Q4 FY14 Results Preview

India Infoline News Service | Mumbai |

Results Preview

Automobiles

  • Q4 FY14 saw the volumes declining across all categories (except tractors and 2-wheelers).  Economic activity not picking-up, persistent rise in fuel prices and high interest rates continue to hurt demand in the sector. In the CV space, while rate of decline in M&HCVs softened, LCV sales started falling precipitously. Ashok Leyland volumes fell by 24.8% yoy and we expect it to report loss at PAT level.

  • UV segment, in spite of a cut in excise duty continued to see a decline in volumes. M&M reported 17.5% yoy fall in its passenger UVs. Tractors sales were a highlight in the quarter and M&M grew its tractor volumes by 11.5% yoy. We also expect 27.9% topline growth in Swaraj Engines on back of healthy tractor sales. Maruti saw a volume decline of 5.5% yoy driven by fall across all segments except compact segment. While domestic volumes were modestly lower by 3.3% yoy export volumes witnessed steeper fall at 24.6% yoy. Two wheeler space saw a relative stronger performance driven by better than normal monsoons, increase in MSPs and rural development initiatives by government. Bajaj Auto saw relatively tougher times as domestic demand recovery was led by scooters where it lacks presence. In the motorcycles segment also it is losing market share to HMSI. However, it fared better in the export markets.

Q4 FY14 volumes
Q4 FY14 Q4 FY13 yoy (%) Q3 FY14 qoq (%)
Hero Motocorp 1,589,462 1,527,351 4.1 1,680,940 (5.4)
Bajaj Auto 935,795 981,242 (4.6) 993,690 (5.8)
TVS Motors 560,801 509,210 10.1 519,308 8.0
Maruti 324,870 343,709 (5.5) 288,151 12.7
M&M - Auto 136,487 149,231 (8.5) 129,424 5.5
M&M - Tractors 55,374 49,664 11.5 78,419 (29.4)
Tata Motors 131,616 196,370 (33.0) 132,819 (0.9)
Ashok Leyland 26,048 34,627 (24.8) 18,453 41.2
Eicher - RE 64,268 34,736 85.0 55,101 16.6
Eicher - VECV 9,981 12,528 (20.3) 8,193 21.8
Source: Company, IIFL Research

  • Operating margins for most companies (except CV manufacturers) are expected to be higher on a yoy basis as commodity prices have cooled off. For CV manufacturers operating deleverage is the main reason for the fall. With contribution of tractors falling down on a sequential basis, M&M margins are expected to decline sequentially. While rupee depreciation will aid margins for Bajaj Auto on a yoy basis lower volumes will lead to sequential decline in margins. Currency benefits will offset the impact of higher discounts and lower volumes for Maruti. JLR margins are expected to decline on a sequential basis due to negative impact of currency movements.

  • Among the auto ancillaries, we expect revenue growth of 24.2% yoy in Motherson Sumi on back of expected growth in SMR and standalone business. In Bosch, we expect a flattish revenue due to strained demand from the OEMs. 

  • Revenues for Apollo Tyres are expected to rise by 10% on yoy basis primarily on account of recovery in Europe sales and modest rise in India as replacement demand comes into market. We expect operating margins to improve ~246bps yoy to 14.2%, driven by muted prices of natural rubber.

  • In the battery space, while volumes will be driven by growth in replacement demand, revenue growth will be restricted owing to price cuts implemented during the quarter.  Margins are expected to be weak for Exide while Amara Raja is expected to report a 318bps yoy increase on operating leverage.

  • Our top picks in the auto space include Tata Motors, Hero Motocorp and Maruti. Amongst auto components we like Motherson Sumi.


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
Auto                  
Ashok Leyland 28,123 (24.6) 44.0 1.5 (382) 646 (1,508) (200.5) (9.8)
Bajaj Auto 48,934 3.1 (4.6) 20.3 267 (182) 8,044 5.0 (11.1)
Hero Motocorp 65,025 5.8 (5.4) 13.9 7 84 5,444 (5.2) 3.7
Maruti 126,156 (5.2) 15.8 12.3 66 (14) 9,614 (22.4) 41.1
M&M 95,891 (8.6) (9.2) 12.1 (1) (99) 7,833 (11.9) (16.1)
Tata Motors 677,735 21.0 6.1 14.7 (21) (187) 41,876 6.1 (12.8)
TVS Motors 21,541 23.2 4.7 6.2 84 20 763 (333.1) 10.8
Eicher Motors 20,092 16.5 19.6 11.0 114 111 1,200 22.5 24.7
Auto Ancillaries
Apollo Tyres 33,436 10.1 (6.1) 14.2 246 (181) 2,440 72.1 (27.8)
Bharat Forge 8,476 25.6 1.9 25.7 469 (7) 964 92.7 2.7
Exide 13,871 (10.0) 6.4 12.4 (86) 146 986 (32.7) 27.2
Amara Raja 8,600 7.0 (0.3) 17.1 318 (32) 927 55.5 (2.5)
Motherson Sumi 82,895 24.2 3.8 9.5 97 (9) 2,222 13.5 (11.0)
Swaraj Engines 1,449 27.9 (2.9) 14.3 (18) (30) 163 16.7 4.6
Bosch 22,520 1.9 4.2 14.2 (308) 433 2,029 (21.9) 46.0
Source: Company, India Infoline Research


Banking

  • For banks, the growth and asset quality conditions remained challenging during Q4 FY14 with loan demand being anemic and sustained stress in corporate/SME segments.  On the rate side, while the G-Sec yield remained elevated throughout the quarter driven by hawkish RBI stance, short-term rates stabilized post the decline seen in Q3 FY14 aided by comfortable liquidity conditions. Improvement in banking system deposit growth and higher foreign equity/debt inflows supported the easing of system liquidity. Wholesale funded banks are expected to benefit from benign short-term rate environment. 

  • Most PSU Banks in our coverage are likely to end FY14 with 12-15% loan growth. Profitability (RoAs) would remain depressed during Q4 FY14 due to continuance of high credit cost, residual provisioning for investment depreciation (as medium-to-long term rates were firm) and higher opex (provisioning related pension/gratuity liability or impending wage revisions). Annualized delinquencies are expected to be in the range of 2.5-3.5% for most PSU banks in our coverage except for BoB (1.8%) and BoI (2.1%). Also, we don't expect any reprieve in the restructuring activity. NIM is estimated at similar to Q3 FY14 level for all banks on the back of stable deposit cost and lending yield. The decline in wholesale funding rates would only marginally benefit PSU Banks as they have reduced reliance on bulk deposits substantially over the past couple of years.

  • The performance of private banks will continue to be much better than public banks. With corporate and SME asset quality continuing to exhibit stress, banks such Axis Bank, ICICI Bank and Yes Bank may continue to report higher impairment. However, they are unlikely to negatively surprise on their existing guidance/commentary. For these largely wholesale-funded banks, higher credit cost could get partially offset by NIM expansion thereby enabling them to sustain RoA near Q3 FY14. Banks with credible retail franchise, largely working-capital corporate exposure and materially wholesale funded such as IndusInd Bank, Kotak Banks, ING Vysya Bank are expected to fare well and improve RoAs. Amongst the smaller private banks, we expect Federal Bank to report better core performance on sequential basis. 

  • In the NBFC space, we expect a much improved operational performance from Mahindra Finance, STFC and Magma Fincorp in Q4 FY14 on the back of material improvement in collection efficiency and expansion in NIM. Bajaj Finance is estimated to deliver another strong quarter with near 30% yoy asset and profit growth. On the back of spread expansion and teaser loan provisioning reversal, LIC Housing is estimated to report healthy performance.

  • Though being cautious on the near-term due to challenging operating conditions, we are constructive on the financials space from a longer term perspective as we see macro recovery from H2 CY14. The credit cycle is at its peak and is likely to start easing after a couple of quarters. Based on risk-reward offered, we prefer IndusInd Bank, ICICI Bank, ING Vysya Bank and Federal Bank. We expect limited near-term upside in public banks post the recent sharp re-rating as RoAs are likely to remain under pressure in the medium term. Within NBFCs, our picks are Bajaj Finance, LIC Housing Finance and Magma Fincorp. 


Q4 FY14 estimates
Banking Total Income (Rs mn) NIM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
PSU Banks
Allahabad Bank 19,986 26.5 6.3 2.8 0.5 0.1 3,582 184.0 13.6
Bank of Baroda 43,087 7.6 8.0 2.4 (0.1) 0.1 10,116 (5.1) (4.9)
Bank of India 39,690 11.2 4.0 2.4 0.0 0.1 6,729 (11.1) 14.9
Indian Bank 14,187 (9.5) 6.3 2.7 (0.2) 0.0 2,718 (6.9) 2.8
OBC 17,335 3.5 10.3 2.7 (0.1) 0.0 2,476 (19.6) 10.4
Punjab National Bank 54,551 10.1 5.7 3.6 0.1 0.0 9,668 (14.5) 28.0
SBI^ (SA) 190,162 14.4 13.0 3.2 (0.1) 0.1 41,252 25.0 84.6
Private Banks
Axis Bank 50,658 8.4 9.4 3.7 (0.0) (0.1) 17,205 10.6 7.3
Federal Bank 7,341 8.4 4.6 3.3 0.2 0.1 2,052 (7.9) (10.8)
HDFC Bank 68,455 12.2 0.9 4.3 (0.3) 0.1 22,472 18.9 (3.4)
ICICI Bank 69,536 15.7 (1.5) 3.4 0.0 0.1 25,376 10.1 0.2
IndusInd Bank 12,662 23.0 4.6 3.7 0.0 0.1 3,888 26.5 12.1
ING Vysya Bank 6,706 7.4 6.3 3.6 (0.1) 0.3 1,865 9.5 11.5
Karur Vysya Bank 4,678 (0.1) 13.9 2.6 (0.5) 0.0 891 (43.8) (16.6)
Kotak Bank# (SA) 13,030 2.8 7.5 4.6 0.1 0.0 3,784 (13.3) 11.3
Yes Bank 11,790 15.9 11.9 3.0 0.0 0.1 4,285 18.3 3.1
NBFCs
HDFC* 64,255 13.2 6.5 2.3 0.00 0.05 14,371 (7.6) 12.5
IDFC 8,931 (11.9) 4.5 - - - 5,192 (1.2) 3.7
LIC Housing Finance 5,829 14.9 11.6 2.2 (0.24) 0.05 3,283 3.8 0.5
Shriram Transport Fin 10,205 6.4 4.1 6.7 (0.57) 0.15 3,280 (7.7) 8.8
Mahindra Finance# 7,676 13.1 12.5 8.9 (1.20) 0.60 2,608 (14.6) 58.8
Bajaj Finance# 6,950 34.4 3.4 12.5 0.30 (0.50) 2,107 28.6 8.5
Magma Fincorp 2,688 10.8 17.2 - - - 464 (1.4) 31.7
Mahindra Finance# 5,829 14.9 11.6 2.2 (0.24) 0.05 3,283 3.8 0.5
 # Computed NIM, ^Cumulative NIM, *used Spread in place of NIM


Cement

  • Though the demand remained sluggish, pricing scenario witnessed mix trend across the country.

  • While the south struggle to hold on to the prices on back of falling demand, North players enjoyed better pricing and utilization on account of shutdown of a Binani Cements plant.

  • Operating margins are likely to come under pressure for most of our coverage universe on back of diesel price hike and surcharge in railway freight

  • We expect companies under our coverage universe to report a muted top-line growth barring Ultratech.

  • Ambuja Cement and JK Lakshmi are two companies in our coverage universe which will not see significant margin erosion yoy basis.

  • We expect slowdown in construction activities to translate into a sluggish demand for cement, thereby depressing earnings for the next two quarters. However, we expect the sluggishness in demand and pricing to improve post monsoon (H2 FY15)

  • Maintain BUY on JK Lakshmi Cement

Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
Cement
 ACC * 31,409 6.3 12.5 13.4 (323) 44 2,435 (44) (11)
 Ambuja Cem* 25,820 1.0 16.9 21.1 (49) 725 3,490 (28) 10
 Ultratech 57,410 6.5 19.9 19.3 (454) 263 5,611 (23) 52
 India Cement 11,387 (5.0) 9.7 11.2 (346) (278) (224) - -
 JK Lakshmi Cement 5,421 1.2 7.9 16.8 (102) 414 390 (22) 177
Source: Company, India Infoline Research
*ACC and Ambuja Cement reporting their Q1 CY14 numbers


FMCG

  • We expect our FMCG universe of 10 companies to witness revenue and earnings growth of ~12% yoy and 16% yoy respectively. Operating margins for the universe are expected to expand by 50bps to 21.6%. Companies are likely to witness slower volume growth but pricing growth could be a bit higher to offset inflationary pressures.

  • HUL is expected to register ~9% yoy growth in revenues at ~Rs70bn during the quarter led by healthy ~10% yoy growth in its HPC business. Volume growth is likely to be ~3% yoy due to weak macro-economic conditions and pipeline filling in the base quarter due to transporters' strike. Soft discretionary spends will continue to impact growth in the personal products segment. Operating margins for the quarter are likely to expand by 60bps to 15.9% on a low base. Net profit growth is likely to be modest at ~13% yoy at Rs8.8bn.

  • ITC is likely to witness healthy ~13% yoy revenue growth at Rs82bn driven by strong performance in cigarette, other-FMCG and agri segment. We expect the company to report ~1-2% yoy volume decline due to steep price hikes taken over the past few quarters. We expect the Other-FMCG segment to register healthy ~17% yoy growth driven by distribution led growth. Operating margins are likely to expand by 190bps to 34.1% partly aided by sharp price hikes in cigarettes segment. We estimate ~19% yoy growth in net profit at Rs22.8bn during the quarter.

  • Godrej Consumer is likely to report strong ~17% yoy revenue growth at ~Rs20bn driven by healthy growth in household insecticides segment and improved performance of hair colour segment. Household insecticides segment is likely to witness mid-teens revenue growth (had reported mere 8% yoy growth in Q3 FY14 due to adverse seasonal impact). Net profit is expected to increase by 13% yoy to Rs2.4bn. We expect Dabur to report healthy ~17% yoy revenue growth at Rs17.8bn partly led by healthy growth in domestic business. Operating margins are likely to decline by 60bps to 17.2%. We expect Dabur to register 15% yoy PAT growth at Rs2.3bn during the quarter. Colgate is expected to register 16% yoy revenue growth at Rs9.4bn led by ~9-10% volume growth in the toothpaste segment. Operating margins are likely to decline by 230bps (on a high base) due to higher advertising and overhead cost. Net profit for the quarter is likely to increase by ~5% yoy to Rs1.3bn.

  • GSK consumer is expected to report 15% yoy revenue growth (led by price and volume) at Rs10.8bn led by healthy performance in its key brands Horlicks and Boost. We expect PAT to register ~11% yoy growth at Rs1.7bn with 20bps decline in operating margins at ~21.8%. We expect Marico to report 5% yoy revenue growth (as Kaya financials are included in the base numbers) at ~Rs10bn and strong 67% yoy PAT growth at Rs891mn on a low base. Operating margins for the quarter are estimated to expand by 50bps yoy to 12.6%.

  • Nestle is likely to register ~5% yoy revenue growth at ~Rs24bn led by 4% yoy growth in domestic revenues and ~18% yoy increase in exports. Operating margins are expected to contract by 160bps to 22.4% (on a high base) due to higher staff and overhead cost. Net profit is likely to increase by ~13% yoy to Rs3.2bn during the quarter. Britannia is expected to record ~11% yoy revenue growth at Rs16.4bn driven by premiumisation, price hikes and volume growth. Net profit is likely to register 26% yoy growth (on a low base) at Rs1.1bn. Operating margins are expected to witness sharp 140bps expansion at 10.2% aided by lower raw material and advertising cost.

  • Asian Paints is likely to witness healthy ~17% yoy growth in revenues at Rs31.6bn led by ~10-11% yoy volume growth. Operating margins are expected to decline by ~70bps to 13.1%. Net profit for the quarter is expected to increase by modest ~8% yoy to Rs2.8bn due to higher depreciation (Khandala plant) and tax outgo.

  • We believe new product launches; inorganic growth opportunities and better rural penetration would enable players register better performance in coming quarters. We maintain our positive view on the sector with ITC, Dabur and Britannia as our top picks.


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
FMCG*
HUL 69,658 9.4 (1.0) 15.9 63 (154) 8,769 12.7 (15.6)
ITC 92,233 12.8 7.0 34.1 195 (279) 22,848 18.5 (4.2)
Britannia 16,427 10.5 1.8 10.2 137 103 1,107 26.0 15.0
Colgate 9,394 15.8 6.3 18.5 (225) 150 1,290 4.7 14.2
Dabur 17,837 16.5 (6.3) 17.2 (65) 155 2,323 15.0 (4.9)
GSK Consumer 10,808 15.0 28.8 21.8 (18) 1,124 1,734 10.9 117.5
Godrej Consumer 19,986 16.5 0.8 16.2 16 53 2,395 13.0 9.4
Marico 10,471 5.0 (12.6) 12.6 53 (425) 891 67.2 (37.1)
Nestle 23,586 4.9 4.7 22.4 (161) 116 3,161 13.3 16.4
Asian Paints 31,583 16.5 (7.5) 13.1 (73) (154) 2,788 7.7 (18.0)
United Spirits 23,571 12.5 2.1 10.2 (107) 58 984 75.7 51.5
Source: Company, India Infoline Research
* Excluding United Spirits


Information Technology

  • We expect the nine companies in our coverage to report 2.2% qoq dollar revenue growth in aggregate for Q4 FY14. Growth would be volume driven with pricing being largely stable. Cross currency movements during the quarter are likely to have negligible impact on sequential growth. Barring Infosys which is facing near-term choppy revenue environment and TCS that has indicated of modest growth, the other seven coverage companies are estimated to deliver 3%+ dollar revenue growth in Q4 FY14 in a seasonally weak quarter thus implying that demand environment continues to be strong. 

  • Infosys is expected to conservatively guide for 5.5-8% FY15 dollar revenue growth. Our current estimate of revenue growth is at 10% building-in an improvement in growth trajectory from Q2 FY15. Still Infosys is likely to materially underperform industry growth (NASSCOM projection at 13-15%) for a second consecutive year. With company's growth being impacted by organizational and client-specific issues, Infosys' guidance has been losing relevance as an indicator of market conditions. Recent history of somewhat perplexing commentary (positive during Q2/Q3 FY14 earnings and sudden caution in March) also means that any guidance from the company cannot be looked as sacrosanct. With the near-term growth concerns dominating the discourse, company is likely to issue a very conservative FY15 guidance (the lower-end of growth range could be 5.5%) which provides its enough scope to beat. Wipro on the other hand could issue healthy sequential growth guidance for Q1 FY15 at 2.5-4% further confirming its growth convergence with the industry. 

  • Amongst the larger companies, HCL Tech (driven by continued traction in IMS), Wipro (sustained benefits from organizational strategy) and Tech M (growth driven by recent deal wins) are expected to post strong growth. Sequential revenue growth is likely to be strong across all the mid and small sized players in our coverage. Key things to watch out would be management commentary on client CY14 IT budgets, demand environment especially for discretionary services and employee hiring.

  • Operating margin movement would be company-specific based on individual triggers. For Infosys and Wipro, margin is expected to stable aided by cost optimization measures for the former and productivity improvements for the latter. Moderation in growth is estimated to marginally impact TCS's margin. For HCL Tech and Tech M margin would be impacted by wage hikes. Mindtree and KPIT could witness some margin expansion on the back of strong growth and operational benefits.

  • Appreciation of the rupee has partially driven the recent underperformance of the sector which is justified given the high sensitivity (1.7-2%) of sector earnings to 1% appreciation of the currency. Therefore, incremental rupee appreciation (current estimates at Rs60.5/$) driven by a strong political verdict, sustained lower CAD and robust external inflows is the single biggest risk to our extant positive stance on the sector. Our preferred picks are HCL Tech, Tech M, Mindtree and Infotech.


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
TCS   217,178 32.2 2.0 31.1 2.7 (0.3) 51,580 43.4 (2.9)
Infosys   129,753 24.1 (0.4) 27.8 1.3 (0.0) 28,484 19.0 (0.9)
Wipro   116,490 21.0 2.8 23.4 2.7 0.0 20,842 28.1 3.5
HCL Tech   84,179 31.0 2.9 25.5 3.1 (0.5) 15,374 47.9 2.8
Tech Mahindra   49,883 32.4 1.8 22.2 1.7 (1.0) 6,506 25.8 (27.8)
Mindtree   8,150 33.1 3.1 19.7 0.7 0.2 984 24.7 11.3
KPIT Tech   6,988 22.6 3.1 15.7 (2.1) 0.4 620 11.7 2.0
Persistent Syst   4,440 32.9 2.6 26.7 1.8 (1.0) 669 28.9 4.2
Infotech Entp   5,959 28.3 3.0 19.4 2.4 (0.2) 707 30.5 1.9
Source: Company, India Infoline Research

Infrastructure

  • Infrastructure stocks continued to outperform the Benchmark Indices during the quarter. The recent steep increase in stock prices have come on rising expectations of a quick revival in capex cycle, which in turn is underpinned by expectations of a stable Government in the upcoming general elections. The rally was further fuelled as the investment cycle is showing signs of bottoming out. The Q3 FY14 data on capex investment shows quarterly new projects starts were at their highest levels in 6 quarters. Also, the Cabinet Committee on Investments (CCI) has cleared ~US$80bn of projects in the last 15 months. While new projects announced by the private sector continued to decline, government capex showed a sharp increase in the quarter.

  • We believe the street is too optimistic on the rate of recovery in the investment cycle. Even assuming the formation of a stable government we expect execution would take some time due to the systemic risks present in the country. Availability of coal continues to remain a question in the near term. The recent Land Acquisition Bill has further complicated matters for Greenfield projects. In short, though we expect a stable government would accelerate approvals and clearances, challenges related to execution persist.

  • We believe players in the transmission space would be key beneficiaries of a revival in infrastructure spending as in the past pickup in transmission spending has been faster compared to other businesses. In the near term, we believe order inflow in the BTG would be limited to PSUs as the market is already facing excess capacity in the system. Pricing pressure is clearly visible in the orders won recently. Ordering by Power Grid during the quarter was down and equipment ordering continues to remain weak. Industry growth in Q4 FY14 was driven largely by exports with improvement in execution in the domestic market.

  • BHEL is expected to report 25.7% yoy decline in revenue as orders from the private players largely remain slow moving. Margin is expected to shrink by 785bps due to company's high fixed costs and lower revenue. PAT is expected to decline by 50.2% yoy to Rs16.1bn. Order booking is expected to be higher on a qoq basis, but lower on a yoy basis at Rs163bn. During Q4 FY14, BHEL has till date received aggregate project awards of Rs122bn, higher than the orders received in 9M FY14.

  • Order bookings for LT are expected to be lower on yoy basis at Rs215bn, of which LT has already announced Rs163bn orders in Q4 FY14. Execution growth is likely to remain below management guidance of 15% yoy. Numbers cannot be compared on a yoy basis as the company has demerged its hydrocarbons subsidiary in Q3 FY14.

  • KEC and Voltas are out top picks in the sector.


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
Infrastructure
BHEL 142,613 (25.7) 65.2 16.4 495 (785) 16,118 (50.2) 132.0
Havells 12,786 9.3 8.0 13.0 (77) 30 1,175 7.1 2.4
LT 194,195 (4.3) 35.0 12.1 46 2 15,829 (11.5) 27.6
Power Grid 38,284 13.5 3.9 86.3 25 237 11,487 3.5 10.2
Source: Company, India Infoline Research


Metals & Mining
  • The run up in the metals and mining sector extended in Q4 FY14, led by rising expectations of a revival in both, domestic and developed economies. The ferrous sector was the outperformer in this space as margins for most of the players is expected to increase due to higher steel prices and a decline in coking coal prices. Metal companies with foreign debt would also benefited by the appreciation in the rupee against the dollar resulting into MTM gains on their dollar denominated loans. The non-ferrous sector performance would be a mixed bag as prices of zinc have improved on a qoq basis against a decline for copper and aluminium prices. Most of the steel players had increased their prices by Rs1,000-1,500/ton in January-February '14 due to an increase in iron ore and transportation costs. However, with a decline in international steel prices and an appreciation in the rupee, steel producers announced price cuts by end-March '14. Average rupee rate against the dollar appreciated marginally on a qoq basis to 61.76, but depreciated by 14% yoy. Zinc prices gained by 4.4% qoq due to the tight zinc market globally. Zinc market transformed into a deficit state in 2013 due to closure of two large mines during the year. Rest of the base metals were lower on a qoq basis, led by aluminium (3.3%), copper (2.4%) and lead (0.7%). The mining companies, Coal India, NMDC and MOIL, in our universe are expected to report an increase in realisations on a qoq basis after the price hikes announced during the quarter.

  • Steel demand in the country grew by a mere 0.7% yoy over the period April-February '14. India had consumed 67.3mn tons steel during 11M FY14 against 66.8mn tons in the same period last year. Taking advantage of the weaker rupee during the year, exports jumped 8.1% yoy during the period of April-February '14. Sales volume for most of the steel companies is expected to remain higher led by an increase in exports and seasonally strong demand. For the non-ferrous space, volumes are expected to improve for most of the players except Hindustan Zinc. Hindustan Zinc is expected to report a decline in mined metal output due to slower rampup of volumes at its underground Rampura Agucha mine. Coal India's volumes would be lower than the company's target, but flat on a yoy basis. NMDC is expected to report strong volume numbers during the quarter.

  • For the ferrous space, EBIDTA/ton for most of the players would be higher on a qoq basis on account of the price hikes and lower coking coal prices. Tata Steel would be benefited from the expansion in spreads between steel prices and raw material prices at its European subsidiary. EBIDTA/ton for Tata Steel Europe is expected to improve qoq to US$50/ton. In the non-ferrous space, aluminium players would continue to benefit from the strong product premiums and would lead to higher margins. Most of the players are expected to report an increase in margins on the back of improvement in coal supply from Coal India.

  • HZL, NMDC and Tata Steel are our top bets in the metals space.


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
Metals
Bhushan Steel 24,072 (14.6) 6.2 30.7 416 (199) 489 (82.5) (189.2)
Coal India 198,296 (0.4) 17.1 29.9 564 (87) 52,906 (1.9) 35.5
Hindalco* 71,962 2.9 (1.1) 8.8 15 48 3,233 (25.4) (3.2)
JSPL 51,740 (8.4) (3.8) 34.6 293 642 6,912 (9.1) 23.1
JSW 131,555 32.9 (3.4) 18.9 120 138 6,218 110.1 33.9
MOIL 2,854 7.0 8.3 55.6 371 1,460 1,536 39.5 (2.5)
NALCO 15,957 (14.5) (2.9) 13.6 114 (901) 1,376 (44.1) 5.0
NMDC 38,258 19.4 35.5 63.3 (410) (398) 19,542 33.4 24.7
SAIL 133,876 8.6 16.8 12.7 281 536 8,007 87.7 50.3
Sesa Sterlite 196,039 - 1.0 35.3 150 - 15,552 - (12.6)
Tata Steel 408,404 17.9 11.2 12.3 140 (30) 13,120 203.7 162.7
Source: Company, India Infoline Research, *Standalone

Oil & Gas

  • Crude oil (Brent) prices declined 4.3% yoy and 1.3% qoq. Rupee on the other hand depreciated 14.1% yoy and remained flat qoq. However, product spreads at international levels rose substantially leading to an offsetting impact on under recoveries. Nevertheless, we expect gross under recoveries to decline sequentially to Rs411bn. Upstream companies are expected to contribute at US$56/bbl, while we have accounted for high payouts from the government. Also GAIL is not expected to see any under recovery burden during the quarter.

  • Refining margins have increased on a sequential basis on the back of rise in gasoline and fuel oil spreads. For RIL, lower proportion of fuel oil in its slate (vis-?-vis Singapore basket) and higher heavy-light spreads will lead to outperformance when compared with Singapore GRM. We expect RIL to report a GRM of US$9/bbl. We expect petrochemical spreads to weaken on a sequential basis particularly on the polyester side. Crude oil production from MA-1 field and gas production from KG-D6 field are likely to be higher on a qoq basis.

  • We expect OMCs to report strong set of numbers on the back of full provisioning of subsidy sharing from the government. Increase in GRMs will have further positive impact on profitability. All three companies are expected to report profits at EBIDTA and PAT level.

  • Rise in production at Rajasthan field coupled with rupee depreciation will result in strong revenues growth for Cairn India. For ONGC and Oil India, we expect net realizations to decline sequentially given the fall in crude prices while subsidy discount remained flat. Sales volume for crude oil and gas is likely to remain flat on sequential basis.

  • GAIL should witness a strong set of numbers on back of nil under recoveries for the quarter. This will be partially marred by decline in transmission volumes. For GSPL, we expect lower transmission volumes on the back of yoy fall in KG-D6 gas production. Petronet is expected to see a strong yoy growth in revenues driven by higher volumes and higher regas tariffs. However, depreciation and interest expenses of Kochi Terminal will impact profitability. IGL margins are expected to improve owing to increased allocation of domestic gas. Gujarat Gas will also see improved profitability on better volumes and margins.

  • Our top picks in the sector are Reliance Industries, Oil India and BPCL.


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
Upstream
Reliance Ind 991,104 17.7 (4.3) 8.0 (133) 60 56,334 0.8 2.2
Cairn 49,751 14.0 (0.5) 76.3 165 247 29,565 15.3 2.5
ONGC 211,582 (3.1) 1.5 52.5 333 (662) 53,306 57.3 (25.3)
Oil India 24,250 (1.9) (11.2) 49.0 952 171 8,097 5.9 (10.3)
Downstream
HPCL 625,243 4.7 12.7 7.9 (658) 956 27,895 (63.7) (260.9)
BPCL 745,638 12.4 15.1 5.4 (449) 685 22,384 (53.3) (305.6)
IOC 1,253,205 (2.6) 6.5 9.7 (327) 1003 85,581 (41.0) (990.1)
MRPL 204,453 9.6 8.5 3.1 194 346 3,950 (738.1) (259.5)
Gas utilities
GAIL 167,958 34.7 4.7 13.5 394 (73) 14,227 130.1 (15.3)
IGL 9,531 8.0 (8.5) 21.2 17 245 969 16.0 8.3
GSPL 2,499 (30.5) 2.5 87.0 (405) 265 932 (42.3) 8.2
Petronet LNG 105,161 24.2 12.1 3.7 (143) (2) 1,485 (39.4) 9.6
Guj Gas 7,735 0.7 (0.9) 18.2 879 104 930 56.9 2.6
Source: Company, India Infoline Research

Telecom

  • Q4 is seasonally strong quarter for telcos and we expect Bharti and Idea to witness 3.5%-5.1% qoq rise in traffic; accordingly wireless revenues for both would rise 4%-5% qoq with Idea expectedly ahead of industry rate

  • After 2-3 quarters of pricing uptick, we expect RPM to remain broadly stable on sequential basis though over the medium term we still expect realized tariffs to harden for all the three telcos

  • Bharti Africa US$ revenues could remain largely flat (<+1% qoq) due to seasonal weakness in Africa while avg INR appreciation of 0.5% in Q4 would also act as a dampener; Africa EBIDTA margin to be mostly flat qoq at ~26%

  • Our Rcom estimates do not factor in revenues from fibre optic deal with Reliance Jio in view of timing uncertainty and we expect Rcom to post revenue/EBIDTA growth of 2.2%/2.5% qoq


Q4 FY14 estimates
Company Sales (Rs mn) OPM (%) PAT (Rs mn)
Q4 FY14 yoy (%) qoq (%) Q4 FY14 yoy (bps) qoq (bps) Q4 FY14 yoy (%) qoq (%)
Bharti Airtel   221,201 8.1 0.7 33.0 127 68   10,301 102.5 68.8
Idea   69,426 14.5 5.0 31.5 390 42   5,302 72.0 13.4
Rcom   52,705 2.7 2.2 31.1 396 10   1,669 (44.9) 55.2
Bharti Infratel   27,569 3.1 0.9 40.9 326 (46)   3,969 38.1 (3.3)
Tata Comm.   50,015 13.7 1.0 15.0 394 (62)   228 - (37.4)
Source: Company, India Infoline Research
 

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