Earnings on recovery route
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

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.

 Sector-wise expectations for the September 2017 quarter results


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 near-normal 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 EBITDA/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 2-19% 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 8-14% 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.

Source: Kotak Institutional Equities