUTO Positive / Negative surprises TATA Motors: JLR, after positively surprising for many quarters, surprised negatively with 530bp (IGAAP) sequential decline in EBITDA margin
to 14.8%. On the other hand, domestic business performance was above estimates. M&M (incl MVML, ex MADPL) positively surprised, with 4QFY12 EBITDA margin of 13.2% (flat QoQ v/s our expectation of 90bp contraction). Hero MotoCorp lowered dividend payout to INR45/share in FY12 v/s INR105 in FY11 and our estimate of INR60/share.
Guidance highlights M&M cut its FY13 tractor industry growth guidance to 5-6 (v/s 8-10% earlier). Tata Motors guided for Land Rover's EBITDA margin (IFRS) of ~15% in FY13, impacted by adverse product mix, higher staff and promotional
cost. We downgraded our EPS estimate by ~10% for FY13 to INR36.5 and 4% for FY14 to INR39.
CAPITAL GOODSPositive / Negative surprises L&T’s PAT was 30% higher than estimate, largely driven by increased other income, while operating performance was marginally below
estimates. Crompton Greaves reported another disappointing quarter in terms of profitability across segments (domestic margins in power and
industrial segments at lowest levels since FY06). Overseas business revenues in Euro terms were down 11-13% (adjusting for Emotronacquisition); and margins remained sluggish at 1.4%.
Guidance highlights L&T’s guidance surprised positively – order intake growth of 15-20%, revenue growth of 15-20% and EBITDA margin at +/- 50bp. Crompton has guided for 12-14% consolidated revenue growth and EBITDA margins at 8-9%.
Importantly the management outlined a strategy to improve consolidated EBITDA margin by 450bp over a 3-year period.
June 2012 34
Positive/Negative surprises and Guidance highlights by sectorCONSUMER
Positive / Negative surprises Asian Paints surprised positively with higher than est volume growth (18% v/s est 14%), and PAT growth (39% v/s est 24%). Pidilite surprised positively with higher than est PAT growth (42% v/s est 7%) due to high other income and low tax rate, growth in Consumer
and Bazaar segment remains healthy. UNSP disappointed with performance lower than estimated on both EBITDA and PAT fronts. PAT declined 87% due to high interest
cost, volume growth at 5.1% was lower than est 10%.
Guidance highlights Asian Paints maintained that demand for paints in decoratives segment remained robust, however the mgmt is cautious considering the
high inflationary scenario. HUL indicated that it will focus more on volume growth, distribution expansion and innovation as a strategy for future growth. Companies that witnessed slowdown due to low offtake from CSD expect the sales to be normal in the coming quarters. Consumer companies have not witnessed slowdown in consumer demand or any downtrading. However companies remain cautious due to
high inflationary environment. INR deprecation and input cost volatility remain concerns; prices of PFAD, LAB, HDPE, and edible oils and agri commodities remain firm.
FINANCIALS
Positive / Negative surprises SBIN surprised positively with all-time high quarterly profit led by healthy margins (though decline 16bp QoQ to 3.9%), improvement in fee
income and strong asset quality performance (negative net slippages of INR3.4b). ICICIBC highest ever margin of 3%, higher dividend income contribution and strong asset quality performance led to positive surprise and
strong RoA’s of 1.5%+ for FY12 BOI and UNBK performance on margins and asset quality was impressive leading to higher than estimate PAT. Further sharp improvement in
fee income for UNBK helped profitability. PNB though reported PAT was above expectation, it was led by strong gains in treasury income and decline in opex. Sharp decline in margins
(40bp QoQ), and steep sequential increase in slippages disappointed. INBK and OBC disappointed on margins and asset quality
June 2012 35
Positive/Negative surprises and Guidance highlights by sectorFINANCIALS (contd)
Guidance highlights ICICIBC: Domestic loan growth of 20%, NIM guidance revised upwards to 2.85-2.9% from 2.8% earlier, credit cost of ~75bp for FY13; cost to
income ratio to be maintained in the range of 40-42% and exit RoA and RoE target of 1.7% and 14% for FY13. SBIN: Margins to be maintained at ~3.75%, quarterly net slippages run-rate around INR20b for 1QFY13, CASA ratio to remain above 45%. BoB: RoA of 1.2%+ and RoE of 20%+ for FY13; NIM within 10bp of FY12 figure (global NIM of 2.97% in FY12); Slippage ratio of 1.25% v/s
1.44% in FY12; PCR of ~80% (stable YoY); 3-4% higher-than-industry business growth AXSB: Loan growth above industry average, NIM guidance of 3.25-3.5%, FY13 credit cost to be in historical range, restructuring likely to
increase in 1HFY13.
HEALTHCARE
Positive / Negative surprises Divi’s surprised positively with best ever quarterly EBITDA and PAT led by execution of new contracts and ramp-up in capacity utilization at
new SEZ Lupin's higher tax rate was a negative surprise. Cipla - Inadequate ramp-up at Indore SEZ facility continues to disappoint.
Guidance highlights - Strong guidance & aspirations Sun expects 18-20% topline growth for FY13 on a high base Divi’s has guided for 25% topline growth for FY13 on a high base DRL expects 30% topline growth for FY13 Lupin targets USD3b topline over next three years with implied CAGR of 24% Cadila targets USD3b topline by FY16 with implied CAGR of 27% Glenmark has guided for 22-25% topline growth for FY13 and INR9-9.25b EBITDA Cipla has given a muted guidance of 10% topline growth for FY13 EBITDA Margins - Most of the companies target to either sustain or improve EBITDA margins in FY13 Tax rate guidance for many companies is higher and most companies are now near to MAT rate
June 2012 36
Positive/Negative surprises and Guidance highlights by sectorMETALS
Positive / Negative surprises Nalco surprised positively with stronger volumes and significant reduction in cost of production of aluminium. Improved supply from
Mahanadi Coal field helped significantly in reducing cost of power generation and improving production. Hindalco surprised positively as premium on value added products like copper rod and aluminium extrusions were stronger. Sesa Goa surprised positively on realization likely due to average grade improved although volumes disappointed. Tata Steel Europe surprised negatively with drop in realization despite stronger spot prices.
Guidance highlights Hindustan Zinc: CapEx guidance for FY13 has been hugely increased to INR20b for investment in mining. Cost of mining will increase in
1HFY13 and volumes will be lower due to temporary rise in strip ratio. Sterlite Inds - Zinc International: Volumes are expected to decline 10-15% due to mine life depletion. Tata Steel: Indian furnaces will deliver 1m ton of extra volumes, while there will be similar loss of production in Europe due to shut down of
Port Talbot blast furnace. JSW Steel: Volumes are expected to increase 14% YoY to 8.5m tons, while CapEx is expected to be INR63b in FY13. SAIL: Lowered capex guidance from INR145b to INR120b for FY13.
OIL & GAS
Positive / Negative surprises OMCs were compensated 100% for under recoveries (except Petrol), helping them to report profits and avoid erosion of book value. Cairn India ramped up Rajasthan production to 175kbpd. It upgraded its in-place resources by 12% to 7.3bboe and announced the dividend
policy of 20% payout of the annual consolidated net profit. Reliance Industries’ KG-D6 gas production declined 12% QoQ to 35.9mmscmd, Petchem margins at 10.2% were the lowest in last 32
quarters and later on it downgraded its 1P gas reserves by 7%. Gail India did ample provisioning in 4QFY12: a) INR1.2b for GSPC order, b) INR1.3b for retrospective impact of lower tariff orders from
PNGRB and b) provision for doubtful debtors in gas trading business.
Guidance highlights Petronet LNG guided for more than 100% capacity utilization at Dahej terminal and start up of its new Kochi terminal by 4QCY12.
June 2012 37
Positive/Negative surprises and Guidance highlights by sectorREAL ESTATE
Positive / Negative surprises Prestige: PEPL beat the FY12 sales guidance of INR15b by wide margin to INR21b. Met leasing guidance of 3msf despite concerns of
commercial outlook. DLF: Best ever quarterly sales of INR27b in 4QFY12 since FY09.
Guidance highlights HDIL: Despite weak FY12, HDIL expects to witness substantial revival in cash flow to cut ~INR9b debt over FY13 from internal accruals. Anantraj: Anantraj has guided for ~40-50% debt reduction (existing debt of INR12b) over FY13. Godrej Properties and Indiabulls Real Estate: After subdued FY12, both the companies have guided for aggressive launch plan over
FY13, with Godrej planning to launch 15 projects (v/s 5 in FY12) and Indiabulls to launch 10 projects (v/s nothing major in FY12).
TECHNOLOGY
Positive / Negative surprises TCS surprised positively with volume growth of 3.3% QoQ, and with its commentary around environment suggesting recovery in
discretionary spending and bottoming out of growth in BFSI. Infosys’ significant miss on its guidance was a negative surprise, led by ramp-downs in some of its top BFSI accounts in the US. Guidance for
FY13 too, surprised negatively. Wipro’s outperformance to peers on margins in 4QFY12 came in earlier than we expected.
Guidance highlights Infosys guided for FY13 USD revenue growth of 8-10%, gross hiring addition of 35,000 employees and YoY operating margin decline in the
band of 50-100bp. 1QFY13 guidance of 0-1% QoQ growth in USD revenue and margin decline of 200bp. Wipro guided for -1% to +1% QoQ USD revenue growth in 1QFY13. TCS gave a gross hiring guidance of 50,000 employees in FY13.
June 2012 38
Positive/Negative surprises and Guidance highlights by sectorTELECOM
Positive / Negative surprises IDEA surprised positively with adjusted EBITDA margin increasing 420bp YoY and 130bp QoQ to 28.1%. BHARTI’s EBITDA was in-line but PAT was significantly below estimates due to higher finance costs and tax rate.
Guidance highlights Bharti’s capex guidance stands at USD3-3.2b (FY12 capex of USD2.8b). Bharti has guided for a change in capex mix with India & SA capex to
increase 60% YoY to USD2-2.2b; Africa capex to decline 30% to USD1-1.1b. Idea’s FY13 capex guidance stands at INR35b vs 42.5b incurred in FY12. RCom’s capex guidance on ’s FY13 capex INR15b in FY13 implies no YoY change in outlay.
UTILITIES
Positive / Negative surprises Coal India surprised positively with higher e-auction volumes (~12% of dispatch) and higher realization of FSA/washed coal. Powergrid surprised with higher than expected capitalization at INR78b for the quarter (highest ever in a quarter)
Guidance highlights Powergrid increased its FY13 capitalisation guidance to INR200b / annum. NTPC scaled down its capacity addition target for 12th plan to 12GW v/s 22GW earlier.
June 2012
AUTO: EBITDA Margins up QoQ, after 8 quarters of decline
Summary
Volumes diverge: 4QFY12 auto volumes witnessed divergent trends- strong growth in LCVs (27%), UVs (27%), cars (12%), moderation in2Ws (12%), M&HCVs (5.5%), but decline in 3Ws (-2.5%)
RM cost highest in last 5 years: 4QFY12 saw peak RM cost, up~60bp QoQ and 150bp YoY for MOSL Auto Universe (ex-JLR), on theback of higher commodity cost, adverse forex and product mix.Most auto OEMs have indicated they do not expect to benefit fromdecrease in global commodity prices due to depreciating INR.
EBITDA margin up QoQ after 8 quarters of decline: EBITDA marginfor MOSL Auto Universe (ex-JLR) improved 50bp QoQ (down 100bpYoY), after declining consistently for last 8 quarters. While 2Wcompanies reported flat margins QoQ, Maruti’s margins expanded210bp QoQ, led by better product mix and operating leverage. TataMotors showed divergent trend with domestic business reportinghighest margins in last 5 quarters while JLR disappointed with190bp QoQ drop in margins. Despite slowdown in tractors, M&M(incl MVML, ex MADL) margins were flat QoQ at 13.2%.
Recent INR weakness negative for MSIL, HMCL, neutral for BJAUT:The impact of depreciating INR over the last one month would startreflecting from 1QFY13. MSIL and HMCL, having payables inJPY, would be adversely impacted. On the other hand,net exporter like BJAUT will be have limited impact as it has hedged85% of its FY13 targeted exports at base rate of INR48.
Top picks: Prefer Bajaj Auto (well-diversified product and marketmix, well-placed to offset rising competition in domestic market),and TTMT (strong volume momentum in JLR, driven by Evoque).
39
TTMT: JLR disappoints, while standalone surprises positively
Hero MotoCorp: Lower dividend payout disappoints
June 2012
CAPITAL GOODS: Revenue moderating, order intake constrained
SummaryL&T and BHEL’s 4QFY12 results were above our expectations, while Siemens,Crompton and ABB disappointed. L&T performance beat was largely driven by increased other income, while
operating performance was marginally below estimates. Order intake forL&T declined 12% YoY in FY12, missing management’s guidance of 5% YoYgrowth given challenging macro environment
BHEL showed strong performance with a 74% YoY PAT growth driven bystrong EBITDA margin ahead of expectations. Order intake declined sharplyby 63% YoY during FY12 impacted by slowdown in Power sector.
Cummins results were broadly in line. Sales continue to show sluggish trendimpacted by slowing demand in domestic market (down 11.8% YoY).
Crompton Greaves had yet another disappointing quarter especially inoverseas business (we have cut FY13/14 earnings by 15%/6%). Howeverorder intake in the domestic business was robust driven by orders fromPowergrid.
Siemens results were well below estimates hit by slowing demand andmargin pressure due to rising input prices. Sales grew strongly by 20% YoY;however, Adjusted EBITDA margins dipped to 7.5% (down 620bp YoY)although margins have shown significant volatility in the past also driven byproject cost and revenue booking.
ABB’s performance was much below expectations impacted by forex losses;however, adjusted for the same PAT grew 35% YoY, in line with estimates.
Deteriorating business environment, and high interest rates continue toimpact capital goods demand. Order intake of our capital goods universedeclined 47% YoY in 4QFY12 and 30% in FY12. Outlook continues to bechallenging, especially for capex in segments like power generation,hydrocarbons and metals.
Order intake declining led by decline in power segment
Revenue growth moderating impacted by declining order book
40
1363
1471
1570
1751
1905
2055
2099
2196
2339
2558
2756
2883
3032
3073
3280
3295
3363
3259
3069
2.4
2.4
2.4 2.
6 2.7 2.8
2.7 2.7 2.9 3.
1
3.1
3.1
3.2
3.0
3.0
2.9
2.8
2.6
2.3
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
Order book (INR bn) BTB (x)
Revenues in line; profitability beats estimates led by L&T and BHEL
June 2012
CONSUMER: No signs of slowdown in demand yet; volume growth healthy
41
Summary
PAT above estimate: Consumer coverage universe reported 18.6%revenue growth (est 20%), 20.3% EBITDA growth (est 21.4%) andbetter than expected 21.8% Adjusted PAT growth (est 17%).
Volume growth trend has remained healthy across companies inthe sector; Asian Paints, HUL and GCPL’s domestic businesssurprised positively while ITC and UNSP posted lower thanestimated volume growth. However, we note that distributionexpansion is also playing a key role in sustaining volume growth.
Input cost pressure is visible as 2/3rd companies have seen grossmargin contraction. PFAD, edible oils, coffee, tea and milk prices areon a upward trend, also LAB, HDPE are firm. Margins would remainunder check in the coming quarters as well.
Ad spends trend has been mixed: Britannia, Dabur, GCPL steppedup ad spends to support new product launches. HUL, Marico andGSK Consumer maintained lower ad spends YoY, We expect adspends to increase for most of the companies in 1QFY13.
INR depreciation impacted GCPL, Asian Paints, HUL and Pidilitewhich import key inputs.
International business performance remains a drag for AsianPaints, Pidilite and Marico, while GCPL is doing well in Indonesiaand Africa.
Top picks: Asian Paints, ITC, Marico and Pidilite are our top picks inthe sector. We lowered our EPS estimates for Marico on account ofequity dilution, however maintain Buy due to its strong footing inhair oils and premium edible oils. Pidilite looks attractive asconsumer business traction sustains and input costs soften.
4QFY12 Performance Snapshot
Volume growth trend has been largely healthy
Company Sales YoY (%) EBIDTA YoY (%) PAT YoY (%)As ian Pa ints 25,387 29.5 3,754 31.8 2,595 39.5Bri tannia Inds 13,096 16.8 680 8.0 530 22.6Colgate 6,859 17.9 1,699 20.6 1,308 14.6Dabur* 13,636 23.0 2,153 4.7 1,705 16.0Godrej Cons 13,230 32.4 2,481 39.6 1,730 22.1GSK Cons 8,130 14.5 1,617 11.3 1,320 19.3HUL 57,659 16.1 8,334 29.8 6,636 29.0ITC 69,545 16.9 22,633 18.8 16,143 26.0Marico 9,177 22.9 1,100 38.8 714 -0.6Nestle India 20,475 13.1 4,572 18.7 2,886 9.9Pidi l i te 6,519 15.6 958 17.8 749 41.6United Spiri ts 18,627 17.0 1,760 -6.0 79 -86.7
Quarter Ending Dec-10 Mar-11 Jun-10 Sep-11 Dec-11 Mar-11As ian Pa ints 27.0 16.0 15.0 15.0 12.0 18.0Colgate (Toothpast 13.0 13.0 14.0 15.0 15.0 14.0Dabur 10.0 9.3 8.6 10.0 10.8 12.4Godrej Consumer
Soaps 3.0 9.0 9.0 19.0 19.0 17.0Hair Color 2.0 5.0 10.0 8.0 9.0 9.0
GSK Consumer 13.0 5.5 14.0 8.0 12.0 7.0Hindustan Uni lever 13.0 14.0 8.3 9.8 9.1 10.0ITC (cigarette) 2.0 -2.0 8.0 7.5 5.0 5.5Marico
Parachute 5.0 5.0 10.0 10.0 13.0 11.1Hair Oi l 31.0 21.0 32.0 26.0 20.0 17.5Saffola 13.0 14.0 15.0 11.0 15.0 3.3
United Spiri ts 14.0 12.0 15.4 8.0 0.7 5.1
June 2012
FINANCIALS: Net stress loans continue to rise; SBIN, ICICIBC +ve surprise Asset quality – a mixed bag; pvt banks fare well: Net slippages increased
significantly for PNB, BoB and INBK. Among PSBs, SBIN and ANDBsurprised positively with improvement in asset quality led by both fall ingross slippages and strong improvement in recoveries and up-gradation.UNBK and BOI also delivered strong performance on NPA movement.
Pace of restructuring continue to rise: Restructured loan increasedsharply in 4QFY12 for most PSBs. PNB, BoB and OBC’s restructured loanbook increasing sharply QoQ, but a large part of it was on account of SEBand AI. BoI restructured loan of INR38b (1.5% of loan book), howeverunlike peers it is yet to account for AI. ICICIBC restructured loan increaseof INR12b which was led by two large accounts.
Large cap NIM remains healthy; mid-caps impacted: NII growth waslargely in line with expectations. PSBs reported stable/declining NIMs [ex-BoI (+30bp QoQ)] partially due to higher interest income reversal onslippages and restructured loan. BoB, CBK and UNBK NIMs were stableQoQ whereas PNB disappointed with ~40bp decline. SBIN reported 16bpQoQ decline in NIM to 3.9% from an elevated level. ICICIBC surprisedpositively with 30bp+ sequential improvement.
Strong QoQ loan growth, a year-end phenomenon: Loan growth forpublic sector banks (PSBs) picked up QoQ to +7% and +9% ex-SBIN (17%and 18.3% YoY). PNB, BoB and UNBK reported strong 10%+ growth in4QFY12, whereas in private sector AXSB, FB, IIB and VYSB loan growth wasabove industry average. Strong growth of 14% QoQ (+19% YoY) for AXSBwas driven by growth in agri and SME segments. For HDFCB and ICICIBCretail loan growth remained strong at 7% and 9% QoQ; however, declinein corporate loan led to moderation.
Valuation & view: Challenging macro environment is moderating growthand raising net stressed loan in the system. While GNPA havepeaked, further restructuring will keep valuation under check. Howeverfall in interest rate and improvement in liquidity could ward off someconcerns. Top picks: SBIN, ICICIBC , HDFC, YES, IDFC, Union Bank.
4QFY12 PERFORMANCE SNAPSHOT
42
QoQ % YoY % QoQ % YoY % QoQ % YoY %SBIN 2 45 60 13 24 N.A.PNB -6 9 15 11 24 19CBK 6 5 -2 -17 -5 -8BoB 5 7 9 2 18 17BoI 21 8 13 13 33 93UNBK 5 9 25 22 N.A. 29OBC -6 5 28 29 -25 -21INBK -7 -3 44 6 -34 -21ANDB -7 6 1 -1 12 9Coverage PSU 2 20 36 10 21 88Coverage PSU (ex-SBI) 2 7 14 6 19 16ICICIBC 14 24 2 -3 10 31HDFCB 9 19 14 21 2 30AXSB 0 26 9 8 16 25Yes 5 29 21 21 7 34IIB 8 20 5 60 8 30VYSB -1 19 -1 8 7 40SIB 4 28 45 64 19 49FB -7 10 18 17 18 38Coverage Private 7 22 7 10 9 30Coverage Banks 3 21 22 10 17 63
NII Fees (ex forex) PAT
QoQ % YoY % QoQ % YoY % 4QFY12 3QFY12 4QFY11SBIN 3 15 -1 57 3.9 4.1 3.1PNB 12 21 35 99 3.5 3.9 3.9CBK 6 9 1 31 2.6 2.6 3.2BoB 10 26 15 42 3.0 3.0 3.1BoI 8 16 -8 22 2.9 2.6 2.9UNBK 16 18 5 50 3.3 3.3 3.4OBC 2 17 11 86 2.7 2.9 3.0INBK 4 20 55 150 3.2 3.6 3.9ANDB 7 17 -5 81 3.3 3.8 3.7Coverage PSU 7 17 11 58 N.A. N.A. N.A.ICICIBC 3 17 -3 -5 3.0 2.7 2.7HDFCB 1 22 -1 18 4.2 4.1 4.2AXSB 14 19 -6 13 3.6 3.8 3.4Yes 6 11 16 4 2.8 2.8 2.8IIB 8 34 4 31 3.3 3.3 3.5VYSB 9 22 5 2 3.3 3.5 3.3SIB 10 33 14 16 3.1 3.1 3.1FB 14 18 -5 13 3.6 3.9 4.0Coverage Private 6 20 -2 1 N.A. N.A. N.A.
NIMLoan GNPA
June 2012
Loan growth improves QoQ; however on a YoY basis remains moderate
Outstanding standard restructured loan book increases QoQ (%)Net slippages rise for most PSBs- but for SBIN, BoI and ANDB
Margin performance – a mixed bag( Chg. in bps, QoQ )
43
9.4
10.5
14.7
16.3
16.7
17.3
17.4
18.2
18.3
19.2
20.4
21.3
21.8
22.2
25.7
32.9
34.0
CBK
Yes
SBIN BoI
OB
C
ICIC
IBC
AN
DB FB
UN
BK
AXS
B
INB
K
PNB
VYS
B
HD
FCB
BoB SI
B IIB
Loan growth YoY (FY12, %)
-47 -4
2 -38
-38
-22 -20
-20 -1
6
-5 -4 -3
0
4 5
10
31 31
AN
DB
INB
K
PNB FB
OB
C
AXS
B
VYS
B
SBIN
UN
BK
CBK
BoB Ye
s
IIB SIB
HD
FCB
ICIC
IBC
BoI
1QFY12 2QFY12 3QFY12 4QFY12 1QFY12 2QFY12 3QFY12 4QFY12
SBIN 30.5 65.0 61.9 -3.4 1.9 4.0 3.6 -0.2PNB 5.3 2.7 13.2 23.4 1.1 0.6 2.5 4.2CBK 8.0 7.3 3.2 5.1 1.9 1.7 0.7 1.1BoB 3.9 4.0 6.5 11.0 0.9 0.9 1.3 2.1BoI 13.3 23.8 1.2 -5.2 3.1 5.4 0.3 -1.1UNBK 4.6 15.9 3.6 4.1 1.5 5.1 1.1 1.2OBC 2.6 12.6 1.8 8.9 1.2 5.9 0.8 3.9INBK 0.8 2.8 2.3 10.0 0.5 1.7 1.3 5.4ANDB 1.8 9.7 -1.0 -0.8 1.3 6.8 -0.7 -0.5Overall 70.7 143.8 92.8 53.1 1.6 3.2 2.0 1.0Overall (Ex-SBIN) 40.3 78.8 30.9 56.5 1.5 2.8 1.1 1.7
Net Slippages (INR b) Net Slippage Ratio (INR b)
3.5 4.2 4.2 3.9 4.4 4.7 4.95.8
4.5
7.70.10.6 1.0 1.5
1.52.0
3.02.5
4.0
2.2
SBIN
CBK
UN
BK
ALB
K
BOB
BOI
PNB
AN
DB
OBC
INBK
Other SRL AI and SEB
FINANCIALS: Net stress loans continue to rise; SBIN, ICICIBC - +ve surprise
June 2012
HEALTHCARE: Strong growth traction
Summary
Above estimates: Overall coverage universe EBITDA and Adj PATwere above estimates led mainly by the large generic companieswith US being the key growth driver. Growth recovery was alsovisible in the India formulations businesses for most companies.Overall growth was partly led by favourable currency.Sun, DRL, Cipla, Cadila & Divi’s reported better operationalperformance while GSK, Ranbaxy & Torrent disappointed.Lupin, Glenmark & IPCA reported in-line performance.
EBITDA outperformers: Sun, Divi’s, Dr Reddy’s, Cadila, Cipla,Biocon, Strides
In-line EBITDA: Glenmark, Lupin, IPCA
EBITDA disappointment: Ranbaxy, GSK & Torrent
Strong guidance & aspirations: Many Indian companies havegiven strong growth guidance – Sun expects 18-20% toplinegrowth for FY13 on a high base; DRL expects 30% topline growthfor FY13; Lupin targets USD3b topline over next three years withimplied growth of 24%, CDH targets USD3b topline by FY16 withimplied growth of 27%, GNP has guided for 22-25% topline growthfor FY13. Divi’s expects 25% topline growth for FY13 on high base.Most of the companies target to either sustain or improve EBITDAmargins in FY13.
Key ratings change: We have upgraded ratings for Dr Reddy’s,Cadila and Glenmark to BUY
Top picks: Expect our basket of 7 stocks (DRL, Divi’s, Cadila, Lupin,Glenmark, IPCA, Torrent) to record 25% EPS CAGR for FY12-14.
4QFY12: US led growth; India growth recovers
44
June 2012
Summary
Execution remained challenging given (1) trade-off betweengrowth and receivables management, and (2) uncertain policyenvironment like land acquisition, MoEF issues, etc, delayingproject clearances. This, in turn, hit revenue growth, up 5% YoYfor our universe. Though few companies like NCC and Simplexdid manage revenue growth of 21% and 31%, sustaining thesame looks difficult. EBITDA margins for most constructioncompanies declined 100-150bp, given (a) execution delays and(b) increasing commodity prices.
Muted order intake growth: Order intake for 4QFY12 remainedmuted except few exceptions like IVRCL and Simplex. IVRCL’stotal intake in 4QFY12 stood at INR41b (v/s INR15b in 4QFY11)and Simplex INR26b (up 21% YoY). In contrast, HCC’s orderintake at INR4b was down 53% YoY, and NCC at INR1.7b down70% YoY. Expect order inflow to improve in sectors like urbaninfra, railways and roads.
Interest rates continue to impact profitability: Interest cost forinfrastructure construction companies has shot up significantlyin the last few quarters. In 4QFY12, interest cost grew 67% YoYfor HCC (INR1.5b), 71% for NCC (INR984m), 35% for Gammon(INR781m) and 84% for Simplex (INR680m). This, in turn, led tosharp PAT decline.
Working capital situation tight; debt on a rising trend: Workingcapital situation has remained grim for companies, up 15-20%on average. This, in turn, has led to the increase in debt levelse.g. HCC debt stood at ~INR42b (v/s INR35b in FY11), IVRCL atINR25b (v/s INR21b), and Simplex at INR20b (v/s INR16.6b).
Quarterly Financials (INR m)
Order intake trend (INR m)
INFRASTRUCTURE: Execution subdued, focus on wkg cap mgmt; interest still hurts
45
June 2012
832
1,38
7
646
653
1,26
6
746
633
813
929
902
1,19
9
799
908
1,17
9
791
Jagran Prakashan Deccan Chronicle HT Media
2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
Media sector earnings decline led by challenging adenvironment: Aggregate PAT for our media universe declined~29% YoY. PAT for broadcasters was broadly in-line, but printcompanies disappointed at the EBITDA level due to lower adgrowth. Jagran’s PAT was above estimate largely due to higherother income/forex gain.
Slowdown impact on ad revenue higher for broadcasting: Adgrowth remained muted due to weak macro. While Jagranposted double-digit ad growth, HT grew 3% with Englishsegment declining 4% YoY. Sun/Zee reported second/thirdconsecutive quarter of decline in ad revenue (5/13% YoYdecline) due to lower spends by sectors with high broadcastingexposure (e.g. Consumer, Telecom).
Healthy subscription/circulation growth for Zee/Jagran; mutedfor HT/Sun: Zee reported 29% growth in subscription revenue.HT/Jagran saw 3/12% YoY increase in circulation revenue. Sun TVsaw 10% YoY decline due to lower analog revenue; Sun has notyet reached an agreement with government-run Arasu cable.
Margin decline led by muted revenue growth, cost inflation:Zee’s EBITDA margin declined ~10ppt overall and 7.5ppt for non-sports business. EBITDA margin for HT/Jagran declined900/400bp YoY on newsprint cost inflation and lower ad growth.
Outlook mixed; we remain Neutral: Overall ad environmentremains weak; print companies are relatively better placed interns of ad outlook but face cost pressures due to adverse INRmovement. Investor interest in the broadcasting sector is likelyto remain high due to implementation of mandatory digitization.
Top pick: Sun TV
EBITDA trend for print: Up QoQ but down YoY (INR m)
YoY Ad revenue growth (%)
4QFY12: Actual v/s estimates
MEDIA: YoY earnings decline led by weak ad environment
Actual Est Var (%) Actual Est Var (%)Sun TV 4,270 4,195 2 1,590 1,619 -2ZEEL 8,691 7,469 16 1,422 1,369 4Jagran Prakashan 3,104 3,205 -3 428 376 14HT Media 4,941 5,104 -3 220 400 -45
PAT (INR m)Net Sales (INR m)
11
3
-5
-13Jagran HT Media SunTV ZEEL
714
876
820
903
791
713
851
777
659
481
Jagran Prakashan HT Media
4QFY11 1QFY12 2QFY12 3QFY12 4QFY12
46
June 2012
METALS: Higher prices, lower costs help limit lossesSummary SAIL, JSW Steel and Tata Steel India reported QoQ improvement
in margins due to recovery of demand, price and reduction in cost.Although Tata Steel India reported improvement in realization,SAIL and JSW Steel reported flattish average realization. The pricesof long products were stronger due to supply side constrains atsecondary steel producers. Raw materials cost declined andhelped the margins. SAIL is not providing for pending wagerevision for non-executives and pensions. The operating costs arerising across the industry.
Tata Steel India commissioned new blast furnace, but has takenout 2 older furnaces for maintenance as its coke-oven batteriesare not ready and demand remains weak. JSW Steel reporteddeterioration in quality of iron ore that was secured through E-auction. Although Supreme Court has given nod for restart of Acategory mines after proper Reclamation and Rehabilitation oftransgressed area, JSW Steel’s production is at risk if mines takelonger than couple of months for restarting the operations.
JSPL reported strong results due to liquidation of steel inventoryand strong steel, pellets and power production. Strong prices ofpellets and benefit of bilateral power contract for merchant sale ofpower helped margins.
Tata Steel Europe is facing operational challenges at Port Talbotblast furnaces. Novelis’ volumes improved but not margin.
Nalco, VAL and Hindalco reported reduction in cost of productionof aluminum due to improved coal supply from Coal India linkages.
Major capex: Hindalco and Tata Steel have incurred USD2.5bCapEx each across its group companies in FY12.
47
EBITDA/Ton for Steel Majors improved QoQ on better realization
CoP (USD/t) declined for the most Aluminium producers
Nalco and Sesa Goa surprised positively with above estimates margin
June 2012 48
OIL & GAS: RIL E&P disappoints; OMC’s report profits; Gas headwinds continueSummary
OMCs report profit as shared nil subsidy in FY12: In FY12, OMCsreceived 100% compensation towards their under-recoveries ofcontrolled products (Diesel, kerosene and LPG) as Governmentshared 60.3% and upstream shared 39.7%. However, OMC’s had tobear petrol loss of ~INR50b in FY12.
Upstream - KG-D6 decline continues, Cairn ramps up Rajasthanproduction: KG-D6 volume averaged 35.9mmscmd in 4QFY12 (v/s41 in 3QFY12), concerns remain on timelines of further ramp up.Cairn ramped up Rajasthan production to 175kbpd (4QFY12average at 138kbpd) and upgraded its in-place resources by 12% to7.3bboe.
Midstream: Declining KG-D6 production impacted GAIL and GSPLtransmission volumes. In absence of incremental gasavailability, GAIL and GSPL will continue to remain under pressurein the medium term. However, domestic gas scarcity augurs wellfor LNG importer, Petronet LNG.
Refining - Dismal GRM’s offset by forex gains: All the PSU refinersGRM’s were at discount to benchmark Reuters Singapore GRM ledby difference in product slates. However, INR depreciation of 4%from start-to-end in 4Q resulted in forex gains. RIL reportedmarginal premium of USD0.1/bbl to benchmark Reuters SingaporeGRM.
Petchem margins decline: We believe polymer margins could havebottomed out as incremental ethylene capacity additions are lowerthan likely demand growth. Lower cotton prices are keepingpolyester margins are under pressure.
Valuation and view: While near term triggers are lacking, manystocks like ONGC, OINL and Petronet LNG are available atattractive valuations.
Singapore GRM down QoQ to USD7.5/bbl; refiners discount continue
4QFY12: Actual v/s Estimate
June 2012 49
OIL & GAS: KG-D6 prodn. declines; Cairn prodn. at 175kbpd; OMC’s share nil subsidy
We model upstream share at 38.7% in FY13/14
ONGC: Increase in D,D&A led by higher dry well write-offs (INRb)
RIL: KG-D6 volume decline impacts GAIL and GSPL (mmscmd)
OMC’s debt levels rising at rapid pace (INR b)OMCs report profit; shared nil subsidy in FY12 (INR b)
RIL: GRM at USD7.6/bbl; USD0.1/bbl premium to Singapore (USD/bbl)
June 2012
Summary Momentum in new launches: With approval logjam easing, a
lot of spillover launches hit the ground in 4QFY12. WhileBangalore players continued steady monetization, NCRdevelopers such as DLF, Anantraj and other pan India playerslike Godrej saw strong revival in launches. Others, includingMumbai players, also have guided for robust launches in FY13.
Ex Mumbai sales uptick indicates strong underlying demand:While Mumbai-based developers are yet to see revival, otherswitnessed strong sales recovery driven by recent launches.During 4QFY12, DLF posted best ever quarterly sales since FY09(INR27b). Stronger sales led to improvement in operating cashflow for most developers, although cost pressure and interestoutflow dented net cash flow. Ex-Bangalore, leasing volumedeteriorated (DLF witnessed major cancellations during FY12).
No meaningful success in de-leveraging: No meaningful de-leveraging success was visible among levered developers likeDLF (debt unchanged), HDIL (debt 6% down YoY v/s guidance of15-20%). Only GPL (among coverage companies) witnesseddecline in net debt level backed by INR4.7b QIP. However, costof debt seems to be stabilizing.
Management outlook: Optimistic over better business outlookin FY13, amidst macro challenges and approval hurdles delayingmonetization plans. Priority remains streamlining cashflow, execution, customer collections and managing liquidity.On the back of macro concerns, outlook on commercial leasingcontinues to remain uncertain.
Top picks: Oberoi, Phoenix, Prestige and DLF.
REAL ESTATE: New launches led sales uptick; de-leveraging yet to see big success
50
4Q witnessed momentum in launches for NCR and PAN India players
Visible trend of sales uptick over 2H (INR b) Leverage level yet to moderate (Eg. DLF)
June 2012
RETAIL: weak SSS growth, higher interest costs hurt earningsSummary
PAT above estimates – Our coverage universe sales were below estimates with18.3% revenue growth (est 21.2%), 49% EBITDA growth (est 58.2%) and 14.8%Adjusted PAT decline (est 8.4% growth).
SSS growth under pressure across segments due to weak consumer demand andhigher prices of apparel (Pantaloon, Shoppers Stop) and gold (Titan). QSR space isstill healthy with Jubilant Foodworks posting 26% SSS growth.
Margin trend is mixed: Price increases and operating leverage aided marginexpansion in Jubilant; cost and store rationalization assisted Pantaloon’s margins,declining SSS growth and faster store expansions impacted margins for Shoppersand higher realizations improved margins for Titan.
Rising interest burden: Pantaloon and Shoppers witnessed profit erosion onhigher interest costs due to rising debt burden. Pantaloon will require significantfund infusion in the near term; Shoppers with 0.47x debt equity is well placed.
Pantaloon Retail to divest 25% stake in Pantaloon format to Aditya Birla Nuvo:Pantaloon Retail has entered into an agreement to divest 25% stake in Pantaloonformat stores to Aditya Birla Nuvo (ABNL). It will issue debentures to ABNL worthINR8b, convertible in the equity shares of the resulting entity.
Jubilant Foodworks launches Dunkin Donuts. Jubilant Foodworks launchedDunkin Donuts outlet, with its first full-fledged outlet in Connaught Place, NewDelhi branded “Dunkin Donuts & More”. The launch enables Jubilant to enterhigh growth segment of Coffee retailing, on a differentiated platform.
Neutral on the sector: We remain positive on the business prospects of JubilantFoodworks; however, stretched valuations are a concern. We maintain Neutral onPantaloon as we await more clarity on the stake sale. Weak consumer demandand margins pressure remains a concern for Shoppers Stop while jewelry volumegrowth is a concern for Titan.
4QFY12 performance snapshot
Margin trend mixed across players
Company Sales YoY (%) EBIDTA YoY (%) PAT YoY (%)Jubilant Foodw orks 2,832 46.2 509 54.0 293 51.8Pantaloon Retail 29,588 8.5 2,099 29.4 120 -76.2Shoppers Stop 5,406 18.5 363 -2.8 137 -31.0Titan Industries 22,814 28.3 2,071 95.7 1,443 72.0
Gross Margin EBITDA MarginJubilant Foodw orks 14 91Pantaloon Retail 90 114Shoppers Stop -10 -300Titan Industries -330 312
Company Expansion/Contraction in (bp)
Declining trend in SSS growth over 3 qtrs
Store expansion trend across playersCompany Q1FY12 Q2FY12 Q3FY12 Q4FY12
Jubilant Foodw orks 392 411 439 465
Pantaloon Retail
Big Bazaar 149 0 149 157
Pantaloons 59 0 59 64
Shoppers Stop (dept) 41 43 49 51
Titan Industries
World of Titan 311 317 326 332
Tanishq 121 125 129 129
Company Q1FY12 Q2FY12 Q3FY12 Q4FY12
Jubilant Foodw orks 36.7 26.7 30.1 26.2
Pantaloon Retail
value 7.5 3.6 3.2 2.7
lifestyle 11.4 6.5 5.7 3.5
Shoppers Stop (dept) 7.0 11.0 -1.3 10.0
Titan Industries (jew elry vol) 40.0 3.0 -5.0 -7.0
51
June 2012
TECHNOLOGY: BFSI concerns; HCL, TCS outperform
Summary
BFSI headwinds drive 4Q weakness; TCS outperformed onrevenue growth: 1.7% QoQ decline in BFSI revenue across thetop-tier Indian IT was a key negative, flagging industry-wideconcerns. TCS’ 2.4% QoQ revenue growth was aboveestimate, while HCL Tech (aided by cross currency) and Wipro(aided by pricing) were inline and Infosys disappointed.
Margin outperformance at HCL, Wipro; decline at TCS andInfosys inline with expectations: Flattish sequential marginperformance at Wipro and HCL Tech was a positivesurprise, amid headwinds from currency and low growth.Pricing uptick at Wipro and utilization increase at HCL facilitatedabove-estimate margins. Declines of 150bp QoQ at TCS and110bp QoQ at Infosys were inline with our expectation of lowgrowth environment impacting utilization and dragging margins.
Weak guidance across the board: Cognizant’s cut in revenuegrowth guidance to 20% (v/s 23% earlier) and 1QFY13 guidancefrom Infosys and Wipro (flattish revenue) were disappointing.While TCS’ commentary around the environment was mostbullish, its guidance of 50,000 gross additions in FY13 failed tosuggest expectations of very high growth.
Infosys valuation near bottom, little room at TCS to surprisefurther, better risk-reward at Wipro: Expect TCS and HCL Techto outperform growth in FY13. But at 19.3x FY13, we see littleroom for TCS to outperform expectations. Infosys’ valuationsare near bottom witnessed in the previous financial meltdown.We see favorable risk reward at Wipro and HCL Tech.
Volume growth continues to trend downwards
52
4QFY12 Performance Snapshot
USD revenue - b EBIT margin PAT - INR b
Act. Est. % beat Act. Est. bp beat Act. Est. % beat
TCS 2,648 2,615 1.3% 27.7% 27.2% 50 29.3 28.2 4.1%
Infosys 1,771 1,808 -2.0% 29.9% 30.1% -20 23.2 22.8 1.7%
Wipro 1,536 1,536 0.0% 20.7% 19.5% 120 14.8 14.0 5.7%
HCL Tech 1,048 1,056 -0.8% 15.2% 14.0% 120 5.8 5.1 14.9%
4.9%
8.3%
9.1%
7.5%
3.0%
4.6% 5.2%
2.8%
-0.9%-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Mar
10
Jun
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
BFSI - top tier sequential growth
-2.0
3.0
8.0
13.0
Jun
10
Sep
10
Dec
10
Mar
11
Jun
11
Sep
11
Dec
11
Mar
12
TCS Infosys Wipro HCL Tech
June 2012
Summary
Strong 4QFY12 operating performance; PAT remains volatile: GSMincumbents reported robust 4QFY12 with QoQ EBITDA growth of 5-12%. Bharti reported strong but in-line operating performance withEBITDA growth of ~5% QoQ supported by rebound in mobile trafficgrowth and lower marketing spends. Idea reported the bestoperating as well as PAT level performance adjusting for one-offprovision related to regulatory levies. Vodafone-Indiarevenue/EBITDA growth of 20/30% YoY was broadly in line. RComreported an in-line flat YoY/QoQ EBITDA performance. PATperformance remained volatile across the companies due to impactof forex fluctuations, year-end tax adjustments and low net margin.
4QFY12 blended RPM down 2% QoQ; below estimates: Blended4QFY12 wireless RPM decline of 2% QoQ (vs QoQ increase of 1.5% in3QFY12 and 2% in 2QFY12 driven by tariff hikes) for telecom majorswas below our expectation of flat RPM. Pricing pressure was led byrelatively higher aggression from market leader Bharti (to preservetraffic market share) and new entrants (to prevent subscribermigration post cancellation of licences by the Supreme Court inFebruary 2012).
QoQ traffic growth 6% QoQ vs 3% QoQ growth in 3QFY12 due toelasticity: Traffic growth for GSM majors improved to 6% QoQ withIdea clocking an industry leading growth of 9% QoQ followed byVodafone (7%) and Bharti (5%). RCom continued to underperformwith a lower traffic growth of 3% QoQ.
2HFY12 wireless margin flat for Bharti; improvement forIdea/Vodafone: Wireless margin remained flat HoH for Bharti butimproved 150-200bp for Idea/Vodafone driven by better volumegrowth performance. RCom’s wireless margin declined by 30bpduring 2HFY12 on lower revenue growth.
QoQ wireless traffic and blended RPM growth (%)
TELECOM: Strong operating performance; regulatory uncertainty persistsQUARTERLY FINANCIALS (CONSOLIDATED)
4QFY11 3QFY12 4QFY12 YoY (%) QoQ (%)REVENUE (INR B)Bharti (ex Africa) 121.2 131.6 134.2 11 2.0Bharti (consol idated) 162.7 184.8 187.3 15 1.4Idea 42.0 50.3 53.7 28 6.7RCoM 53.3 50.5 53.1 0 5.1Vodafone - India (impl ied) 66.4 76.0 80.1 21 5.5EBITDA (INR B)Bharti (ex Africa) 44.3 45.2 47.4 7 4.7Bharti (consol idated) 54.5 59.6 62.3 14 4.6Idea 10.0 13.4 15.1 50 12.1RCoM 15.9 16.1 16.3 3 1.3Vodafone - India (est) 16.7 20.8 21.9 31 5.5Adj. PAT (INR B)Bharti (ex Africa) 18.2 12.7 13.5 -26 6.1Bharti (consol idated) 14.0 10.1 10.1 -28 -0.5Idea 2.0 2.0 3.4 69 70.6RCoM 1.8 2.4 2.0 14 -16.1
6 5
-21 59 7
-2
793 3
1 138 7
04 7
-2 -1
2.1 1.5
-2
-10
-5
0
5
10
15
4QFY11 1QFY12 2QFY12 3QFY12 4QFY12
Bharti (India & SA) Idea RCOM Vodafone-India Avg. RPM QoQ (%)
53
June 2012
Higher churn, lower non-voice contribution key challenges: Churnrate for major operators increased QoQ is currently at 9/10% forBharti/Idea implying high competitive activity. Non-voice revenuecontribution for Bharti/Vodafone remained under pressure during2HFY12 but improved for Idea.
Africa business exhibits steady performance for Bharti despiteweak sesoantiliy; enterprise weak: Bharti’s Africa business reporteda 4%+ QoQ EBITDA growth despite weak seasonality and disruptionsin Nigeria (revenue +1% QoQ; mobile traffic +3% QoQ; mobile RPM -2% QoQ). Enterprise business performance reported secondconsecutive quarter of double-digit EBITDA decline due to on-goingbusiness restructuring. Passive infrastructure segment revenuedeclined modestly due to impact of certain greenfield operatorspulling out.
Leverage remains high for most operators: Leverage levels remainhigh with net debt/annualized EBITDA of 2.6-2.7x for Bharti/Idea.RCom’s net debt/EBITDA remains alarming at almost 6x.
Regulatory visibility elusive: Regulatory uncertainty for the sectorhas increased post TRAI’s impractical recommendations onspectrum auction. The government is expected to soon decide onkey issues such as reserve price and quantity of spectrum to beoffered in the Supreme Court mandated spectrum auction.
Outlook: While regulatory uncertainty persists, operatingperformance of GSM incumbents (Bharti, Idea, Vodafone) remainedstrong with good volume traction, relatively stable pricing and stableto improving margin profile. However risk of significant demandsfrom the government for spectrum and proposals like re-farmingremain significant overhangs given lack of balance sheet strength.Valuations based on EV/EBITDA are inexpensive.
Top picks: Bharti, Idea
Leverage continues to remain high: FY12 net debt/EBITDA (x)
TELECOM: Strong operating performance; regulatory uncertainty persists
Non-voice as % of wireless revenue
6.0
3.52.7 2.6
RCom Vodafone India Bharti Idea
0
3
6
9
12
15
1QFY
09
2QFY
09
3QFY
09
4QFY
09
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
1QFY
12
2QFY
12
3QFY
12
4QFY
12
Bharti Idea Vodafone
54
June 2012
UTILITIES: Performance robust, NTPC/TPWR buck the trend
Summary
4QFY12 performance: Coal supply remains key issue and operating rateswere thus muted. ST prices remains flat QoQ. CIL’s committeemen todeliver 35m ton incremental coal to power sector in FY13, a key factor towatch for.
NTPC performance muted owing to lower PAF/PLFs of coal plants (down by172bp/260bp YoY), However, situation improved from dismal levels in2Q/3Q (PAF/PLF improved by 945bp/760bp QoQ in 4Q).
PGCIL FY12 capitalization stood higher at INR141b v/s INR71b in FY11 andearlier guidance of INR120b. FY13 capitalization target at INR200b(achieved INR25b till May-12)
NHPC generation de-grew 10% YoY, FY12 addition stood nil v/s targeted313MW. FY13E capacity addition target at 1212MW, possible only ~700MW in
our view.
Tata Power consolidated performance muted owing to higher impairment losses at Mundra and lower production/realisation at coal SPVs.
CESC’s PAT boosted by other income, arrears recovery. Spencerconsolidation continues, closed 35 small stores in FY12.
Adani Power PAT below estimates; led by muted PLF, lower availability oflow cost coal. Fuel cost increased to INR2.4/unit v/s INR2/unit QoQ.
JSW Energy performance higher than estimates led by higher contributionfrom other operating segments., improved gross margins at INR1.8/unit
PTC India performance above estimates led by higher volume and grossmargins. Debt repayment lower interest cost, increases other income.
Coal India PAT boosted by mix change (higher e-auction volumes), higherrealization (Incentive Income) and higher other income by INR5b
Actual v/s Estimate (INR m) - NTPC and TPWR buck the trend
55
PLFs lower for Adani Power, NHPC
Key operational metrics
June 2012 56
Markets and Valuations
June 2012 57
Markets Performance
World Indices Performance CY12 YTD (%) – Local Currency
2012 YTD: India among the top performing markets; INR weakness is significant
World Indices Performance CY12 YTD (%) – USD
June 2012 58
Sectoral PerformanceSectoral Performance for CY12 YTD (%) Sectoral Performance from Dec-10 till-date (%)
June 2012 59
Sensex Best and Worst PerformanceSensex Best and Worst Stock Performance CY12 YTD (%)
Sensex Best and Worst Stock Performance from Dec-10 till-date (%)
June 2012 60
Fund Flows: FII inflows in CY12YTD is a positive surpriseFund flow into Indian markets
Fund flows
Compared to CY11 net FII outflow ofUSD0.5b, the YTD CY12 FII has net inflow ofUSD8.6b. This has been a positive surprise, giventhe continued build-up of macro headwinds anda sharp deprecation in INR.
However DII has a net outflow of USD4.1b YTDCY12 as against an inflow of USD5.9b in CY11.
Monthly Net FII Flows(USD b) Monthly Net DII Flows(USD b)
June 2012 61
Markets valuations at below historical averages
Sensex P/E (x) Sensex P/B (x)
Market Cap to GDP (%)Sensex RoE (%)
June 2012
MOSL Universe: Annual Performance (INR b)
62
June 2012
MOSL Universe: Valuations
63
For information, please contact
Navin Agarwal, ACA, CFACEO - Institutional Equities
Tel: +91 22 39825450 Mobile: +91 98201 58913
Email: [email protected]
Bloomberg: [email protected]
Rajat Rajgarhia, ACA, MBADirector - Research
Tel: +91 22 39825441 Mobile: +91 98202 69614
Email: [email protected]
Bloomberg: [email protected]
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Motilal Oswal India Strategy Gallery
