Sunday, October 9, 2011

Q2 Results will disappoint markets

India Inc is likely to post a muted earnings growth for the second quarter of this fiscal, largely due to fall in rupee value, rising interest costs, high inflationary pressures and a global economic slump. The analysts expect the rupee's sharp depreciation alone to impact the corporate earnings by an average of 3-5 per cent, on account of losses suffered due to their forex exposure such as overseas loans.

Besides, the global economic slowdown, as also headwinds in domestic macroeconomic scenario, might have a ripple effect on the companies' second-quarter financial results, they said. Investment banking and equity research major CLSA said in its Q2 earnings preview report that the sharp depreciation of rupee is likely to significantly impact the earnings of companies with unhedged foreign currency liabilities. "Overall earnings growth would be muted due to the one- time impact of rupee depreciation, estimated at 3 per cent of earnings," CLSA said.

Brokerage firm Religare Capital also said that the signs of economic slowdown were expected to be reflected in the Q2 results and the Sensex companies could report a profit growth of less than 9 per cent for the quarter. Religare Capital expects good Q2 figures in the IT, banking, FMCG, cement and pharma sectors, while companies in the real estate, telecom, power and metal space could post disappointing results. Excluding the oil companies, the Q2 earnings growth for the Sensex companies could fall to below 5 per cent, as per Religare Capital estimates.

CLSA has estimated an earnings growth of 7 per cent for the Sensex companies for the second quarter. Interestingly, the earnings growth of the Sensex companies before taking into account exceptional items such as forex losses is estimated at over 13 per cent as per CLSA. The earnings season for the second quarter of the current financial year will commence when IT bellwether Infosys would declare its result on October 12. The country's most valued firm RIL is scheduled to announce its results on October 15.

The Q2 results are likely to act as the next trigger for the stock market, where its benchmark Sensex index has dropped by about 14 per cent in the second quarter. CLSA said that the rising interest costs was likely to have affected the margins across the board, making funds costlier for the companies. It said that the full impact of higher interest costs would be visible from the second quarter onwards and could become a potential source of disappointments.

Making things worse for the corporates, inflation remains at high level despite softening commodity prices, and this has already led to the Reserve Bank hiking its key rates 12 times in the past 18 months to control the price rise. "While the RBI's hawkish policy has now started hurting business growth, inflation remains meaningful despite the recent softening in commodity prices. Early to say if margins are reverting and if the earnings cycle has bottomed out," Religare said.

As per CLSA, the depreciation in rupee value -- of 10 per cent against the US dollar and 15 per cent against the Japanese yen -- would be another dampener for Q2 results. CLSA said that companies like Lanco, Ranbaxy and Tata Power were likely to report loss on this account in Q2, while the numbers could also be impacted of firms like Bharti Airtel, PFC, Suzlon, L&T, Tata Motors, Tata steel, JSW steel and a host of IT companies.

Brokerage firm Unicon Financial further cautioned that issues like shortage of fuel and environmental clearances also remain a major concern for the power sector. "The power ancillary companies are expected to post robust earnings on the back of strong order book. However new order inflows for these companies remains slow," it said.

Prabhudas Lilladher:

``We expect consensus downgrade to continue in the current quarter. It is skeptical about double digit earnings growth of FY12 and anticipates consensus earnings cut of 3-5% in Jul-Sep 2011 for the current fiscal. Earnings for Nifty are likely to grow by 8.6% (vs Cons.: 11.7%) YoY for FY12, whereas for FY13 growth is expected to be 15.1% (vs Cons.: 16.1%) YoY. We expect PAT (FY12e) for Nifty to grow by 14.7% YoY, against consensus expectation of 19.6% YoY growth. Moreover, for FY13 we are maintaining the growth momentum stable at 14.1% YoY growth, versus deceleration in consensus momentum to 16.2% YoY growth. We are expecting growth contribution to come from BFSI, Technology, and FMCG for FY12 and FY13, however we expecting mid to high single digit growth in Auto, Metals, Telecom and Cement.

Revenue growth of NIFTY companies (excl. Oil & Gas) would show a sharp drop to 15.5% in Q2FY12 YoY from 21.5% in the preceding quarter. This would mark the lowest QoQ growth in last 18 months. PAT growth continues on a downward trajectory and expected to post an anaemic 6.8% growth YoY, the lowest in 18 months. For companies under our coverage, Revenue and PAT are expected to grow YoY by 21.9% and 10.8%, respectively and QoQ by 5.2% and 3.4%, respectively. EBITDA margin (ex-BFSI) is expected to decline by 149bps YoY and 45bps QoQ. Elevated raw material costs, slackening demand due to uncertainty in macro environment and high interest rates are expected to impact the margins of Corporate India.``

Motilal Oswal:

``2QFY12 earnings will be reported amidst an adverse macro backdrop. Interest rates are up further 50-75bp during the quarter, demand continued to weaken in domestic economy and India rupee depreciated by ~10% against the USD. Aggregate (ex RMs) Sales growth 20.9%, EBIDTA growth 11.7%, PAT growth 9.7%. EBIDTA margin will contract 190bp YoY to 23.6% (2nd lowest in last 8 years), PAT margin will contract 120bp YoY to 12.7% (lowest in last 8 years).

Number of companies with growth rates of over 30% is the lowest at 19%, while percentage of companies with YoY decline is at a 8 quarter high of 33%.

Top 3 contributors to aggregate earnings are Financials, Oil & Gas and Metals, accounting for 57% of the 2QFY12 earnings.

Sectors with strong YoY PAT growth include Cement (67% YoY due to low base effect), Private Banks (+23% YoY) and Oil & Gas (excl. RMs) 21% YoY. FMCG, Private Banks and Retailing are the only 3 sectors where all companies will report earnings growth. Sectors with disappointing / muted growth are PSU Banks, Telecom, Autos. Telecom with a decline of 44% shaves off 200bp from aggregate growth.``

ICICI Securities:

``The I-direct coverage universe (ex- BFSI) is expected to post a YoY revenue growth of 21.3% while QoQ growth would be modest at 2.1% since Q2 is a cyclically weak quarter for most sectors. At the same time, EBITDA growth of 7% YoY will not mirror the revenue growth as most of the companies under coverage will face the full blown impact of high input prices and rise in other operating expenditure. This, we believe, will impact operating margins by 215 bps to 16.1% in Q2FY12. Even though topline and operating profits will register positive growth rates, profitability will come under pressure due to the unabated hike in key policy rates by the RBI. Hence, we estimate an 11.4% YoY decline in net profit for our coverage universe for Q2FY12. This performance would be slightly better as PAT, excluding oil & gas, would decline 6.5% YoY. What will be highly crucial to determine during the quarter would be whether the earnings downgrade cycle gets intensified as we face significant local and macro headwinds? As of now, we expect the broader market earnings to grow at 11% CAGR over FY11-FY13E.``

Angel Broking:

``Margin pressures have dented the profitability of Indian corporates over the past few quarters and are likely to continue in 2QFY2012 as well. While top-line growth for Sensex companies is expected to remain healthy at 21.1% yoy (muted 2.6% qoq), margin pressures are likely to result in PAT growth falling to sub-10% (at 8.2%) level. However, on a sequential basis, both operating and net profit margins are expected to improve, albeit marginally. Earnings expected to grow at 7.4% yoy, driven by 18.6% yoy top-line growth.`
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