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SHAREKHAN SPECIAL Q4FY2013 Auto earnings preview
Skids off the track Auto companies to witness widespread earnings decline during Q4FY2013
The Sharekhan's automobile (auto) tracking universe (excluding Tata Motors) is expected to report a 4.5% year-on-year (Y-o-Y) earnings decline for Q4FY2013. Barring for few auto companies, like Maruti Suzuki (Maruti), Mahindra and Mahindra (M&M) and Greaves Cotton, most of the companies are expected to report a decline in their earnings during the quarter. The auto universe (including the coverage and non-coverage companies) is expected to report a 0.6% Y-o-Y decline in the EBIDTA and a 25.4% Y-o-Y decline at the profit after tax (PAT) level (with bulk of it contributed by Tata Motors due to high base effect resulting from tax credits in Q4FY2012). H1FY2014 to witness subdued demand, expect recovery in H2
The automotive volumes have witnessed a declining trend in Q4FY2013. With the weak economic scenario, the rising fuel prices and a high inflation, we expect the automotive demand to remain subdued for the next two quarters. We expect a recovery in H2FY2014 on account of the pro-growth policies before the elections by the government, a stable fuel price scenario and a low base created during the current slowdown phase. Prefer M&M and Maruti
We expect M&M to outperform amongst the original equipment manufacturers (OEMs). Maruti could also turn out to be a winner if the weakness in the yen persists for a longer period of time. Hero MotoCorp is likely to underperform amongst the OEMs as it is vulnerable to loss of market share to competition. Q4FY2013 Pharma earnings preview
US business drives the growth Key points -
Q4FY2013 revenues to be driven by US business: We expect our pharmaceutical (pharma) universe to report a 23.4% year-on-year (Y-o-Y) growth in the revenues, mainly led by Sun Pharmaceutical Industries (Sun Pharma, up 40.8% YoY) followed by Aurobindo Pharma (up 26.8% YoY) and Glenmark Pharmaceuticals (Glenmark Pharma; up 24.8% YoY). The growth in the revenues is mainly led by the domestic players' US business.
The revenues from the US business are likely to grow by 40.8% for our universe, mainly led by Aurobindo Pharma (55% year on year [YoY] on launch of new products and due to low base effects) followed by Sun Pharma (65% YoY on contribution from the newly acquired entities and the launch of key products), Glenmark Pharma (25% YoY on contribution from the launch of generic products). The players like Lupin (18.8% YoY) and Cadila Healthcare (Cadila Health; 16.1% YoY) would witness a relatively slower growth due to price erosion in the key products. The growth during the quarter would also be contributed by the acquisitions in case of Sun Pharma (nearly two-month revenues coming from the new acquired DUSA Pharmaceuticals [Dusa Pharma] and the generic business of URL Pharma). Excluding revenues from the newly acquired entities, our universe would be growing at 33% YoY.
The domestic market is likely to grow at 16.6% for our universe as compared with the industry growth of nearly 13% during the quarter (as per the secondary sales data). The growth in the domestic market is mainly led by Ipca Laboratories (Ipca Labs; 28.3% YoY), on better contribution from the newly expanded field force, followed by Cadila Health, on account of the launch of new products and contribution from the newly acquired Biochem Pharmaceutical Industries (Biochem Pharma). Glenmark Pharma is also likely to post an impressive 22.4% Y-o-Y growth in the domestic market on the launch of niche products. -
OPM to expand by 144 basis points YoY for our universe on low base: We expect the operating profit margin (OPM) of our universe to expand by 144 basis points YoY to 25.2% on better product mix, favourable currencies and better utilisation of the newly expanded facilities coupled with the low base effect. The expansion in the OPM would be mainly led by Torrent Pharmaceuticals (Torrent Pharma; up 578 basis points YoY due to the low base caused by some non-recurring operating expenses) followed by Aurobindo Pharma (up 475 basis points YoY) on account of the low base due to the import alert on its Unit-VI facilities disrupting the supplies and margin in Q4FY2012, Lupin (up 360 basis points YoY) on account of the low base in Q4FY2012 due to commencement of production from the Indore special economic zone (SEZ) facilities, which caused higher overhead expenses, and Ipca Labs (up 300 basis points YoY to 22.8%) due to consolidation of Tonira Pharma (Tonira) and weaker export sales impacting the margin in Q4FY2012. On the other hand, the contract research and manufacturing services (CRAMS) players like Dishman Pharmaceuticals (Dishman Pharma) and Divi's Laboratories (Divi's Labs) are likely to witness a decline in their margin due to a lower contribution from the high-margin CRAM business. -
Higher effective tax rate to restrict the profit growth at 18.7% for our universe: Our pharma universe is likely to record a growth of 18.7% YoY mainly due to the higher effective tax rate due to the imposition of alternate minimum tax (AMT) on partnership-based manufacturing facilities and a sunset clause for export-oriented units (EOUs). However, players like Aurobindo Pharma (net profit to multiply 23 times on a Y-o-Y basis from low base), Lupin (75% YoY), Torrent Pharma (34.6% YoY) and Ipca Labs (up 34.1% YoY) are expected to outperform peers. On the other hand, we expect a decline in the profit of Dishman Pharma (down by 32.8% YoY), Cadila Health (down by 32.8%) and Divi's Labs (down by 4% YoY) due to the weaker margins and higher effective tax rates. -
Sector valuation and view: We expect the pharma players in our coverage to report a strong revenue and profit growth despite the absence of the one-offs (sole exclusivity). The growth would be mainly led by the newly acquired entities and scaling up of the newly started facilities. However, the industry is facing a currency risk, which though is favourable at the top line, but may cause severe damage to the bottom line. We have not considered the mark-to-market (MTM) foreign exchange (forex) loss or gains to arrive at the adjusted profits of players during the quarter.
On an average basis, our universe is trading at 14.2x FY2014E earnings, which is 12% discount to the BSE Healthcare Index (Bloomberg consensus estimate at 16x). We found that Aurobindo Pharma (nine key approvals in the US market), Sun Pharma (strong contribution from Taro Pharma (Taro) and the newly acquired entities in the US) and Lupin (10 key approvals in US and an overall good performance) are well placed to outperform peers. Q4FY2013 Power earnings preview
Uncertainty shadows growth avenues Key points -
Power generation likely to be flattish; hydro sector remains sluggish: In Q4FY2013 the country is estimated to have generated 228 billion units (BU) of power. This reflects a growth of 2.6% year on year (YoY) and a flat performance quarter on quarter (QoQ). The country's power generation capacity has grown by 9% YoY and 3% QoQ to over 217,000MW. Hydro power generation is showing a declining trend (a decline of 14% expected YoY and of 13% QoQ). Whatever growth the power sector is likely to see is expected from the thermal power generation segment. -
Thermal load factor to peak, in line with seasonal trend: The all-India thermal plant load factor (PLF) is expected to improve sequentially due to the seasonal factor. We expect PLF of around 79% in Q4FY2012. However, till February 2013 the overall PLF seems to be slightly better than that recorded in the same period of the previous year. -
Energy deficit could touch 10%: During Q4FY2013, both power requirement and power availability are expected to have grown by 2% YoY. Therefore, we expect the power deficit to touch 10% in Q4FY2013. We also expect power availability of around 217.2BU and a deficit of 24BU in Q4FY2013. -
Merchant power prices likely to remain in a broad range: The merchant power prices are expected to have been in a broad range of Rs2.5/unit to Rs4.5/unit during Q4FY2013. The blended price of the merchant power players should be about Rs3.5/unit. Q4FY2013 Construction earnings preview
No respite yet Key points -
Lower execution to affect revenue growth, weakness at PAT level to persist: The fourth quarter of FY2013 will continue to witness poor results as the engineering, procurement and construction (EPC) companies have had to prolong their battle against mounting interest burdens. We expect the aggregate revenues of the Sharekhan EPC universe (excluding IVRCL, Punj Lloyd) to decline by a 0.3% year on year (YoY) led by lower execution across projects. However, the earnings are estimated to decline by 27.5% on account of lower revenues and a sharp jump in the interest burden. -
Asset developers to witness a subdued growth in earnings: Asset developers that have otherwise outperformed the EPC players would feel the pinch too due to a rising interest burden. IL&FS Transportation Networks Ltd (ITNL) is expected to post a growth of 8.8% YoY in its revenues on account of consistent execution, consolidation of the Chongqing project and some signs of traction in the Elsamex division. We expect the margins to improve by 134 basis points leading to an EBITDA growth of 15.2% YoY. But higher depreciation and a rising interest burden would dent the earnings, which would grow by about 1.3% YoY. IRB Infrastructure Developers (IRB) is expected to post a nearly 4.4% growth YoY in its earnings in spite of a 13.5% growth in its top line led by strong order execution and the start of construction activity at its mega highway project, viz the Ahmedabad-Vadodara project. -
Small EPC companies to follow suit in terms of earnings growth: In our universe, we expect the smaller EPC players like Gayatri Projects (Gayatri), Pratibha Industries (Pratibha) and Unity Infraprojects (Unity) to post a flat growth to a decline in the earnings led by lower margins coupled with higher interest and depreciation costs. This expectation is supported by lower execution of an otherwise strong order book, which comprises smaller orders that normally do not get stuck for long for want of clearances or approvals. -
Outlook-situation likely to improve from FY2014: The construction companies are already witnessing an improvement in execution of projects. Going ahead, the policy action prompted by the direct intervention by the Prime Minister's Office (PMO) is expected to improve the situation further. Moreover, we expect the margin and the interest burden to also ease out on the back of the expected monetary easing by the Reserve Bank of India. However, the divergence in the performances of the construction companies would remain wide and it would be better to remain selective. We prefer companies that have relatively better order inflows and execution track record in the existing tough conditions. Hence, we maintain our positive bias on ITNL and Pratibha.
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