India Strategy4QFY13 earnings
June 2013
Mar-13 Quarter Review Macro: Growth poised for moderate
recovery
4QFY13 Aggregate: MOSL Universe PAT flat, Sensex PAT up 1%
Sensex EPS: FY13 upgraded 1.3%; FY14 downgraded 1.6%.
Research Team ([email protected])
June 2013 2
Discussion points
Macro OverviewGrowth poised for moderate recovery
Aggregate 4QFY13 ReviewIn-line with estimates; Aggregate PAT flat
Markets & ValuationFY14 P/E at 14.7x is at long-term averages; imperative for growth to rebound for market returns
Sector Snapshot4QFY13 review and outlook
AnnexureMOSL Universe – Annual Performance & Valuations
June 2013 3
INDIA STRATEGY: Mar-13 Results Review Aggregate sales grew 7%, PAT growth flat for first time since Sep-09
Aggregate sales of MOSL Universe (Ex-RMs) grew by 6.9% (v/s est of 8.3%), EBITDA grew in line with est of 5%. However, PAT remained flat (-0.1%) v/s est of 0.9% growth.
Large-caps which delivered above estimates are Tata Steel, Idea Cellular, Tata Motors, Maruti Suzuki, Oil India, Lupin, M&M, IndusInd Bank and Zee Ent.
Major disappointments in earnings were from Tata Power, SAIL, Cipla, UltratechCement, Ambuja Cements, NTPC, Asian Paints, Shree Cement, Godrej Consumer.
Sensex EPS grew 6.5% in FY13 (1.3% upgrade from 4QFY13 preview); FY14 EPS estimate saw a 1.6% downgrade over 4QFY13 preview levels. FY14 Sensex EPS expected to grow 12.6% to 1,346.
Refer our Mar-13 Quarter PreviewSensex EPS growth trend
June 2013 4
MACRO: Growth poised for moderate recoveryPositive growth in IIP in 4QFY13
See moderate recovery in GDP growth in FY14
IIP expanded for all 3 months of4QFY13 in a year when 6 out of 12months recorded negative growth.
Latest indications for upturn incapital goods sector and continuedperformance from consumer non-durables.
FY13 IIP growth was at 1.0%. Weexpect FY14 IIP to recover to 4% onthe back of hopes of policy drivenpush to investment and ensuingeasier monetary conditions.
GDP growth plummeted to 4.5% in3QFY13 and likely at 5% in FY13.
We expect a moderate recovery inFY14 to 5.8% based on improvedperformance of agriculture andindustrial sector.
IMD has indicated a normal rainfallfor 2013 kharif season andsounded more confident in theirsubsequent interactions.
Quarterly IIP growth has bottomed out
IMD more confident of a normal 2013 monsoon
June 2013 5
MACRO: RBI on easing course though liquidity challenges remainSharp drop in inflation, to below 5%
Tight liquidity inhibited rate transmission
Inflation has dropped sharplybelow RBI’s comfort level to4.9% in Apr-13 with coreinflation ruling at only 2.8%.
The international commodityprices and relatively stable INRpresent a benign inflationaryoutlook, going forward.
This has provided headroom toRBI to further ease policy ratesby 50bp in remaining FY14.
However, improvement inliquidity situation has not beencommensurate, hinderingtransmission of monetarypolicy to financial marketsexcept bond yields that havesoftened starkly.
Lower deposit growth andconcerns over credit qualityhave also restrained creditgrowth.
Credit growth constrained by deposits, NPA issues
Provides headroom to cut rates another 50bps
June 2013 6
MACRO: INR trends remain weak amidst external vulnerability
The trade deficit improvedsignificantly during Feb-13 andMar-13. However, it increased againin Apr-13 and have possiblyremained high in May-13 too.
However, we expect gold imports tofall Jun-13 onwards and stable oilprices further raises hopes of acorrection in trade deficit.
We expect the trade deficit to comelower at 8.5% of GDP in FY14 vs.10.4% in FY13. CorrespondinglyCAD/GDP is also likely to comedown to 3.0% from 4.7%.
However, some near term externalvulnerability indicators have showndeterioration including the relianceon short term debt and increasedexternal claims (net investmentposition) on economy.
However, amidst all these INR hasbeen fairly stable for the pastseveral months as capital flows havekept the BoP in balance.
External sector: some deterioration in India’s external vulnerability indicators
Trade deficit and CAD in FY13 at highest level Some stability to INR at 54-56 levels
Mar-12 Sep-12 Dec-12
1. Ratio of Total Debt to GDP 19.7 19.3 20.6
2. Ratio of Short-term to Total Debt (Original Maturity) 22.6 23.2 24.4
3. Ratio of Short-term to Total Debt (Residual Maturity) 42.6 43.7 44.1
4. Ratio of Concessional Debt to Total Debt 13.9 13.2 12.5
5. Ratio of Reserves to Total Debt 85.2 80.7 78.6
6. Ratio of Short-term Debt to Reserves 26.6 28.7 31.1
7. Ratio of Short-term Debt (Residual Maturity) to Reserves 50.1 54.1 56.2
8. Reserves Cover of Imports (in months) 7.1 7.2 7.1
9. Debt-Service Ratio (Debt Service Payments to Current Receipts) 6.0 6.0 5.8
10. Net International Investment Position (NIIP) (USDb) -249 -272 -282
11. NIIP/GDP ratio -13.3 -15.1 -15.4
June 2013 7
MACRO: Fiscal consolidation and reform underway
Government has started the fiscalconsolidation process with FY13fiscal deficit restrained nearly at thebudgeted levels of 5.1% as per thelatest indications. Sticking to themedium term fiscal framework thatseeks to achieve fiscal deficit of 3%of GDP by FY17, govt. has placeFY14 fiscal deficit figure at 4.8%.
Government has also embarkedupon many difficult reformincluding in the area ofsubsidy, FDI, disinvestment andsector specific reforms in the area ofinfrastructure. However, manyremain an work in progressincluding tax reforms.
Expect fiscal consolidation to take shape in FY14 Union Budget Fiscal correction plan laid down for 12th plan
Area Measure
Tax Government deferred and diluted the contentitous income tax provisions, viz., GAAR, retrospective amendments and indicated no rash action in Vodafone case
Subsidy Government hiked diesel prices by INR5 at one go and later embarked on a phased deregulation of diesel prices. It also limited the LPG subsidy initiatlly to 6 cylinder per year per household.
FDI Govt. liberalises FDI norms in multibrand retail, aviation, power trading exchange, broadcasting, and single brand retail.
Investments Cabinet Committee on Investment (CCI) formed for fast track clearances following which the government has approved 25 oil and gas projects, 13 power projects and also put in place a system to monitor projects of INR1b and above.
Disinvestment Raised INR240b through disinvestment in challanging market conditions in FY13 vs. a target of INR300b.
Fiscal policy Announced fiscal correction plan for 12th Plan period; starting with a fiscal deficit of 5.3% for FY13 and 3.0% in FY17; eventually keeps FY13 deficit at 5.2% and sets a target of 4.8% for FY14.
Monetary policy RBI eased rates cumulatively by 125bp and cut CRR by 200bp from their recent cyclical peak.Exports Announced various incentives to boost exports in two phases. Also reduced the minimum land
requirment for SEZs.Railway Effects near 20% hike in railway passenger fares after a decade. Introduces fuel adjustment
component in freight traffic.Power Announced financial packages for revival of SEBs. Most state governments embarked upon regular
power tariff hikes.Road A new approach to road construction, the EPC mode, has been put in place along with various
procedural simplificaitons. Further for 'linear projects' (such as roads, rail, pipeline, etc. environmental and forest clearances has been delinked as per Supreme Court guidance.
Banking Banking law amended paving way for RBI to issue new licensesSugar Partially decontrolled the USD15b sugar sector by giving freedom to millers to sell in the open
market and removed their obligation to supply at subsidised rates to ration shops. Welfare Operationalises Direct Benefit Transfer for various subsidy and welfare scheme through the
Aadhaar mechanismRetail investors Rajiv Gandhi Equity Savings Scheme announced to encourage small savings.FIIs Govt reduces withholding tax on overseas corporate borrowings to 5% . Abolishes various sub-
ceilings for foreign investment in domestic government and corporate debt papers paving way for USD30b capital flow
June 2013 8
Mar-13 Quarter Results Review: Sales grew 7%, PAT growth flat
Aggregate sales grew 7%, PAT growth flat for first time since Sep-09
Aggregate sales grew by 6.9% (v/s est of 8.3%), EBITDA grew in line with est by 5% (est of 5.3%), PAT remainedflat v/s est of 0.9% growth.
Aggregate EBITDA margin (ex financials) is down 40bps YoY (est 50 bps); Cement, Utilities and Capital Goods arethe key contributors to the margin decline.
53 companies reported PAT higher than estimates, 59 companies below and 29 in-line. On the EBITDA front, 42companies exceeded estimates and 60 companies were below estimates.
The current quarter saw more downgrades than upgrades with FY14 EPS revised upwards for 42 companies anddownwards for 85 companies.
Sector performance: Healthcare and Autos led the PAT growth
Sales grew by 6.9% led by Healthcare (21%), Technology (20%), Consumer (14%) and Oil & Gas Ex RMs (8%).
PAT growth remained flat (-0.1%) with NBFC (32%), Healthcare (31%), Private Banks (25%), Technology (20%)and Consumer (18%) among the contributors. However, Telecom (-58%), Bank PSUs (-17%), Utilities (-7%) andwere the laggards.
Top outperforming sector over estimates were Autos (+27% Variance) and Healthcare (+14% Variance).
Capital Goods (-11.4%) and Cement (-9.2%) contributed negatively to the EBITDA growth, while Technology(20%), Automobiles (19%) and Healthcare (12%) remained the top sectors.
June 2013 9
Mar-13 Quarter Results Review: Sales grew 7%, PAT growth flat
Sector performance (contd…)
Autos provided the beat to PAT estimates reporting PAT significantly above estimates led by TataMotors, Maruti Suzuki and M&M. Ashok Leyland remained the major disappointment.
Capital goods reported EBITDA higher than expectations led by BHEL (only company reporting EBITDA aboveexpectations). However, 6 out of 9 companies reported below expected EBITDA.
Cement EBITDA margins have dipped to ~20% (350bp decline v/s est of 120bp). The sector saw the maximumdowngrades with earnings cut by more than 15% for all the companies.
In Consumer space, Britannia, HUL, Pidilite and United Spirits reported PAT above expectations. Britannia sawupgrades in estimates (+16.6%) and Asian Paints was downgraded (-10.8%).
Within Private Banks, all companies were above / in-line with estimates. Amongst the PSU Banks, SBI and PNBwere the major disappointment. Union Bank was the positive surprise.
Healthcare sector continued to grow at 20.6% YoY with PAT growth driven by Sun Pharma, Dr Reddy’s andLupin among large caps. Sun Pharma saw the maximum upgrade in earnings.
For Metals, Hindustan Zinc, Tata Steel and Sterlite Industries were the positive surprises reporting EBITDAabove estimates. SAIL was the only major disappointment in the sector.
In the Energy space, Cairn India and Chennai Petroleum were the laggards. ONGC EBITDA was above estimatedue to lower subsidy sharing. Reliance Industries was in-line with estimates.
Technology sector reported PAT in-line with estimates with HCL Tech, TCS, Wipro reporting estimates in-line.Tech Mahindra was the positive surprise reporting earnings above estimate.
June 2013 10
Mar-13 Quarter Results Review: Sensex PAT growth flat; Nifty negative
Sensex performance: PAT growth flat, in-line with estimates
Sensex aggregate Sales grew 7% (v/s est of 9%), EBIDTA grew 6% (in-line with est) and PAT was flattish at 1%(v/s est of 1.9% de-growth).
12 companies in Sensex reported PAT above estimates; 8 companies reported below estimates; 10 reported inline.
Fastest growing companies are Tata Steel (+104%), Maruti Suzuki (+79%), Dr Reddy’s Labs (+72%), GAIL(+68%), Sterlite (+43%), Reliance Industries (+32%) and Sun Pharma (+31%).
Negative earnings growing companies are Tata Power (-62%), Bharti Airtel (-49%), ONGC (-40%) and JSPL(-35%) .
Nifty performance: PAT de-growth, below estimates
Nifty excl BPCL aggregate Sales grew 6% (v/s est of 8%), EBIDTA growth was at 5% (v/s est of 4%) and PAT de-grew by 1.6% (vs est de- growth of 1.3%).
16 companies in Nifty reported PAT above estimates; 22 companies reported below estimates; 12 reported inline.
The biggest positive surprises against on the PAT front were Reliance Infra (+54% variance), Dr Reddy’s Labs(+52% variance), Tata Motors (+44% variance) and Maruti Suzuki (+42% variance), while negative surpriseswere Tata Power (-59% variance), Sesa Goa (-40% variance) and Ranbaxy (-39% variance).
June 2013 11
MOSL Universe: Mar-13 Quarter Performance (INR b)
June 2013 12
MOSL Universe: Mar-13 Quarter Performance4QFY13 SECTOR PAT GROWTH (YOY, %): NBFC, HEALTH CARE, PRIVATE BANKS, MEDIA LEAD THE PACK
SECTOR PAT VARIANCE FROM ESTIMATES (%): TELCOM, REAL ESTATE, CEMENT, OIL (EX RMS) DISAPPOINTS
PAT growth was led by NBFC (+32%, in line with estimates, Health Care(+31%, above
estimates), followed by Private Banks (+25%, in line
with estimate).
Telecom, Real Estate, Cement, Oil (Ex
RMs), were the key sectors that underperformed over our
estimates.
June 2013 13
Sectoral quarterly PAT trend: Financials rise to 26% of aggregates
MOSL Universe Mar-13 PAT at INR817bn. Contribution of Financials has risen from 18% to 26% in last 20 qtrs.Similarly, share of Metals has fallen from 16% to 12% during this period.
Note: Comparable Universe, excludes Coal India, NHPC, JSW Energy, Oberoi Realty, Oil India and MCX.
June 2013 14
Sectoral quarterly contribution: High PE stocks share at new highCONTRIBUTION OF PVT BANKS, CONSUMER & TECHNOLOGY AT ALL TIME HIGH
CONTRIBUTION OF METALS & OIL (EX RMS) AT MULTIPLE QUARTER LOW CONTRIBUTION OF TELECOM IS NOW AT JUST 1%
June 2013 15
MOSL Universe PAT at INR817b; Mkt Cap below Dec-10 levels
Note: Comparable Universe, excludes Coal India, NHPC, JSW Energy, Oberoi Realty, Oil India and MCX.
June 2013 16
Sensex Performance: Actual v/s EstimatesTREND IN SENSEX SALES GROWTH (%): ACTUAL V/S ESTIMATES
TREND IN SENSEX EBITDA GROWTH (%): ACTUAL V/S ESTIMATES
June 2013 17
TREND IN SENSEX PAT GROWTH (%): ACTUAL V/S ESTIMATES
Sensex Performance: Actual v/s Estimates
4QFY13 PAT GROWTH (YOY, %): TATA STEEL, MARUTI, DR REDDY’S, GAIL, STERLITE AMONG KEY LEADERS
June 2013 18
Sensex Performance for 4QFY13
June 2013 19
Comparison of Earnings Based on Growth Rates
For 4QFY13, 25% of the companies in MOSL Universe reported earnings growth of over 30%. In total, 41% of MOSL
Universe saw growth of over 15%.
41% of MOSL universe companies reported negative earnings growth.
Distribution of PAT Growth: highest no. of companies with PAT de-growth (ex crisis quarters)
June 2013 20
Mar-13 Quarter Results: The Best & The Worst (>$3B Mkt cap)
June 2013 21
Mar-13 Quarter Results: The Best & The Worst (<$3B Mkt cap)
June 2013 22
Highest Earnings Upgrade / Downgrade (>$3B Mkt cap)
June 2013 23
Highest Earnings Upgrade / Downgrade (<$3B Mkt cap)
June 2013 24
Sensex Companies’ EPS Upgrade / Downgrade
June 2013 25
Markets reaction on quarter performance
June 2013 26
4QFY13 earnings leads to downgrade in FY14 Sensex EPS
Post the 4QFY13 earnings, FY13 Sensex EPS growth stood at 6.5% to 1,196.
FY14 Sensex EPS saw a downgrade of 1.6%. We now expect the FY14 EPS to grow by 12.6% to 1,346.
In FY13, the 3 highest contributors to growth are the banks (ICICI, SBI, HDFC Bank), with 60% share in thegrowth.
Tata Motors, Tata Steel and Bharti Airtel were the biggest negative contributors to FY13 earnings growth.
Sun Pharma (+18%), Maruti Suzuki (15%) and Tata Steel (13%) are the top companies that saw upgradesin their FY14 EPS. SBI (-16%) and Hindalco (-14%) were the companies with downgrades.
In FY14, we believe ONGC, HDFC Bank, ICICI Bank and Tata Motors will be the biggest contributors togrowth.
We expect BHEL to continue as negative contributor to growth in FY14 also.
June 2013 27
Earnings growth in FY13 down to 6.5%; cyclicals lead growth in FY14
TREND IN FY13 SENSEX EPS REVISION TREND IN FY14E SENSEX EPS REVISION
EARNINGS GROWTH EXPECTED TO REVIVE IN FY14 AT 14% (INLINE WITH LONG TERM AVERAGES)
216 236 272348
450 523718
833 820 834
10241123 1196
13461543
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
E
FY15
E
FY01-08: 21% CAGR
FY08-13:7% CAGR
FY13-15E: 14% CAGRFY01-12: 16% CAGR
June 2013 28
Growth contributors: Tata Steel / Tata Motors impact growth in FY13Stock-wise contribution to growth in FY13E Sensex EPS (INR)
Stock-wise contribution to growth in FY14E Sensex EPS (INR)
June 2013 29
FY13 Sensex EPS entire downgrade led by just 3 stocks in 12 monthsSTOCKS CONTRIBUTION TO GROWTH IN FY13E SENSEX EPS (INR)
TOP 10 STOCKS FY13E EPS CHANGE BOTTOM 10 STOCKS FY13E EPS CHANGE
June 2013 30
MOSL Universe’ EPS Upgrade / Downgrade
June 2013 31
MOSL Universe’ EPS Upgrade / Downgrade
June 2013 32
MOSL Universe’ EPS Upgrade / Downgrade
June 2013 33
Markets and Valuations
June 2013 34
Markets Performance
World Indices Performance CY13 YTD (%) – Local Currency
2013 YTD: Indian markets are underperforming, post a strong 2012 outperformance
World Indices Performance CY13 YTD (%) – USD
June 2013 35
Sectoral Performance: Consumer, Telecom, Healthcare have huge outperformance
Sectoral Performance for CY13 YTD (%) Sectoral Performance from Dec-10 till-date (%)
June 2013 36
Sensex Performance: Sun / ONGC performs; Cyclicals underperform Sensex Best and Worst Stock Performance CY13 YTD (%)
Sensex Best and Worst Stock Performance from Dec-10 till-date (%)
June 2013 37
Fund Flows: FIIs remain big buyers; DIIs remain big sellersFund flow into Indian markets
Fund flows
Compared to CY12 net FII inflow of USD24.5b, the YTD CY13 FII has net inflow of USD15.2. This has been an important trigger for a stable INR, despite deteriorating external trade.
Selling intensity of DIIs have been rising with a net outflow of USD9.1bn, post an outflow of USD10.9b in 2012.
Monthly Net FII Flows(USD b) Monthly Net DII Flows(USD b)
June 2013 38
Markets valuations at about historical averagesSensex P/E (x) Sensex P/B (x)
Market Cap to GDP (%)Sensex RoE (%)
June 2013 39
Sector valuationsAuto Sector EV/EBIDTA (x) PSU Banks P/B (x)
Capital Goods Sector P/B (x) Private Banks P/B relative to Sensex P/B (%)
June 2013 40
Sector valuationsConsumer Sector P/E relative to Sensex P/E (%) Technology Sector P/E (x)
Metals Sector P/B relative to Sensex P/B (%) Media Sector P/E (x)
June 2013 41
Sector valuationsOil & Gas Sector P/B relative to Sensex P/B (%) Health Care Sector P/E(x)
Telecom Sector EV/EBIDTA (x) Utilities Sector P/B (x)
June 2013 42
Sector Snapshots
June 2013
AUTOPositive / Negative surprises TATA Motors: JLR delivered strong operating performance led by Fx benefits, richer mix. S/A business also marginally ahead of expectations. M&M's operating performance was above estimate on better cost management. Margins for both auto & FES division improved QoQ. Maruti Suzuki reported above estimate operating performance driven by Fx benefits, localization savings and lower discounts QoQ. Hero MotoCorp reported above estimate margins on favourable INR/JPY movement, softness in commodity prices, and better mix. Eicher Motors: Royal Enfield (RE) delivered highest ever margins. VECV also reported sequential margin rise amidst tough environment. Bajaj Auto reported marginally below estimate EBITDA margins due to rise in other expenditure likely due to higher marketing spends
Guidance highlights Tata Motors: Healthy JLR demand & margin outlook led by product actions. India business to remain under pressure over near term. M&M: Expects tractor industry growth at 6-8% with an upward bias. Outlook for auto segment challenging. MSIL: Demand seems to have bottomed out, expect industry growth of 5-6%; 30% of FY14 JPY exposure hedged at JPY/USD of 95 (v/s 90 for
4Q), discounts to remain similar in 1Q, localization initiatives on track. Bajaj Auto: Exports & 3Ws to grow 10-12%, domestic 2W outlook remains uncertain. To pass-on 50% of Fx benefits to spur export demand. Eicher Motors: RE vol. guidance at 175k/250k units for CY13/CY14, new RE plant can be scaled up to 500k units, Volvo engine project and
new CV range launch by CY13-end.
43
Positive/Negative surprises and Guidance highlights by sector
CAPITAL GOODSPositive / Negative surprises L&T’s E&C EBITDA margins were down 226bp YoY during 4QFY13, leading to 110bps decline for FY13 (vs guidance of +/-50bp). NWC has
been maintained in band of 15-16%; while investments in subsidiaries was curtailed at INR14b in FY13. Consolidated ROE stood at 16.8% in FY13, up from 16.2% in FY12.
Crompton Greaves reported another disappointing quarter with overseas subsidiaries reporting EBIT loss of INR641m, largely given rework related costs in Belgium of INR550m. Margins in domestic business has declined given lower share of exports in power business, poor margin institutional sales in consumer, adverse product mix , etc.
June 2013 44
CEMENTPositive / Negative surprises 4QFY13 results were unusually weak led by marginal decline in QoQ realizations leading to negative surprise on profitability. While
realizations declined ~INR60/ton QoQ (v/s est INR200/ton improvement), lower than estimated cost resulted in improvement in EBITDA/tonby ~INR60/ton QoQ (v/s est of improvement of INR235/ton).
Cost side positively surprised largely driven by savings on energy cost, driven by soft imported coal prices, which also resulted in soft pet-coke and e-auction coal pricing.
Guidance highlights UltraTech has indicated for ~8% volume growth. However, it expects margins to remain under pressure due to adverse demand-supply
equilibrium and cost pressures.
CAPITAL GOODS (contd)Positive / Negative surprises KKC margins were impacted due to corporate charges of INR157m to parent company and re-alignment of forex rates based on producer
margins. TMX reported robust performance with a 40bp increase in margins; which is commendable in light of the sales decline of 13% YoY.
Guidance highlights LT’s guidance for FY14 came as a positive surprise (order intake to grow 20%, revenue to grow 15%, and E&C EBITDA margin to be
maintained). Also, the management expects margins in overseas business to be at 8%, which is significantly lower that the earlier expectations of ~10%+.
TMX expects a double digit growth in order inflow during FY14. Margins are expected to be maintained. KKC guided for 8-10% YoY revenue growth in FY14; and margins to be maintained at 4QFY13 levels of 16.8%. Crompton has guided 8-10% revenue growth in FY14, and also expects overseas operations to return to profitability. All its key global power
transformer factories have full order books. The key monitorables are: Losses in Canada, Risk of Liquidated Damages and Rework related costs, which could impact performance in FY14.
Positive/Negative surprises and Guidance highlights by sector
June 2013 45
CONSUMERPositive / Negative surprises APNT reported a muted 3% volume growth in domestic decorative paints. Management indicated a challenging CY13. Britannia’s margin expansion of 270bps was a positive surprise. We upgraded the stock to BUY. Colgate’s volumes bounced back in double digit territory however margins disappointed. We cut our estimates marginally. Dabur’s domestic volume growth was ahead of our expectations at 12%. Guided for robust volumes and margin expansion in FY14 GCPL’s margins disappointed but Hair Colors witnessed turnaround. Management guided for continued traction in domestic business. reported in-line numbers but parent’s open offer announcement to increase stake to 75% stole the limelight away from results.. ITC’s Cig volume growth of ~3% was ahead of expectations. 20% Cig EBIT growth continued. Marico’s volume growth and margins were below expectations. Nestle continued to disappoint on top-line as well as bottom line fronts. Pidilite’s margins were well ahead of expectations. We downgraded the stock to Neutral on expensive valuations.
Guidance highlights HUL indicated continued challenges in discretionary premium personal care and foods consumption. Lower RM costs may aggravate
competitive intensity. Liquor companies guided for better outlook on raw material costs after a challenging FY13. Focus on profitability will continued especially
after the entry of Diageo in UNSP. While most of the companies reported Gross margin expansion due to stable to lower input costs; channelizing the same into advertising
spends have restricted and will continue to restrict the gains at operating margin level.
FINANCIALSPositive / Negative surprises HDFCB surprised positively on margins (+20bp QoQ and +10bp YoY); strong traction in SA Deposits (+8% QoQ and 18% YoY) and stable
asset quality (flat QoQ; GNPA % at ~1%) were the other key positives. ICICIBC’s upward trajectory in margins continued (+26bp QoQ and +37bp YoY); asset quality performance remained stable.
Positive/Negative surprises and Guidance highlights by sector
June 2013 46
FINANCIALS (contd)Positive / Negative surprises
SBIN core operations were weak as NIMs declined 14bp QoQ to 3.2% and fee in come growth was muted. Further led by higher provisions PBT came in 35% below estimate. Lower tax rate of 8% however helped contain underperformance of PAT (9% below estimate). Fresh restructuring rose significantly to INR83b (83bp of loans), which overshadowed strong performance of net slippages (just INR1.5b) .
PNB’s core operations remained healthy with stable NIMs. As a strategy bank continued to tread on a consolidation path and strong recovery efforts led to lower net slippages. Provisions increased as bank increased its PCR impacting bottom-line
Continued stress in corporate segment and SME segment led to rise in slippages for BoB, BoI, INBK, ANDB and FB. This also led to higher interest income reversals and provisions which impacted NIMs and earnings. In case of INBK sharp rise in employee expense on back of pension provisions came in as a surprise.
Guidance highlights for FY14
SBIN: (1) Domestic NIM to be ~3.7%, (2) Loan growth to be driven by higher re-financing opportunity, working capital demand and retail financing. For FY14, loan growth of 20-22% and deposit growth of 20-25% (3) Restructuring pipeline is at INR103b (including SEBs).
ICICIBC: (1) 10bp improvement in NIM from 3.1% in FY13, (2) Fee income growth to be in double digits v/s 3% in FY13, (3) C/I ratio to becontained below 40%, (4) credit cost of 75bp, (5) Domestic loan growth of 20%, retail growth of 25% and international loan growth of 10%
AXSB: Loan growth to be faster than industry growth rate. NIMs to be in range of 3.25-3.5% (with bias on upward guidance). Opex growthfor FY14 expected to be in the range of 17-20% and management remains confident of containing the cost to income ratio within 45%. Gross stress addition to remain in the average range of INR10-12b per quarter for FY14.
OBC: (1) NIM to improve by ~10bp, (2) GNPA and NNPA to be contained to 2.9% and 2% (3) PCR guidance of 68%+ v/s 63% in FY13 (4) CASAdeposits of 26% v/s 24.5% in FY13.
BOB: Business growth 2-3% above industry; Domestic NIM to stabilize, whereas international NIM expected to improve; Slippages in domestic operations to be contained at current levels, international portfolio slippages to recede.
Positive/Negative surprises and Guidance highlights by sector
June 2013 47
Positive/Negative surprises and Guidance highlights by sectorHEALTHCAREPositive / Negative surprises Dr. Reddy’s better than expected operational performance was led by strong performance in US generics, Russia/CIS and PSAI segment. Lupin witnessed higher than expected core profitability reflecting benefits of operating leverage and better product mix in the US. Cadila’s EBITDA was in line despite a lower topline growth, as some of the non-recurring costs pressures have eased up. Cipla reported lower than expected EBITDA, dampened by the negative impact of operating leverage. EBITDA for Divi’s was below estimate, impacted by lower capacity utilization due to expansion initiatives and ongoing quality inspections. GSK Pharma’s results were below expectations due to supply chain related issues, some of which are expected to resolve by 2QCY13.
Guidance highlights - Strong guidance & aspirations Cipla guided for double digit sales growth in FY14 and indicated that margins would be under pressure due to high R&D and staff costs. Divi’s lowered its topline growth guidance to 15% for FY14 and continues to caution on pressure on margins in the near future. Glenmark guided for 18-20% growth in US generics and Indian formulations in FY14; EBITDA expected to grow 21% to INR12.25b Lupin targets USD5b topline over next five years with implied CAGR of 25% Cadila targets USD3b topline by FY16 with implied CAGR of 27.5%; has lowered tax guidance to 15% from earlier 25%. Biocon has charted our a growth plan to reach USD700m/USD1b by FY15/FY18. Dr. Reddy’s did not guide for FY14 due to uncertainty in getting FDA approvals; however indicating of healthy growth in rest of the business. EBITDA Margins – Some companies like Lupin, Glenmark, Cadila, IPCA are targeting a gradual improvement in margins over the next 2 years
MEDIAPositive / Negative surprises Zee Entertainment and DB Corp surprised positively for second consecutive quarter Jagran and Dish TV disappointed for second consecutive quarter
Guidance highlights Zee expects its ad growth to be in-line with the industry ad growth in contrast with significant outperformance in recent quarters Print companies indicated that worst might be behind for ad growth and expect double-digit ad growth in FY14.
June 2013 48
METALSPositive / Negative surprises Tata Steel surprised positively due to better than expected margins at Europe, Indian and S.E Asia. JSW surprised positively due to higher sales volume and slightly lower cost. Sales volumes increased on higher export volumes. Nalco surprised positively as 100% linkage coal supply lowered power and fuel cost thereby boosted margins. HZL surprised positively as operating profit were boosted by non-recurring third-party sale of Zinc concentrate . STLT surprised positively due to better coal availability, stronger performance from HZL and ramp up of 80MW Tuticorin CPP SAIL surprised negatively due to sticky cost amid declining realizations. Employee cost was higher due to actuarial losses. NMDC surprised negatively as royalty and freight cost was higher than expected. Dividend increase to INR7/share (6% yield) was positive. JSPL surprised negatively margins were hit due to lower realization, higher discounts in weak market condition despite higher volumes.
Guidance highlights HZL: FY14 guidance for mine production is 1m ton while Saleable silver (ex captive use) is 360 tons. NMDC: Targeting 27.4mt of iron ore sales in FY14 against 26.3mt achieved in FY13 (our est. 29mt). HNDL: Novelis is planning to spend another USD700-750m in FY14 (USD775m in FY13). Trial production started in Mahan and Utkal.
OIL & GASPositive / Negative surprises Reliance Industries’ earnings were in-line helped by higher GRM’s at USD 10.1/bbl and QoQ flat Petchem margins at 8.6%. KG-D6 gas decline
continued and averaged 19mmscmd (-20% QoQ). OMC’s in black for FY13 led by (a) govt. subsidy, and (b) inventory gains during 4QFY13 (except BPCL). Share marginal 0.6% of subsidy. ONGC and OIL’s reported numbers were below estimates due to one-offs. However, operating profitability was boosted by lower than exp.
subsidy sharing at ~37% for FY13 v/s our est of 40%. We model upstream companies to share 40% of total under recoveries for FY14/15. Decline in gas availability led by fall in domestic gas production and LNG imports impacted earnings of PLNG, GAIL and GSPL.
Positive/Negative surprises and Guidance highlights by sector
June 2013 49
OIL & GAS (contd)Guidance highlights Petronet LNG expects Kochi terminal commissioning by Jul-13 (v/s Mar-13 earlier). PLNG has also delayed all the other key projects by
~3months.
Cairn India maintained guidance for FY14 exit rate at 200-215kbpd v/s ~175kbpd now. Management has hinted that Mangala production might not decline in 4QFY14 against our and street expectations.
IOCL’s Paradeep refinery commissioning delayed by 3-6 months to April-14.
Key Actionables Our positive stance on the Oil PSU’s (ONGC/OINL/BPCL) is driven by ongoing diesel reforms which is likely to reduce the gross under
recoveries by ~55% by FY15. We remain positive on the same and have modeled INR0.45/ltr diesel price hike.
For OMC’s, in the initial period of reforms, the stock performance will be largely through re-rating, and the earnings benefit will be limited as we already assume nil subsidy sharing in FY14.
Also we model domestic gas price at USD6.8/mmbtu v/s USD4.2/mmbtu now and will be positive for ONGC, Oil India and RIL.
REAL ESTATE
Positive / Negative surprises Prestige/Sobha: Continue to post strong sales and cash flow despite others struggling. Guides for 15-20% growth in presales for FY14 amidst
concern of oversupply and potential moderation in demand.
Godrej Properties: Generated positive operating cash flow for the first time in past 5-6years on the back of uptick in new launches and sales.
Unitech: Written off INR8b from due networth due to re-statement of financials by one subsidiaries.
Positive/Negative surprises and Guidance highlights by sector
June 2013 50
RETAILPositive / Negative surprises Titan ‘s margins exceeded expectations Management guided for good 1QFY14 due to lower Gold prices. Regulatory concerns are receding. Jubilant Foodworks posted 15 quarter low same store growth of 7.7%, a key disappointment. Shoppers Stop’s and Pantaloon’s same store growth maintained the momentum witnessed in 3Q. Shoppers Stop margins surprised
positively.Outlook Retailers have seen some improvement in same store growth led by improved consumer sentiment. However, discretionary categories like
Jewellery and QSR are still not out of the woods in our view.TELECOMPositive / Negative surprises Wireless traffic growth and EBITDA margin for GSM incumbents surprised positively driving 7%/20% QoQ wireless EBITDA growth for Bharti
(India &SA)/Idea Bharti Africa EBITDA declined 5% QoQ vs our expectation of flat performance
Guidance highlights Bharti’s FY14 capex guidance unchanged at USD2.2-2.3b. Idea’s capex guidance for FY14 at INR35b.
TECHNOLOGYPositive / Negative surprises Infosys’ brings back Mr. N. R. Narayana Murthy to the Board and executive leadership of the company as Executive Chairman of the Board
and Additional Director with effect from June 1, 2013. Across the tier-II, KPIT and Hexaware outperformed on margin front. Mindtree only player with major deal wins which lend higher visibility
to better growth in FY14. Infosys’ weak guidance for FY14 was a key disappointment, compounded by a weak 4QFY13 result on all fronts. Revenue grew 1.4% QoQ
, significantly below the company's guidance of 4.1% QoQ. EBIT margin declined 210bp QoQ to 23.6% v/s guidance of 100bp decline.
Positive/Negative surprises and Guidance highlights by sector
June 2013 51
UTILITIESPositive / Negative surprises Powergrid’s capitalization stood at INR78.5b and FY13 capitalisation was INR172b, ahead of our estimate Coal India, E-auction realization surprised negatively and declined to INR2,308/unit (down INR633/ton QoQ). Washed coal volumes (down
41% YoY), realization too declined sizably. Tata Power coal division EBIT decline by 45% QoQ, as cost of production went up by USD6/ton QoQ. EBIT margins thus were lowest in last
8 quarter to USD6/ton in 4QFY13. CESC standalone number improved led by tariff hike and incentive of INR300m during the quarter. Consolidated retail business EBIT (loss)
improved from INR2b in FY12 to INR800m in FY13.Guidance highlights NTPC re-iterated capacity addition target of 1.8GW in FY14 and has plan to import 25mton coal. Coal India: Staff cost increase of 6-7% in FY14E and INR9-10b increase in contractual wage. E-auction/Washed coal volume/prices expected
to be maintained in FY14E. Powergrid maintained its 12th plan capex target of INR1t+. On capitalisation front, management do not give any guidance, but insisted that
equity contribution to new projects wont go below 25%. JSW energy: Standalone volumes to be lower by 1BUs in FY14E (14.5BUs), while merchant realization expected in the range of INR4-
4.25/unit. NHPC will add 937MW of capacity in FY14 and 164GW in FY15. Growth likely to taper off as Kishan Ganga (330MW) project is too
estimated only in 4QFY17E.
TECHNOLOGY (contd)Guidance highlights Cognizant’s guidance of “at least” 5.4% QoQ revenue growth guidance to USD2130m was on the higher side. CTSH retained its annual
guidance for now, and cited that barring any fresh macro concerns, there remains scope of beating if demand environment is unchanged. Infosys’ guidance for 6-10% YoY growth in FY14 revenues to USD 7,842m-8,138m was on the weaker side. Disconcertingly, the company
suspended the practice of giving EPS guidance and outlook on margins, citing higher variability in margins from: [1] continued pricingpressure in Business IT Services (BITS) segment, [2] uncertainty over visa issuances and [3] limited visibility on growth.
Wipro guided for 1QFY14 revenue growth of -0.6% to +1.6% QoQ, well below our expectation of 1.5-3.5% QoQ growth. Soft guidance wason account of seasonally weak India and Middle East business, which drove growth in 4QFY13 (43% of incremental revenue).
Positive/Negative surprises and Guidance highlights by sector
June 2013
AUTO: Favorable Fx, richer mix drive margins; demand recovery signs in 2Ws & tractors
Summary
Volume divergence continues: Auto volumes declined 2% YoY.While 2Ws were largely flat, Cars declined 16%. MHCVs continuesto decline sharply. LCV & UVs though grew 15% & 20% resp.
EBITDA margins for Auto universe (ex JLR) improve 100bp QoQ ledby favorable Fx, better mix and soft RM cost: EBITDA marginsimproved 100bp QoQ (-80bp YoY) led by favorable Fx movement(JPY/USD for Hero, Bajaj), better mix (Royal Enfield, TTMTS/A, MSIL) and benign commodity costs. JLR margins improved290bp QoQ (230bp YoY) to 16.9% on richer mix and favorable Fx.M&M reported QoQ margin rise for both auto and FES segment.
FY14/15 EPS downgrade upgrade for HMCL, MSIL, TTMT &EIM, while downgrade for AL: We upgrade our FY14E/15E EPS forHero (8%/6%), MSIL (15%/7%), TTMT (7%/6%), EIM(16%/7%), while downgrade AL (-34%/-15%).
Volumes stabilizing across segments, 2Ws and tractors witnessingearly signs of recovery: While volumes continue to remain weak ona YoY basis, our channel interaction indicates signs of stabilizationacross segments. Higher farm income (Rabi harvest) and normalmonsoon outlook are driving healthy retail demand for 2Ws andtractors.
Top picks: Prefer Maruti Suzuki (expect demand recovery witheconomic revival, favorable Fx benefit, lower discounts, benigncompetitive environment) and TTMT (strong JLR performance onproduct actions, India business to witness cyclical recovery inFY14/15). Within mid-caps, we prefer Eicher Motors (severalprojects coming on stream in CY13-14).
MSIL reports strong 260bp QoQ margin rise (ex SPIL)
JLR margins rise 290bp QoQ to 16.9% on favorable Fx & richer mix
9.6
5.7 5.27.3 7.3
6.18.0
10.6
1QFY
12
2QFY
12
3QFY
12
4QFY
12
1QFY
13
2QFY
13
3QFY
13
4QFY
13
361
453
375
362
420
639
605
527
486
533
856
16.2 17.1 13.7 13.4 14.4
17.0 14.6 14.5 14.8
14.0
16.9
2QFY
11
3QFY
11
4QFY
11
1QFY
12
2QFY
12
3QFY
12
4QFY
12
1QFY
13
2QFY
13
3QFY
13
4QFY
13
EBITDA (GBP m) EBITDA Margin (%)
52
June 2013
CAPITAL GOODS: headwinds continues; margins impactedSummary TMX and BHEL were above estimates; LT, ABB, SIEM, CRG and KKC were
below estimates. Continued macro economic headwinds and intense focuson cash flow management by several companies impacted execution.Ordering activity also remained sluggish, as decision making has beendelayed given the constrained environment. Key positives has beenrelatively smaller shrinkage in margins and maintaining NWC in a tightrange.
LT’s operating performance was below expectations due to lower thanexpected revenues and EBITDA margins. The key positive was strong orderinflow , up 32% YoY. LT has excluded slow moving orders worth INR170bduring 4QFY13.
KKC’s performance was impacted by corporate charges of INR157m and re-alignment of forex rates based on producer pricing arrangements with theparent company. This led to significant drop in margins (down 230bp QoQ).KKC is focusing on building portfolio in LHP segment in which it has amarket share of only 5-6%.
TMX and BHEL reported robust performance on the back of sturdymargins. TMX reported strong intake of INR11.6b, up 43% YoY, and wasdriven by overseas markets. HAVL’s domestic business growth remainedhealthy across product categories, except industrial cables; Sylvania hasshown meaningful improvement in profitability on a QoQ basis.
CRG showed disappointing performance in overseas business, whilemargins in standalone business also declined.
Order intake continued to remain muted; however enquiries remainedstrong and the challenge is the conversion of the same. Alsocompanies are aggressively focusing on exports to mitigate theimpact of slowdown in domestic market.
Operating performance a mixed bag
Order book impacted; BTB down to 2.2x
Revenue growth moderating, decline in margins a function of negative operating leverage
53
INR m Sales EBITDA PATActual Var % Actual Var % Actual Var %
ABB 19,700 6.8 1,065 -3.4 426 -20.5BHEL 188,502 1.2 46,513 24.8 31,766 26.7CRG 33,873 -3.5 779 -39.5 253 57.6KKC 11,543 2.7 1,939 -10.6 1,493 -9.3HAVL 11,696 -2.7 1,488 -5.6 1,097 -2.4LT 202,938 -4.0 25,759 -6.0 17,758 -7.0SIEM 29,556 -22.3 754 -74.5 300 -82.2TMX 14,682 3.5 1,672 13.4 1,153 11.8Capital goods 512,489 -2.8 79,970 6.1 54,246 9.3
922
1046
1149
1294
1427
1529
1632
1849
2051
2196
2232
2340
2494
2705
2888
3007
3170
3199
3397
3405
3472
3381
3228
3318
3289
3261
3171
2.1 2.3
2.2 2.4
2.4
2.4
2.4 2.6 2.7
2.8
2.6
2.7 2.8
3.0 3.0
3.0 3.
12.
92.
92.
92.
82.
62.
42.
42.
32.
32.
2
2QFY
07
4QFY
07
2QFY
08
4QFY
08
2QFY
09
4QFY
09
2QFY
10
4QFY
10
2QFY
11
4QFY
11
2QFY
12
4QFY
12
2QFY
13
4QFY
13
Order book (INR bn) BTB (x)
39.5
38.0
35.1
32.2
19.1
31.3
28.8
19.7
26.8
8.9
7.3
4.7
24.7
16.0
24.0
30.4
15.1
15.3
17.7
16.3
19.5
17.3
6.2
2.9
1.5
15.5
9.9 13
.914
.014
.311
.712
.113
.515
.411
.613
.416
.116
.513
.314
.315
.215
.812
.012
.213
.0 17.7
11.0
12.1
11.2 15
.8
4QFY
07
2QFY
08
4QFY
08
2QFY
09
4QFY
09
2QFY
10
4QFY
10
2QFY
11
4QFY
11
2QFY
12
4QFY
12
2QFY
13
4QFY
13
Eng Sector (revenue growth %) EBITDA Margin (%)
June 2013
CEMENT: Unseasonal weakness in realizations impacts performanceSummary
Volumes de-grew ~2.8% YoY: MOSL Cement Universe volumes de-grew 2.8% YoY (+40.6% QoQ v/s est flat volumes YoY) in 4QFY13.Demand recovery is not yet visible, with both organized housingand infrastructure showing limited signs of recovery.
Realizations down ~INR60/ton QoQ: Cement prices saw unusualcorrections in February and March across markets. This led to~INR60/ton QoQ (+INR80/ton YoY v/s est +INR200/ton) decline inrealizations for MOSL Cement Universe (ex ACC), with highestdecline for India Cement and Shree Cement. ACC’s realizationsimproved INR5/bag due very weak Dec-12 quarter realizations.
However, cost savings drives EBITDA: Cost savings in 4QFY13 was awelcome surprise, with savings driven by energy cost and operatingleverage benefit. EBITDA/ton stood at INR875/ton (v/s est ofINR1,058/ton) – up by INR50/ton QoQ (-INR156/ton YoY). Ambuja(down INR350/ton YoY & +INR64 QoQ) and India Cement (downINR220/ton YoY & -INR190 QoQ ) witnessed sharpest fall, whileUltratech (-INR18/ton YoY & +INR47 QoQ) was most resilient.
Pre-monsoon price increases underway, expect recovery from2HFY14: Cement prices are seeing increases pre-monsoon, however, we expect recovery in demand and pricing from2HFY14. We estimate realization improvement of INR(1)/15 per bagin FY14/15 and EBITDA improvement of INR(4)/9 per bag.
Top picks: Recovery in demand, lower capacity addition and priceresilience are drivers of sustainable improvement in operatingperformance. Revival in cement demand is the key catalyst for stockperformance. Prefer UltraTech/Grasim and Shree Cement.
Volume growth of ~4% for MOSL Cement Universe
Lower realizations off-set by cost savings supporting profitability
TREND IN KEY OPERATING ARAMETERS
4QFY13 YoY (%) QoQ (%) 4QFY13 YoY (INR) QoQ (INR) 4QFY13 YoY (INR) QoQ (INR)
ACC 6.4 -4.5 8.1 4,269 39 104 696 -195 162Ambuja 6.0 -3.6 10.6 4,271 13 -23 859 -350 64UltraTech 11.1 -3.6 12.0 4,775 214 -41 1,063 -18 47Birla Corp 1.7 4.6 9.1 3,898 -83 -14 507 -171 60India Cem 2.8 6.7 14.7 4,221 -25 -143 605 -223 -191Shree Cem 3.3 -6.2 8.7 3,586 26 -137 1,042 -98 25Aggregate 31.2 -2.8 10.6 4,354 83 -21 875 -156 53
Volumes (M Ton) Realization (INR/Ton) EBITDA (INR/Ton)
50 46 49 55 53 48 51 58
54
51 56 64 59
54
57 66
12.2 10.89.4 9.3
6.9
4.03.2
6.0
0.96.1
10.2 9.0 9.8
5.62.6
4.3
1QFY
10
2QFY
10
3QFY
10
4QFY
10
1QFY
11
2QFY
11
3QFY
11
4QFY
11
1QFY
12
2QFY
12
3QFY
12
4QFY
12
1QFY
13
2QFY
13
3QFY
13
4QFY
13
Despatches (MT) Growth (%)
2,400
3,100
3,800
4,500
400
650
900
1,150
1,400
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
1QFY
13
2QFY
13
3QFY
13
4QFY
13
Realization (INR/ton) RHS EBITDA (INR/ton)
June 2013
CONSUMER: Volume growth holding well; margins disappoint
55
Summary Marginally below estimates: Consumer coverage universe reported
14.4% revenue growth (est 14.6%), 16% EBITDA growth (est 21.1%) and17.9% Adjusted PAT growth (est 18.3%).
Volume growth holding out well; Dabur, Colgate, ITC Britannia and GSKreported healthy volume growth, while the rest of companies witnessedmarginal deceleration
Gross margin expansion; Gross margins expanded across the universehelped by declining/steady input costs, improving mix and stablepricing. Benefits of lower RM costs will help companies maintain pricinggiven the moderation in volume growth.
Gains ploughed back in ad-spends: As witnessed in 3Q, gains from RMwere re-invested in brand spends to sustain/revive the volumemomentum. Rising competitive intensity in Foods and HPC sectorprecluded any cooling off in advertising spends in our view.
EBITDA margins disappointed: EBITDA margins for our universe wasbelow expectations due to rising other expenses (power, freight andtransportation costs) as well as higher ad-spends.APNT, Marico, Colgate, GCPL and Radico were key underperformers vs.expectations.
Top picks: ITC, Dabur and Britannia are our top picks in the sector. ITC’smarket share gains in Cig is driving volume growth which we expect tocontinue as 64mm gains traction. Expect premium valuations to sustainon the back of solid high teens earnings CAGR. Continue to like Daburdue to strong double digit volume growth led by distribution gains. Weupgraded Britannia to BUY as we believe volume growth has bottomedout and margin gains of 70bps over next two years will drive 20% EPSCAGR.
4QFY13 Performance Snapshot
Volume growth holding out well
June 2013
FINANCIALS: PSBs: Weak operating performance; Private RoA’s continue to rise GNPA flat QoQ – a positive: Net slippage ratio for PSBs declined to 1.1% as
compared to 2% in 3QFY13 and near-term peak of 2.7%, led by strongperformance of SBIN (+ve surprise on gross slippages), PNB (INR3.7b -strong recoveries) and CBK. For, OBC slippages increased QoQ as one largeaccount slipped which was expected to be restructured (else in-line).BoB, BoI, ANDB and INBK disappointed. Private Banks performancecontinued to be strong. AXSB and ICICIBC asset quality was stable.
Restructured loans and pipeline remains high, negative surprise in PSBs:In 4QFY13, sharp increase in fresh restructuring and guidance on futurepipeline for PSBs overshadowed better performance on GNPAs. In-linewith RBI notification loans moved out of restructured pool, hence netaddition to restructured loans was contained to INR119b (0.4% of loans).
Divergent trends in NIMs: PSBs NIMs performance were belowexpectation led by (higher FITL loss in some cases) and pressure on lendingyields. SBIN NIM decline of 14bp QoQ (72bp YoY) was a negative surprise.Among others, ANDB, INBK and BoB disappointed. Private banks NIMscontinued to improve. AXSB, and IIB had benefit of capital raised.
PSBs weak core operations; Private banks YoY PAT growth of 24%+: FlatNII (YoY; NIM contraction), weak fee income and higher opex (in few casesled by increase in employee expense) dragged overall PPP lower by 6% YoYfor PSBs. Further, provision expense remained elevated (ageing of NPA andrestructured loan). Thus PAT declined 17% YoY despite PSBs availed taxbenefits. Private Banks profitability remained strong with earnings growthof 24% YoY led by strong core operations.
Valuation & view: Near term growth and profitability outlook remainssubdued for PSU banks however, valuations discount the same. Tradingprofits are likely to support earnings in FY14. Overall RoA is expected to bestable at 0.8% for PSU banks in FY14. Better visibility on growth, healthycore operations and returns ratio, top mgmt continuity etc will keeppremium valuation of private banks in-tact. prefer banks with strongliability franchise, healthy capitalization. Top picks: PSBs-SBIN, PNB, CBK, and OBC; private Banks - ICICIBC, and YES.
56
June 2013
Loan growth improves – partially seasonal (YoY, %)
Outstanding standard Restructured pool remains high (%)Net slippages fall QoQ helped by strong recoveries – a significant positive
NIMs for PSBs decline; Private Banks performance was strong ( change in bps)
57
FINANCIALS: Key exhibits
-40-31
-19-14 -14
-6-2
0 3 410 12 13
2024 26
FB
AN
DB
INB
K
SBIN
BoB
UN
BK
OB
C
YES
CBK
PNB
BoI
VYS
B
AXS
B
HD
FCB IIB
ICIC
IBC
June 2013
HEALTHCARE: Strong growth traction; currency aids strong revenue momentumSummary Mixed bag: Overall coverage universe EBITDA & Adj PAT showed
a mixed trend. US & emerging mkts were key growth driverspartly led by favourable currency. As expected, growth in theIndia formulations biz had slowed down for most companies.Amongst the larger companies, only Cipla, GSK Pharma and Divi’sLabs disappointed with EBITDA below our estimates, dampenedby negative impact of operating leverage with higher fixedoverheads despite slowdown in sales growth.
EBITDA outperformers: Dr. Reddy’s Labs, Lupin, IPCA, TorrentPharma, Dishman Pharma
In-line EBITDA: Cadila, Glenmark, Sun Pharma, Jubilant Life EBITDA disappointment: Biocon, Cipla, Divi’s, GSK
Pharma, Ranbaxy, Sanofi India Strong guidance & aspirations: Cipla guided for double digit
sales growth in FY14, margins under pressure due to high R&Dand staff costs. Divi’s lowered topline growth guidance to 15%for FY14, with pressure on margins in the near future. Glenmarkguided for 18-20% growth in US generics and Indianformulations in FY14 and 21% growth in EBITDA. Lupin targetsUSD5b topline over next five years; implied CAGR of 25%. Cadilatargets USD3b topline by FY16, implied CAGR of 27.5%; loweredtax guidance to 15%. Biocon charted out a growth plan to reachUSD700m/USD1b by FY15/FY18. Dr. Reddy’s did not guide forFY14 due to uncertainty in FDA approvals; healthy growth in restof the business.Some companies like Lupin, Glenmark, Cadila, IPCA are targetinga gradual improvement in EBITDA margins over the next 2 years
Top picks: DRL, Divi’s, Cadila, IPCA, Torrent
US & Emerging mkt growth led by currency; India growth a bit subdued
58
June 2013
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
Summary Media sector earnings up 22% YoY: Aggregate PAT for our
media universe increased 22% YoY driven by 8/14% YoYrevenue/EBITDA growth. Zee and DB Corp surprised positivelyfor second consecutive quarter with 6-17% earnings beat whileDish TV/Jagran disappointed.
Advertising growth normalizing: Ad growth was 15/9% forZee/Sun TV (on a low base). Among print companies, while DBCorp posted strong ad growth of 13% YoY, HT English ad growthswung to 3% vs negative growth in past four quarters.Jagran/HMVL posted flat ad growth on a like-to-like basis due tohigh base of UP election in 4QFY12of for regional print universeof Jagran/DB/HMVL.
Healthy subscription/circulation growth: Zee/Sun TV reported13%/18% growth in subscription revenue while print universewitnessed 12-19% YoY increase in circulation revenue. Dish TV’ssubscription revenue growth of 15% YoY was led by subscribergrowth off 11% as well as ARPU improvement of 4%.
Divergent trends in margins: Zee/DB Corp/HT Media/HMVLreported significant YoY margin improvement while SunTV/Jagran/Dish TV margins reported decline of 300-600bp, impacted by cost increases as well as certain one-offs.
Ad growth bottomed-out; focus on digitization: Ad recoverytheme is playing out well for print companies with aggregate adgrowth improving to 6% YoY in 2HFY13 vs NIL in 1HFY13.Interest in broadcasting remains strong due to digitization.
Top-picks: Sun TV, DB Corp
Significant divergence in YoY EBITDA margin trend (%)
YoY revenue growth (%)
4QFY13: Actual v/s estimates
MEDIA: Strong aggregate growth but divergent performances
59
* Like-to-like growth
June 2013
METALS: Steel sales volume increase aided by exports; realizations flatSummary Tata Steel cons. EBITDA grew 37% QoQ: Stronger performance
across the group helped margins. However outlook remainssubdued as some of the cost savings achieved might not besustainable and realization are expected to come under furtherpressure.
JSPL consolidated adjusted PAT declined 35% YoY to INR7.6b : .Consolidated EBITDA declined 17% YoY to INR15.9b. Standalonevolumes higher but margins hit were hit due to lower realizationsand higher discounts.
NMDC volume and mix improves; Dividend upped to INR7/share:Adj. PAT grew 34% QoQ to INR17.3b, as iron ore sales increased55% QoQ to 8.24m tons. Adj. PAT was below est. due to lowerrealization, marginally higher freight cost, higher royalties andlower other income. Dividend upped to INR7/share (+55% YoY)
Hindalco standalone EBITDA in line, Net debt at USD8.4b:Standalone EBITDA increased 11% QoQ to INR6.4b driven byhigher copper (+1% QoQ) & aluminum (+9% QoQ) volumes due todestocking/production increase. Novelis’ EBITDA/t at USD344/twas in line with expectation. FRP volumes declined 7% YoY belowour estimate. Net debt at USD8.4b increased on higher workingcapital requirement, increased CapEx and translation adjustment.
Sterlite Industries cons. EBITDA increased 42% QoQ to INR33b:Adjusted PAT increased 57% QoQ to INR19.6b. Superiorperformance (v/s est) was largely driven by improved operatingparameters of recently commissioned 80MW CPP at Tuticorin andimproved quality and lower cost of coal for BALCO, VAL and SEL forgeneration of power /aluminum smelting and above est. operatingprofit from HZL due to third-party sale of Zinc concentrate.
60
Steel realization declined 1% QoQ and 9% YoY (INR/T)
Tata Steel and JSW reported better margins, SAIL disappointed (EBITDA USD/T)
Tata, JSW, Nalco , Sterlite and HZL surprised positively
June 2013 61
OIL & GAS: Results marred by one-offs; OMC’s share 0.6% subsidy; diesel reforms criticalSummary OMC’s end in black for FY13, shared marginal subsidy: As
government compensated INR1,000b (62%) and upstreamshared INR600b (37%) of under recoveries, OMC’s only had toshare 0.6% of under recoveries for FY13, enabling them to reportprofits. For FY14/FY15, we model 40% sharing by upstream, 60%by the govt. and nil sharing by OMC’s.
Upstream - KG-D6 decline continues, marginal decline atCairn’s Rajasthan field: KG-D6 volume averaged 19mmscmd(24 in 3QFY13), concerns remain on timelines of ramp up. Cairn’sRajasthan production averaged 168.5kbpd (170kbpd in 3QFY13).
Gas: Low gas volumes impact PLNG, GAIL and GSPL:Declining KG-D6 volumes and lower LNG imports led to subduedtransmission volumes for GSPL/GAIL. However earningsprotected by ship-or-pay contracts. Domestic gas scarcity augurswell for Petronet LNG.
Refining - Inventory gain boost profitability: ExceptBPCL, OMC’s GRM benefited by inventory gains. RIL’s GRM ofUSD10.1/bbl were at USD1.4/bbl premium to Singapore GRM(v/s USD3.1/bbl in 3QFY13).
Several one-off (38-73% of PBT) marred profitability ofONGC/OINL/GAIL.
Petchem margins seems to have bottomed: Polymer marginsshowed some recovery and seem to have bottomed.
Valuation and view: With diesel reforms on track, we expectscepticism on reforms to reduce. Prefer ONGC/OINL in upstreamand BPCL in OMC’s for its E&P potential. Neutral on RIL withRoE sub-13% and new projects are likely to add earnings onlyfrom FY16/FY17. Maintain Neutral on GAIL/GSPL due toheadwinds on incremental gas in medium term.However, domestic gas scarcity augurs well for PLNG.
Singapore GRM at USD8.7/bbl; up 16% YoY and 35% QoQ
4QFY13: Actual v/s Estimate
June 2013 62
OIL & GAS: LNG imports decline; OMC’s end FY13 in black; expect under recoveries to soften
Model upstream share at 40% in FY14/FY15, OMC’s share 0.6% in FY13
ONGC: Increase in D,D&A led by higher dry well write offs (INRb)
RIL: KG-D6 volume decline, lower imports impact transmission volumes (mmscmd)
OMC’s debt increase at rapid pace due to delayed govt. compensation (INRb)
Upstream/govt. subsidy helps OMC’s to report profit in FY13 (INRb)
RIL: GRM at USD10.1/bbl; USD1.4/bbl premium to Singapore (USD/bbl)
June 2013
Bangalore players outperformed: Despite being seasonallystrongest quarter, most of the developers posted sequentialdecline in presales run-rate in 4QFY13, largely due to lowernew launches. Bangalore based developers remains theoutperformers and the select few in our coverage universeto have posted annual presales growth. However there hasbeen some sign of moderation in southern market aswell, albeit Prestige and Sobha guided for strong presalesgrowth in FY14. Among Mumbai developers, IBREL postedstrong 2H due to its recent launch at attractive price points.Barring a few one-off transactions, commercial leasingwitnessed another weak quarter.
DLF’s leverage increased QoQ: Despite FY13 being a yearwith successful divestment, DLF fails to achieve de-leveraging target, rather its debt increased once againQoQ, due to delayed cash flow and operational deficit.
Refinancing getting easier: Management commentary onfunding environment suggests that re-financing is gettingeasier, especially for project level debt.
Execution focus benefiting cash flow in general: Developerswith steady execution and consistent presales havewitnessed better collections and revenue booking.
Management commentaries: Long cautiousness over 3major challenges: (1) cost inflation, (2) approval delay andlabor sourcing, and (3) tight funding are slowly easing off.Priority remained on streamlining cash flow, execution, andmanaging liquidity. Most of the management expect astronger FY14 on the back of healthy launch pipeline.
Preferred picks: Prestige, Oberoi, JPIN and Sobha (not rated)
REAL ESTATE: Core operations improving; Bangalore players continue to rule the roost
63
Barring Bangalore players and IBREL, GPL posted YoY de-growth in annual presales
Collections up for consistent players (INR b) DLF: Leverage up sequentially (INR b)
0
5
10
15
Sobha Oberoi Prestige JPIN
1QFY13 2QFY13 3QFY13 4QFY13
131
136
145
162
198
208
220
226
227
237
237
236
235
240
221
227
227
192
183
0.6
0.6
0.6
0.5
0.8 0.8 0.9 0.9
0.9
0.9
0.9
0.92
0.91
0.92
0.84 0.88
0.88
0.69
0.62
1QFY
102Q
FY10
3QFY
104Q
FY10
1QFY
112Q
FY11
3QFY
114Q
FY11
1QFY
122Q
FY12
3QFY
124Q
FY12
1QFY
132Q
FY13
3QFY
134Q
FY13
FY13
FY14
EFY
15E
Net debt (INR b) Net DER (x)
June 2013
RETAIL: Mixed bag; SSS recovery sustains but discretionary still not firing
Summary
Sales and EBITDA below estimates – Our coverage universe saleswere below estimates with revenue growth of 6.3% (est13.9%), EBITDA growth of 8.5% (est 17%) and Adjusted PAT growthof 17.8% (est 13%). Titan and Shoppers Stop’s profitabilityexceeded our expectations while Jubi and PF disappointed.
SSS was a mixed bag: PF and Shoppers Stop posted improvementin same store performance while Jubilant Foodworks reported 15quarter low same store growth 7.7%. Spill over of festive seasonsentiment coupled with improved customer sentiment drove thisin our view. Titan’s Jewellery margins surprised positively led bylower ad spends.
Operating margins under pressure: Operating margins bore theburnt of lower revenue growth as overheads precluded theoperating leverage.
Expansion plans on track: Expansion plans remained on track–Titan added 26k sqft of space during 4Q while JUBI opened 24stores
Neutral on the sector; Titan is our top pick: Titan remains our toppick; as we believe regulatory risks are receding amidst strongbounce-back in volumes led by lower. Jubilant’s weak same storegrowth is bringing the cyclicality of the business model to the fore.Given this, we believe current premium valuations are stretchedand maintain Neutral. Pantaloon will be a beneficiary of improvedsame store growth coupled with decline in interest costs aheadpost the restructuring of various businesses. Our rating is currentlyunder-review.
3QFY13 performance snapshot
Expansion progressing as per plans
64
Operating margins decline for the universe
SSS improves for Shoppers Stop, Titan
June 2013
TECHNOLOGY: Divergence in guidance, midcap outlook softSummary
Only TCS shows volume growth implying a better FY14: TCS hadthe highest volume growth this quarter to substantiate it claims ofhaving a better FY14 than FY13 and environment improving.Volume growth among others has been steady
Difficult times brings back Mr. Murthy: INFY 4QFY13 results werea significant disappointment on all fronts compounded by weakguidance for FY14. The difficult times have led to INFY leadershipasking for assistance from Mr. N. R. Narayana Murthy who comesback as Executive Chairman for a term of five years. Expectationsare high, we expect Mr. Murthy to reveal concrete plans andstrategy soon.
Cognizant’s guidance strong, INFY guidance weaker thanexpected: Cognizant’s guidance of “at least” 5.4% QoQrevenue growth guidance was on the higher side. CTSHretained its annual guidance for now, there remains scope ofbeating the guidance if demand environment is unchanged.INFY 6-10% guidance was big disappointment
Midcaps – KPIT and HEXW outperform on margins but provideweak outlook: KPIT and Hexaware outperformed on marginsbut provided weaker than expected outlook for FY14 leadingto downgrades on our EPS and revenue estimates.
Prefer Infosys and TECHM: Infosys remains our preferred pick inthe top-tier. Come back of Mr Murthy is expected to boastsentiments among employees and customers and we see ampleoperational slack at INFY to drive higher margins. At 18x FY14EEPS, valuations at TCS appear stretched. TECHM is our top pickamong tier II.
Apart from TCS , low volume growth for others
4QFY13 Performance Snapshot
Apart from TCS, Revenue downgrades across the board
USD revenue - m EBIT margin PAT - INR b
Act. Est. % beat Act. Est. bp beat Act. Est. % beatTCS 3,040 3,037 0.10% 26.50% 26.90% -40 35.969 36.266 -0.80%Infosys 1,938 1,980 -2.10% 23.60% 24.90% -130 23.94 22.334 7.20%Wipro 1,585 1,596 -0.70% 17.80% 17.30% 50 17.373 16.848 3.10%HCL Tech 1,191 1,190 0.00% 19.80% 18.20% 160 10.16 9.849 3.20%
Change in Estimates USD revenue (%) EBIT margin (bp) EPS (%)
FY14 FY15 FY14 FY15 FY14 FY15 TCS 0.8 1.6 3 34 -0.1 1.7Infosys -4.6 -4 -195 -175 -7.4 -10.7Wipro -2.5 -3.9 -22 -12 - -HCL Tech -0.8 -0.9 93 64 4.7 3.1
-2.5%
0.0%
2.5%
5.0%
7.5%
3QFY
11
4QFY
11
1QFY
12
2QFY
12
3QFY
12
4QFY
12
1QFY
13
2QFY
13
3QFY
13
4QFY
13
Sequential Volume Growth (%)
TCS Infosys Wipro HCL Tech
June 2013
Strong growth in domestic wireless EBITDA for GSM incumbents:Seasonal 4Q strength and footprint reduction by challengers drovehealthy wireless revenue growth and wireless margin improvement inthe domestic business for GSM incumbents. Proforma wireless EBITDAgrew ~7% QoQ for Bharti (India & SA) and 20% for Idea.
Traffic up 5-8% for GSM incumbents; RPM stable: Wireless traffic grew5-8% for Bharti/Idea/Vodafone. Wireless RPM remained stable QoQ butdeclined 1-3% YoY for the GSM incumbents.
Bharti: Africa business disappoints: EBITDA for Bharti Africa was 6%below our estimate. Africa EBIDTA declined 5% QoQ to USD285m (vsest of USD 303m) on a 1% QoQ revenue decline (11% QoQ trafficdecline, 11% RPM increase). EBITDA margin declined 100bp QoQ to25.4%.
Increased industry focus on RPM and profitability improvement:Industry has increased focus on RPM improvement and undertakenseveral measures to reduce discounts thereby improving the yields on aper minute basis. Our industry interactions also suggest increased focuson profitability across challengers, likely led by non-availability offurther "loss funding". Apart from taking extreme measures likediscontinuing operations altogether from several circles, manychallengers also seem to be aggressively pursuing time-boundbreakeven targets within the current span of operations.
Industry consolidation inevitable but regulatory challenges continue:We expect sector recovery to be led by pricing up-tick and rationality incompetition. With many operators suffering high losses and stretchedbalance sheets, we believe industry consolidation is inevitable.However regulatory situation remains an overhang given no resolutionof issues related to upcoming spectrum auction, 3G ICR, and AGR share
Top-pick: Idea Cellular
QoQ wireless traffic and blended RPM growth (%)
TELECOM: Wireless EBITDA beat driven by strong traffic growth for incumbents
66
June 2013
UTILITIES: Below estimateSummary
4QFY13 performance was below estimate across several companies.Regulated companies' performance was partly impacted by truing up ofyearly accounts, while players like JSW energy’s performance impacted bylower ST realization.
NTPC NTPC’s operating performance was robust with PAF of 92.7% butprofit was below estimate due to truing up, lower offtake by DISCOMs.
PGCIL 4QFY13 capitalization was robust at INR78b but the profits were flatsequentially. This was partly owing to truing up of accounts and possiblydue to lower equity contribution towards new projects..
Tata Power Standalone adjusted PAT was lower than estimates owing to lower contribution from core business. Consolidated PAT also dipped due to lower contribution from coal SPV and higher losses for Maithon project. Improvement in EBITDA for Mundra UMPP project was key positive.
CESC’s PAT was above estimate led by one time gain and incentives earnedon account of lower T&D losses. Consolidated PAT improvement was led bycontribution of First Source and improved performance from retail business.
JSW Energy Consolidated PAT was below estimate due to lower standalonePAT on account of lower merchant realizations.
Coal India CIL number were below estimate due to decline in E-auctionrealizations. Washed coal realizations and volumes also declined coupledwith increase in the employee cost on adjusted basis (reported cost beinghigher due to re-classification). PAT was thus 15% below estimate.
PTC India tolling volumes and realizations were inline with the estimate butadjusted trading margins were below estimates at Paisa3.77/unit.
Actual v/s Estimate (INR m)
67
Key Operational Metrics
Sector behemoth performance below
estimate
June 2013
MOSL Universe: Annual Performance (INR b)
68
June 2013
MOSL Universe: Valuations
69
June 2013
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June 2013
Motilal Oswal India Strategy Gallery
