GST roll­out cast a shadow on var­i­ous sec­tors but a turn­around holds out prospects of ro­bust fig­ures in sec­tors like con­sumer goods, en­ergy, me­tals and phar­ma­ceu­ti­cals

Financial Chronicle - - DEEP DIVE -

ON Septem­ber 2017 quar­ter earn­ings preview, we model 5.7% YoY growth in net prof­its of our cov­er­age uni­verse, led by strong growth in con­sumers (re­stock­ing post GST-im­ple­men­ta­tion and early/strong fes­tive sea­son), en­ergy (higher re­fin­ing mar­gins and large ad­ven­ti­tious gains for down­stream com­pa­nies), in­dus­tri­als and me­tals & min­ing (higher re­al­i­sa­tions and con­se­quent im­prove­ment in prof­itabil­ity) sec­tors, de­spite drag from au­to­mo­biles (mar­gin com­pres­sion due to high in­put costs), phar­ma­ceu­ti­cals (pres­sure in US rev­enues due to lack of mean­ing­ful ap­provals) and tele­com (in­crease in in­di­rect taxes, con­tin­u­a­tion of hy­per-com­pet­i­tive sec­tor ac­tiv­ity). We ex­pect net in­come of the BSE-30 In­dex to de­cline 4% YoY while that of the Nifty-50 In­dex to in­crease 8.4% YoY, led by strong earn­ings growth in the down­stream com­pa­nies.


We ex­pect a muted quar­ter for auto com­pa­nies. Rev­enue/EBITDA are likely to im­prove by 13%/3% yoy but net profit will de­cline by 12% yoy. We es­ti­mate rev­enue growth for com­pa­nies un­der our cov­er­age, ex­clud­ing Tata Mo­tors, to in­crease by 21% YoY but EBITDA mar­gin will likely de­cline by 200 bps YoY due to higher com­mod­ity prices. We ex­pect Ashok Ley­land, Bharat Forge, Eicher Mo­tors, Mother­son Sumi and Wabco In­dia to re­port a strong quar­ter. We es­ti­mate EBITDA of Ashok Ley­land, Eicher Mo­tor and TVS Mo­tors to in­crease by 24%/31%/19% YoY in 2QFY18. We ex­pect Ba­jaj Auto to re­port a 15% YoY de­cline in EBITDA in 2QFY18 led by 410 bps YoY de­cline in its EBITDA mar­gin due to a sharp de­cline in prof­itabil­ity in the mo­tor­cy­cle seg­ment.


We see weak head­line earn­ings growth for the sec­tor. Un­der­ly­ing trends are broadly sim­i­lar to trends in pre­vi­ous quar­ters, re­flect­ing low loan growth, stable-to-neg­a­tive mar­gins and con­tin­ued high credit costs. We see public banks re­port­ing lower slip­pages QoQ, but high pro­vi­sions will con­tinue. Also, most banks will see lower trea­sury gains ex­cept for ICICI Bank and SBI, which will book gains from stake sales in their gen­eral and life in­sur­ance sub­sidiaries re­spec­tively.


2QFY18 will likely be a strong quar­ter for most NBFCs due to (1) fes­tive sea­son sales partly re­flect­ing in the month of Septem­ber, (2) strong buoy­ancy in ru­ral In­dia post a nearnor­mal mon­soon and (3) in­ven­tory re­stock­ing and grad­ual pickup in busi­ness in 2QFY17 from weak 1QFY17 lev­els. The im­ple­men­ta­tion of RERA sig­nif­i­cantly af­fected busi­ness mo­men­tum in the real es­tate sec­tor dur­ing the first two months of the quar­ter lead­ing to a slow­down in re­tail hous­ing fi­nance as well. How­ever, the mi­cro­fi­nance busi­ness re­verted to near-nor­mal lev­els.

NBFCs with strong un­der­ly­ing mo­men­tum in 2QFY18: Ba­jaj Fi­nance, Bharat Fi­nan­cial Hold­ings, Mahin­dra Fi­nance and IIFL Hold­ings.


All-In­dia re­tail ce­ments prices de­clined by Rs 8/bag QoQ in 2QFY18, re­flec­tive of the weak­ness dur­ing the mon­soon pe­riod. Price de­cline will likely be sharper in the north­ern and cen­tral re­gions, where prices have dropped by Rs14/bag QoQ. We ex­pect pan-In­dia play­ers to re­port vol­ume growth of 5-8% YoY.


We ex­pect 2QFY18 to be a rel­a­tively ro­bust quar­ter aided by re­stock­ing post GST-im­ple­men­ta­tion and the early/strong fes­tive sea­son. Over­all, we ex­pect ag­gre­gate rev­enues to grow by ~9% and EBITDA/re­cur­ring PAT to grow at 13% YoY.

ITC: We model 4% de­cline in cig­a­rette vol­umes YoY and a 12% in­crease in gross re­al­i­sa­tions. We fore­cast 11% YoY growth in cig­a­rette EBIT. We model mod­est ac­cel­er­a­tion in yoy growth for all the other seg­ments. Ex­pect other FMCG rev­enues to grow 11.5% YoY.

HUVR: We ex­pect dis­cre­tionary com­pa­nies (led by Ti­tan/PCJ, Page and JUBI) to per­form rel­a­tively bet­ter, while in sta­ples, se­lect com­pa­nies in­clud­ing BRIT, HUVR and JYL are likely to post ro­bust earn­ings growth (aided by mar­gin ex­pan­sion).


Up­stream: We ex­pect OIL and ONGC to re­port steady net in­come se­quen­tially, driven by mod­est in­crease in crude oil re­al­i­sa­tions, which will be par­tially off­set by higher op­er­at­ing costs and DD&A (de­pre­ci­a­tion, de­ple­tion and amor­ti­za­tion). Gas: We ex­pect GAIL to re­port se­quen­tially steady EBITDA as re­cov­ery in gas trans­mis­sion and petchem vol­umes will be off­set by mod­er­a­tion in LPG and petchem mar­gins. We ex­pect PLNG to re­port steady prof­its qoq given stable vol­umes and un­changed tar­iffs. We ex­pect IGL and MGL to re­port ro­bust prof­its driven by con­tin­ued strength in unit EBITDA mar­gins. Down­stream: We ex­pect OMCs to re­port strong prof­itabil­ity, led by higher re­fin­ing mar­gins and sig­nif­i­cant ad­ven­ti­tious gains due to the re­cent jump in crude prices. The petro­chem­i­cals seg­ments of RIL, IOCL and GAIL will ben­e­fit from steady mar­gins.


After a strong 1QFY18 for L&T, we ex­pect mod­er­a­tion in ex­e­cu­tion in the key in­fra­struc­ture seg­ment in 2QFY18. Hy­dro­car­bon and Heavy Engi­neer­ing would likely do well on ac­count of re­cently won or­ders (Saudi Aramco and ar­tillery guns or­ders). With the res­o­lu­tion of stuck projects (Yadadri and Manuguru), BHEL may ramp up ex­e­cu­tion through the year but will also face higher costs due to wage re­vi­sion. Over­all, the growth of in­dus­trial com­pa­nies would be sub­dued as pri­vate sec­tor capex re­mains muted and is un­likely to re­vive be­fore FY2019. Com­pa­nies de­pen­dent on gov­ern­ment spend­ing (roads, rail­ways, re­new­ables) would have bet­ter growth sup­port through the year.


Broad­cast­ing and dis­tri­bu­tion: 2QFY18 TV in­dus­try ad spends were im­pacted by a cut in FMCG ad spends in July and Au­gust due to GST im­ple­men­ta­tion. TV in­dus­try ad growth would be 1-2%. We ex­pect Zee to re­port 3% YoY growth in ad rev­enues (like-for-like) ad­justed for the sale of its sports busi­ness and ac­qui­si­tions. Sun TV would likely re­port 1% YoY growth in ad rev­enues (ver­sus 6% YoY de­cline in June quar­ter), re­duc­ing its un­der­per­for­mance ver­sus in­dus­try. For Dish TV, we ex­pect 235,000 net sub­scriber ad­di­tions (down 9% YoY) and ARPU to grow 2.5% QoQ. Print ad­ver­tis­ing was im­pacted by GST im­ple­men­ta­tion and de­clined YoY in July and Au­gust. It bounced back strongly in Septem­ber aided by the early on­set of the fes­tive sea­son and mod­er­a­tion in GST-led weak­ness.

Mul­ti­plex in­dus­try: 2QFY18 box of­fice per­for­mance was dis­ap­point­ing. PVR will likely re­port flat foot­falls (down 5% yoy for com­pa­ra­ble prop­er­ties), low-sin­gle digit growth in ticket prices and high-sin­gle digit growth in F&B spends per head. Ad rev­enues would be flat largely

due to weak con­tent.


Fer­rous: We es­ti­mate In­dia EBITA/ton for Tata Steel and JSW Steel to in­crease by 16-24% QoQ and Europe EBITDA/ton for Tata Steel at US$78. We es­ti­mate 29% QoQ in­crease in EBITDA of Tata Steel and JSW Steel (+5% to 71% yoy). We es­ti­mate net in­come (ad­justed) of Rs1,540 crore for Tata Steel and Rs 920 crore for JSW Steel. Non fer­rous: Zinc and lead prices in­creased by 14% and 8% QoQ and will aid strong growth in earn­ings for Hin­dus­tan Zinc and Vedanta. We ex­pect Hin­dus­tan Zinc's EBITDA to in­crease by 25% qoq to Rs29.8b and Vedanta's EBITDA to in­crease by 27% QoQ to Rs 6,180 crore. Vedanta's earn­ings will also be sup­ported by strong re­cov­ery in alu­minum, cop­per vol­umes and power gen­er­a­tion after 1QFY18 was af­fected by plant out­ages. All-in alu­minum prices in­creased by 5% qoq, though we ex­pect higher in­put costs to par­tial off­set pric­ing gains. We es­ti­mate 14% QoQ in­crease in Hin­dalco's EBITDA to Rs1,310 crore.


We ex­pect US rev­enues to re­main in fo­cus this quar­ter, with the Street likely to look for signs of sta­bil­i­sa­tion. We ex­pect do­mes­tic for­mu­la­tions' sales to bounce back fol­low­ing GST-led de­stock­ing in 1QFY18, and fore­cast 814% yoy growth de­pend­ing on port­fo­lio and dis­tri­bu­tion strength. We ex­pect US rev­enues to re­main un­der pres­sure for the broader sec­tor as the lack of mean­ing­ful ap­provals and pric­ing pres­sure in ex­ist­ing prod­ucts will im­pact growth.


Fi­nan­cials: We ex­pect DLF, Pres­tige's debt to in­crease, while we ex­pect Bri­gade, Sobha to con­tinue gen­er­at­ing pos­i­tive cash flow from op­er­a­tions. Op­er­a­tions: GST im­ple­men­ta­tion will re­flect in lower sales, es­pe­cially in Ma­ha­rash­tra and Haryana (where most de­vel­op­ers fol­lowed the com­po­si­tion scheme). We ex­pect sales to re­main steady for Ban­ga­lore de­vel­op­ers. The im­ple­men­ta­tion of RERA dur­ing 2QFY18 will also im­pact the sales vol­umes of the in­dus­try.


We ex­pect In­fosys, TCS, HCLT and Wipro to re­port or­ganic c/c growth of 2.3%, 2.1%, 2.1% and 0.9%, re­spec­tively. Cur­rency move­ments will pro­vide tail­winds to rev­enues given the de­pre­ci­a­tion in the USD by 6.6%, 3% and 5.8% against EUR, GBP and AUD, re­spec­tively. Over­all, we ex­pect In­fosys to grow the fastest on a cross cur­rency or­ganic ba­sis and Wipro to log the low­est growth.

We note that Indian IT com­pa­nies had to con­tend with mul­ti­ple head­winds in the pre­vi­ous quar­ter, in­clud­ing visa costs and Ru­pee appreciation.


Listed wire­less stocks are likely to see a dis­mal earn­ings print thanks to an in­crease in in­di­rect taxes (18% GST ver­sus 15% ser­vice tax; not passed on to the con­sumer), 2Q sea­son­al­ity and an ad­verse shift in off-net min­utes mix. We ex­pect Bharti's In­dia wire­less rev­enues to de­cline 4.3% QoQ and 16% YoY to Rs12,360 crore. Idea's print is likely to be much worse; we fore­cast a 7.6% QoQ and 19% YoY de­cline in wire­less rev­enues to Rs7,550 crore.

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