Bottomed out

Tags: Stock Market

India Inc is set to report higher profits in Q3 on margin expansion, marking an end to earnings downgrade cycle

Bottomed out
There are several indicators that need to be watched closely to determine where the Indian stock market is headed in 2013. One of the early, and perhaps, the most crucial, indicator is India Inc’s earnings for the October-December 2012 quarter (Q3) that will start from this week, with Infosys numbers expected on January 11.

The outcome of the earnings season and the guidance given by companies is keenly awaited by both investors and analysts, and may be bigger than the Reserve Bank of India (RBI) policy meet on January 29, where the market has already priced in a 25 basis points cut.

Analysts reckon the October-December quarter would see an expansion in margins for companies, reflecting higher profit growth for the broader market. The only problem, they anticipate, is huge losses that will be reported by oil marketing companies, spoiling the overall picture.

In 2QFY13 (July-Sept quarter), Sensex revenue and earnings grew 12 per cent and 2 per cent YoY. “For, 3QF13, we expect revenue growth to remain modest, but margins to expand and profit growth to improve, especially for the broad market,” said Morgan Stanley analysts Ridham Desai and Sheela Rathi, in a note.

For Sensex, Kotak Institutional Equities’ analysts led by Sanjeev Prasad, expect the net income to grow 11 per cent YoY. “On an ex-energy basis, we expect net income to grow 9.8 per cent YoY and 6.1 per cent QoQ,” Kotak said.

Edelweiss Institutional Equities’ analysts fear the earnings season to witness weak growth for companies. According to them, Sensex companies will report about 4.2 per cent growth in earnings, mainly driven by BFSI (banking and financial services), consumer goods and pharma. “The pace of growth is slowing. Earnings of interest rate-sensitive sectors, viz., capital goods and real estate, that had been hit the most by the slowdown, should now improve, both QoQ and YoY,” Edelweiss analysts Prateek Parekh and Vivek Veda, wrote in a note.

Also, earnings downgrades will be muted this season, thankfully. “After two years of rigorous downgrades, the earnings cycle now looks mature with limited downside to the current Sensex EPS forecast. In Q3FY13, the downgrades were about 1 per cent. Sensex EPS estimate for FY13 is at Rs 1,230 (both Edelweiss and Consensus). FY14E Sensex EPS stands at about Rs 1,430 for Edelweiss and Rs 1,412 for consensus, implying about 13-14 per cent growth. Lower interest costs and stabilisation of EBITDA margins should support these forecasts,” according to Edelweiss.


The auto companies are likely to report good operating results in Q3FY13, driven by reasonably stable demand in the festive season, normal inventory levels and a stable price environment, said Kotak analysts. Commercial vehicle sales volumes declined in the October-December quarter due to low freight demand and low freight rates. Two-wheeler and four-wheeler sales volumes either increased or remained stable YoY. “We expect a strong quarter for Bajaj, M&M, Maruti and Tata Motors (JLR), led by improvement in EBITDA margins due to operating leverage benefits and a richer product mix. We expect Ashok Leyland to report a loss, driven by weak commercial-vehicle demand. In the auto-ancillary space, we expect Exide Industries to report results due to an increase in 4-wheeler replacement volumes. We expect Bharat Forge to report weak results due to a weak commercial vehicle cycle,” said Kotak.

Angel Broking said numbers from Tata Motors would weigh on the sector due to weak standalone performance and high base effect for JLR. According to the broker, Maruti is expected to register a strong bottomline growth on account of the low base of last year and sharp revival in volumes post the Manesar strike, while M&M is likely to witness a strong bottomline growth driven by growth in volumes and improvement in realisation.


Edelweiss Institutional Equities expect earnings growth for PSU banks to be soft due to modest net interest income and higher provisions on restructuring partially offset by improved treasury performance. Asset quality stress for PSU banks is likely to stabilise at elevated levels. Private banks are once again expected to deliver a steady quarter led by benign asset quality and stable-to-improving NIMs (net interest margins) coupled with sequential pick up in the loan book. NIMs are likely to be largely stable for PSU banks given the limited impact of interest income reversal coupled with no base rate cut in the previous quarter. Wholesale funded entities will benefit from the decline in wholesale rates. CDR restructuring is likely to post marginal uptick, stretching PSU banks’ restructured pool. NBFCs are likely to report steady asset growth and stable-to-improving NIMs.

Kotak analysts expect overall corporate earnings growth to slow to 11 per cent YoY (16 per cent YoY in 2QFY13) with public banks growing by 6 per cent YoY and private banks by 19 per cent YoY. NII growth is likely to be 9 per cent YoY (5 per cent for public banks and 22 per cent for private banks).


Religare Institutional Research’s Rumit Dugar and Udit Garg expect a muted Q3 for Indian IT with 1-3 per cent QoQ dollar revenue growth for most players, affected by seasonal shutdowns. “Given soft volume growth, we expect modest margin declines (40-80bps QoQ) across large-caps. Overall. net profits could remain flattish at a sector level, aided partially by INR depreciation on a period-end basis. In our view, valuations in the sector have moderated, but recovery in tech spends remains the key to outperformance and we would look for management commentary on client budgets. On a stock-specific basis, we think valuations in TCS are beginning to look to more reasonable,” they said.

For Infosys (organic)/TCS/Wipro/HCLT, Religare expects US dollar revenue growth of 1.5 per cent/3.2 per cent/2 per cent/2 per cent QoQ. “On margins, we are expecting a drop of 40bps/50bps for TCS/HCLT due to slower volume growth/shutdowns, and 80bps for Infosys given the impact from wage hikes. While sharp INR depreciation on period-end rates could provide some balance sheet translation gains, we note that soft volumes and margins could lead to a muted EPS performance.

Kotak expects TCS once again to lead the industry with sequential revenue growth of 3.1 per cent, followed by HCL Technologies with 2.9 per cent, courtesy the latter’s front-ended nature of revenue from certain large deals.


Brent crude prices remained broadly unchanged in Q3FY13, averaging USD111/bbl. Industry under-recovery is down from Rs 377 billion to Rs 329billion due to a fall in diesel under-recovery, said Edelweiss analysts. Complex refining margins dipped around $1/barrel due to a fall in diesel and gasoline cracks following refinery restarts after temporary shutdowns. In petrochemical, while cracker and polyester margins fell, intermediate and polymer margins recovered. They said Reliance Industries’ GRMs are estimated at $8.7/bbl ($9.5/bbl in Q2). “KG-D6 gas production is expected to dip further to average 23.5 mmscmd (28.5 mmscmd in Q2). As a result, the company’s PAT is estimated 6.8 per cent lower QoQ at Rs 50.1billion. We estimate ONGC’s PAT at Rs 50.7bn (quarterly EPS of Rs 6), with net realisation of $47.1/bbl. For Cairn, we expect gross production from Rajasthan at 170kbpd and realisation at 11 per cent discount to Brent. For GAIL, we forecast gas transmission volumes to fall to 104mmscmd. OMCs are expected to report a net under-recovery, with 9m FY13 upstream sharing estimated at 38.2 per cent and government sharing at 38 per cent. We peg PLNG (piped LNG) volumes flat at 135 tbtu. For IGL, we estimate moderation in EBITDA to Rs5.1/scm (Rs6.1/scm in Q2).

For downstream oil companies, Kotak analysts expect oil-marketing companies to report huge losses, given large estimated net under-recoveries of Rs 233billion and forex-related losses due to the rupee depreciation. “We estimate gross under-recoveries of Rs 380 billion for the industry in 3QFY13. We expect refining margins for downstream companies to remain sequentially flat,” said Kotak analysts. zz


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