Q3FY2015 earnings preview

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January 08, 2015
Q3FY2015 earnings preview
Another quarter of moderate growth in earnings but the outlook on earnings growth revival for
the next two years remain bright
Key points
 Flattish revenue growth more of an aberration: In
Q3FY2015 the aggregate revenue growth of the Sensex
companies is likely to turn flattish (a growth of 1%
year on year [YoY] is the expectation) and be the
slowest in many quarters. Though the domestic
demand-driven sectors are gradually showing signs of
a growth revival, the revenue growth of the global
demand-driven sectors and the energy companies is
slowing down due to moderation in exports and a sharp
drop in the price of crude oil. The revenues of energy
companies Oil and Natural Gas Corporation (ONGC),
GAIL and Reliance Industries Ltd (RIL) will decline
because of lower realisations. Excluding the three oil
& gas majors, the revenue growth of our universe would
be around 6.5% for the third quarter of FY2015. Thus,
the lacklustre Q3 results would be more of an
aberration.
companies. Thus, the global environment needs to be
supportive to meet the Street’s expectations.
 Valuation supportive; remain constructive on
equities: Purely on the basis of valuation, the price/
earnings (PE) multiple of the Sensex at 15.5-16.0x oneyear forward earnings is largely in line with its longterm average. Thus, there is scope for gains in the
Sensex owing to the potential multiple expansions
(based on higher growth rates) and double-digit
earnings growth over the next two years. Thus, we
remain constructive on equities and maintain our view
of a sustainable multi-year rally.
Sensex’ one-year forward P/E band
 Margins expand but earnings growth muted: Though
the operating profit margin (OPM) is expected to
expand by 120 basis points (BPS) on an aggregate basis,
the earnings growth would be limited to 3.1% (6.5% ex
energy) in Q3FY2015. Again, the weak performance of
the oil & gas majors along with that of certain other
companies like Bharat Heavy Electricals Ltd (BHEL) and
Mahindra and Mahindra (M&M) is expected to dent the
earnings growth of the entire universe.
 Earnings growth to accelerate in FY2016: In spite of
two consecutive quarters of low to mid single-digit
earnings growth for the Sensex companies, the
consensus estimate for FY2015 still points to an
earnings growth of over 10%, which implies a reversal
of the quarterly growth rate of 13-14% seen in
Q4FY2014. Also, the consensus estimate factors in a
strong revival in the earnings growth to 18-20% per
annum for the next two fiscals, ie FY2016 and FY2017.
We believe that the economic up cycle would boost
the earnings of the private banks, and the financial
service, auto and discretionary consumption
companies, and the signs of the same are already
visible. However, the shift to a higher growth trajectory
would also need the support of the exporting
Source: Bloomberg, Sharekhan Research
Outperformers
Underperformers
ZEE Ent., Eros Int., Persistent Systems HCL Technologies
SBI, Yes Bank, PFS
IDBI Bank, Corporation Bank
KDDL, Relaxo
Titan, KKCL
Marico, Jyothy Laboratories
ITC
Ashok Leyland, TVS Motor
M&M
JK Lakshmi Cement, Finolex Cables
Shree Cements, BHEL, RIL
Cadila Healthcare, Cipla, Lupin
Ipca Laboratories
For Private Circulation only
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sharekhan special
Q3FY2015 earnings preview
Estimated sector-wise contribution to Sensex’ earnings growth (%)
Trend in Sensex’ (ex oil) earnings growth—actual vs estimated
Source: Company data, Sharekhan Research
Source: Company data, Sharekhan Research
Estimated PAT growth by sector (ex energy; %)
Estimated revenue growth by sector (%)
*
*
*3.1% growth on aggregate basis
Source: Company data, Sharekhan Research
Sharekhan Special
Source: Company data, Sharekhan Research
2
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Sectoral reviews
Automobiles
Key points
 The automobile companies (ex Tata Motors) are expected to report a 7.5% growth in revenues for Q3FY2015. The growth
is likely to be on the lower side as a couple of large companies, M&M and Hero MotoCorp Ltd (HMCL), are expected to
report a decline in revenues on account of lower volumes. Ashok Leyland Ltd (ALL) is expected to lead the pack with a
revenue growth of 66%. TVS Motor Company (TVS) and Eicher Motors (Eicher) are expected to report growth rates in the
vicinity of 30%, given the industry leading volume growth. Auto ancillary companies (except tyre manufacturers) too are
expected to post a healthy double-digit growth for the quarter.
 The margins of the original equipment manufacturers (ex Tata Motors) are expected to report an expansion of 25 basis
points (BPS) in the OPM YoY. Higher operating leverage and a stable input cost are expected to drive the margin
expansion. Tyre companies except Balkrishna Industries are expected to report all-time high margins as the prices of the
key raw materials, such as natural rubber and crude derivatives, slid further during the quarter. ALL, which had reported
an operating loss in Q3FY2014, is expected to witness the largest swing in OPM. Automobile companies (ex Tata Motors)
are expected to report a 13.4% growth in the net profit for Q3FY2015.
 We continue to prefer Maruti Suzuki India (Maruti) in the four-wheeler space and HMCL in the two-wheeler space.
In the commercial vehicle industry we like ALL and in the ancillary space we like Apollo Tyres, Gabriel India and
Rico Auto Industries.
Q3FY2015 results snapshot
Rs cr
Company
Sales
OPM (%)
PAT
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
12,476
10,894
14.5
1.4
12.5
12.4
6
13
865
681
27.0
0.3
Coverage Coverage
Maruti Suzuki
Bajaj Auto
5,534
5,131
7.9
-7.2
20.0
20.3
-27
-3
816
838
-2.6
-6.9
TVS Motor
2,627
2,058
27.7
-2.1
6.3
6.0
25
19
96
69
40.0
1.6
M&M**
8,845
10,242
-13.6
-3.6
12.2
15.0
-280
17
613
1,000
-38.8
-37.1
Ashok Leyland*
3,253
1,953
66.5
1.1
7.4
(5.0)
1231
7
46
(260)
NA
NA
Apollo Tyres
3,292
3,485
-5.5
-0.7
15.8
14.2
161
92
283
292
-3.0
9.7
Greaves Cotton
437
423
3.1
-1.1
13.9
11.2
272
116
40
39
1.7
5.5
Gabriel India
393
339
15.9
2.3
8.1
6.8
132
6
19
14
37.8
11.3
Rico Auto Industries
387
362
9.8
12.2
4
9
67,313
63,877
5.4
11.1
15.9
15.6
33
10
4,963
4,827
2.8
50.8
6,792
6,877
-1.2
-1.8
13.7
13.1
62
16
702
525
33.7
-8.1
Non-coverage
Tata Motors
Hero MotoCorp
Eicher Motors #
2,244
1,680
33.6
-1.4
13.5
9.9
361
11
163
96
69.4
-1.2
Exide Ind
1,673
1,304
28.3
-5.1
12.0
10.9
106
22
121
78
56.6
-3.5
Bharat Forge
1,118
832
34.3
-1.8
28.4
25.8
267
-8
173
94
84.2
-3.1
Suprajit Eng
175
160
10.0
14.8
17.6
18.8
-119
133
16
16
-0.7
11.8
FIEM Ind
229
188
21.5
8.6
12.7
12.6
6
42
13
10
24.7
21.1
1,528
1,439
6.2
6.3
13.0
11.0
199
80
97
67
44.4
17.8
869
884
-1.8
-1.4
23.4
25.9
-249
-15
91
124
-26.8
0.5
1,833
1,722
6.5
-2.1
12.7
10.8
188
25
78
44
77.7
2.6
Ceat
Balkrishna Industries
JK Tyre & Industries
# Calender year end, figures are for Q4CY2014
** includes MVML nos
Sharekhan Special
3
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Valuations
Company
Reco
Price
CMP
EPS (Rs)
PE (x)
target (Rs)
(Rs)
FY14
FY15E
FY16E
FY14
FY15
FY16
Buy
4,000
3,448
92.1
116.9
159.8
37.4
29.5
21.6
Bajaj Auto
Hold
2,620
2,460
113.9
119.7
140.1
21.6
20.5
17.6
TVS Motor
Hold
250
271
5.5
8.0
10.6
49.5
34.0
25.6
M&M#
Buy
1,440
1,219
62.2
63.7
73.3
19.6
19.2
16.6
Ashok Leyland
Buy
58
58
-1.8
0.5
2.7
NA
114.6
21.5
Apollo Tyres
Buy
265
229
20.7
22.8
25.0
11.1
10.0
9.2
Greaves Cotton
Buy
155
144
4.9
6.4
8.6
29.5
22.4
16.7
Gabriel India
Buy
110
97
3.3
5.2
7.2
29.7
18.7
13.5
Rico Auto Industries
Buy
55
46
0.2
2.1
4.0
231.0
22.0
11.6
Maruti Suzuki
Non-coverage
Tata Motors
Not rated
524
43.5
57.7
66.4
12.1
9.1
7.9
Hero MotoCorp
Not rated
3,119
105.6
143.3
183.1
29.5
21.8
17.0
Eicher Motors*
Not rated
15,134
145.7
232.3
371.8
103.9
65.1
40.7
Exide Ind
Not rated
185
5.7
6.7
8.1
32.3
27.6
22.8
Bharat Forge
Not rated
943
21.4
27.2
36.0
44.0
34.7
26.2
Suprajit Eng
Not rated
136
4.5
6.1
7.8
30.2
22.3
17.4
FIEM Ind
Not rated
866
31.2
41.2
54.3
27.7
21.0
16.0
Ceat
Not rated
877
78.2
75.7
92.1
11.2
11.6
9.5
Balkrishna Industries
Not rated
645
50.5
50.9
56.9
12.8
12.7
11.3
JK Tyre & Industries
Not rated
135
11.9
14.7
14.9
11.3
9.2
9.1
* CY2013 replaced for FY2014
# includes MVML nos
Banking
Key points
 We estimate the earnings growth of our banking universe will be strong (aggregate earnings up 26% YoY, earnings of
public sector banks [PSBs] up 42%) in Q3FY2015 largely driven by treasury profits (due to a decline in bond yields).
As the margins are expected to remain stable, the net interest income growth is likely to follow the credit growth
for the PSBs (~10% YoY).
 While stressed loan formation is still high, it has shown signs of stabilising and we expect the trend in Q3FY2015 to
be similar to that in the preceding quarter. In case of the private banks the loan impairment may be slightly higher
compared with the previous quarters, though we expect them to maintain their edge over the PSBs in terms of
asset quality.
 Outlook: The outlook for the Indian banking sector is improving on the back of a cyclical recovery in the economy
and a favourable interest rate scenario. We have a positive outlook on the sector and continue to prefer the
private banks (ICICI Bank and Yes Bank). We also like large PSBs (State Bank of India, Bank of Baroda and Bank of
India) because their valuations are reasonable and these would benefit from an economic revival. Among the nonbanking finance companies (NBFCs) we like PTC India Financial Services, LIC Housing Finance and Max India.
Sharekhan Special
4
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Rs cr
Q3FY2015 results snapshot
Banks
Public
State Bank of India
Punjab National Bank
Bank of Baroda
Bank of India
Union Bank
Corporation Bank
Andhra Bank
Allahabad Bank
IDBI Bank
PSBs total
Private
ICICI Bank
HDFC Bank
Axis Bank
Federal Bank
Yes Bank
Private banks total
Grand total
NBFCs
HDFC
LIC Housing Finance
Capital First
Bajaj Finance
PTC India Fin. Ser.
NII
Q3FY15E Q3FY14
YoY % QoQ %
PPP
Q3FY15E Q3FY14 YoY %
PAT
QoQ % Q3FY15E Q3FY14 YoY %
QoQ %
13,590
4,421
3,575
3,182
2,201
1,048
1,086
1,545
1,440
32,088
12,616
4,221
3,057
2,719
1,964
1,002
868
1,338
1,488
29,273
7.7
4.7
16.9
17.0
12.1
4.7
25.1
15.5
-3.2
9.6
2.4
6.5
5.1
5.0
5.6
6.6
-1.6
2.7
2.4
3.7
8,817
7,618
2,929
2,702
2,695
2,197
2,438
2,144
1,504
1,261
801
744
770
522
1,187
1,010
1,254
1,239
22,394 19,438
15.7
8.4
22.6
13.7
19.2
7.7
47.7
17.5
1.2
15.2
4.7
1.8
12.2
14.2
12.7
25.5
3.2
2.6
4.8
7.1
3,400
1,014
1,235
850
520
201
195
277
228
7,920
2,234
755
1,048
586
349
127
46
325
104
5,574
52.2
34.3
17.8
45.1
49.1
58.3
328.0
-14.7
119.0
42.1
9.7
76.3
11.8
8.2
40.0
25.0
35.0
96.1
92.8
21.8
4,808
5,767
3,592
619
864
15,651
47,739
4,255
4,635
2,984
546
665
13,085
42,358
13.0
24.4
20.4
13.5
29.8
19.6
12.7
3.3
4.7
1.9
2.2
0.9
3.3
3.6
4,869
4,439
4,626
3,888
3,222
2,615
453
331
816
615
13,985 11,888
36,378 31,326
9.7
19.0
23.2
36.8
32.8
17.6
16.1
3.6
13.9
1.9
10.5
-0.1
6.4
6.8
2,807
2,795
1,734
260
495
8,091
16,011
2,532
2,326
1,604
230
416
7,108
12,681
10.9
20.2
8.1
12.8
19.0
13.8
26.3
3.6
17.4
7.7
8.1
2.5
9.0
15.0
1,851
556
138
745
108
1,762
458
88
618
55
5.1
21.6
56.0
20.6
95.9
-1.4
4.6
10.0
19.1
29.0
1,783 13.7
449 20.0
35 100.0
374 18.9
135 -16.2
0.5
8.1
10.8
17.5
18.9
1,393
358
33
222
69
1,278
327
10
194
107*
9.0
9.5
223.2
14.5
-35.1
2.6
4.8
20.7
12.8
81.8
2,026
538
70
445
112.8
*includes one-off income of Rs82.2 crore from sale of equity investment, adjusted for the one-off income the Q3FY2015E PAT growth would be 96% YoY
Valuations
Reco.
Price
target
CMP
(Rs)
(Rs)
FY14
FY15E
FY16E
FY14
FY15E
FY16E
FY14
Buy
Hold
Buy
Buy
Hold
Hold
Hold
Buy
Hold
378
UR
1,236
348
250
388
104
145
95
300
208
1,059
292
225
327
90
125
72
0.6
0.6
0.8
0.5
0.5
0.3
0.3
0.6
0.3
0.5
0.7
0.7
0.7
0.5
0.5
0.4
0.4
0.4
0.3
0.5
0.8
0.8
0.8
0.5
0.5
0.4
0.5
0.5
0.4
0.6
10.0
9.7
13.4
10.1
9.5
5.7
5.1
10.1
5.0
8.7
11.4
11.3
13.3
10.2
10.1
9.0
8.6
7.9
3.9
9.5
13.5
13.0
14.7
11.0
10.7
10.2
10.9
10.6
6.0
11.2
2.0
1.1
1.3
0.7
0.8
0.5
0.6
0.6
0.5
0.9
1.8
1.0
1.1
0.7
0.8
0.5
0.6
0.6
0.5
0.8
1.6
0.9
1.0
0.6
0.7
0.5
0.5
0.5
0.5
0.8
Buy
Hold
Buy
Buy
Buy
424
950
556
156
930
348
942
499
145
772
1.7
1.7
1.7
1.1
1.6
1.6
1.0
1.7
1.8
1.7
1.1
1.6
1.6
1.1
1.8
1.9
1.8
1.2
1.7
1.7
1.1
14.0
21.3
17.4
12.6
25.0
18.1
13.4
14.5
22.1
17.3
13.3
20.7
17.6
13.6
15.7
23.3
17.9
14.5
18.9
18.0
14.6
2.7
5.2
3.1
1.8
3.9
3.4
2.1
2.5
4.4
2.7
1.7
2.8
2.8
1.8
2.3
3.7
2.3
1.5
2.4
2.4
1.6
Hold
Buy
Hold
Hold
Buy
UR
464
380
3,45
90
1,102
448
360
3,425
68
2.6
1.6
0.6
3.4
5.0
2.6
1.5
1.0
3.2
3.3
2.6
1.6
1.2
3.2
3.4
20.5
18.8
4.9
19.6
16.1
21.3
18.0
9.1
20.0
15.5
21.8
19.3
12.2
21.1
19.7
6.2
3.0
2.5
4.3
2.8
5.4
2.6
2.4
3.6
2.5
4.8
2.3
2.1
3.0
2.2
Banks
Public
State Bank of India
Punjab National Bank
Bank of Baroda
Bank of India
Union Bank
Corporation Bank
Andhra Bank
Allahabad Bank
IDBI Bank
PSBs total / avg.
Private
ICICI Bank
HDFC Bank
Axis Bank
Federal Bank
Yes Bank
Private banks total / avg.
Grand total / avg.
NBFCs
HDFC
LIC Housing Finance
Capital First
Bajaj Finance
PTC India Fin. Ser.
RoA (%)
RoE (%)
UR - Under review
Sharekhan Special
5
January 08, 2015
P/BV(x)
FY15E FY16E
sharekhan special
Q3FY2015 earnings preview
Capital goods & engineering
Key points
 We expect the aggregate revenues of the capital goods companies under our coverage to grow by 5% in Q3FY2015
due to a decline in the revenues of the heavyweight, BHEL. However, excluding BHEL, the aggregate revenues are
expected to grow by 12% YoY. We expect most of the companies under our coverage to register revenue growth in
the range of 10-15% except Larsen & Toubro (L&T) and Finolex Cables Ltd (FCL), which are expected to grow at a
high single-digit rate only.
 We expect the overall margin of the coverage universe to be affected negatively by poor margin of BHEL and some
weakness in L&T. V-Guard Industries (V-Guard) and Crompton Greaves Ltd (CGL) are likely to be flat on the margin
front but the rest are expected to see an improvement. We believe FCL could witness a substantial margin expansion,
given the strengthening of its margin in the electrical cable business and a lower base in Q3FY2014.
 Overall, the order inflow trend in this quarter was fairly healthy as some heavy engineering companies witnessed
some order inflow after a long hiatus, though the inflow run rate for L&T was relatively soft compared with the
previous trend. On the positive side, the ordering activities have started looking up again in the power transmission
and distribution segment and are likely to remain healthy for the rest of the year. Further, efforts of the government
to remove hurdles from industries like power are going to improve the order outlook in the heavy engineering
space. As for the consumer businesses, we believe the optimism is yet to translate into demand for the companies,
though we see brighter prospects ahead.
 We continue to believe that the market is waiting for signs of an improvement in the earnings of the capital goods
companies as expectations of an economic revival are largely priced in. The evidence of any improvement in the order
inflow in the days to come would be watched by investors. In our view, the next leg of the re-rating should start with an
improving earnings visibility; hence we remain positive on quality stocks. We like quality stocks like L&T and CGL, while
Kalpataru Power & Transmission Ltd (KPTL), Va Tech Wabag and Finolex Cables are our preferred mid-cap stocks.
Q3FY2015 results snapshot
Company
Sales (Rs cr)
Q3FY15E
Y-o-Y %
Q3FY15E
OPM (%)
YoY BPS
PAT (Rs cr)
Q3FY15E
Y-o-Y %
BHEL
7,444
-12.0
5.8
(381)
333
-52.1
Crompton Greaves
3,641
8.6
5.1
7
74
19.3
L&T (stand-alone)
16,124
12.1
10.6
(104)
1,120
-1.4
KPTL (stand-alone)
1,177
12.0
9.3
36
38
6.1
Thermax (stand-alone)
1,140
13.8
9.3
23
74
11.0
Finolex Cables
595
6.7
10.5
254
38
54.1
V-Guard Industries
405
15.7
8.3
3
18
2.7
Va Tech Wabag
655
11.1
7.6
68
26
3.8
31,181
4.8
8.6
(131)
1,721
-16.6
Sharekhan coverage
Valuations
Company
Reco
Price
CMP
EPS (Rs)
PE (x)
target (Rs)
(Rs)
FY14
FY15E
FY16E
FY14
FY15E
BHEL
Hold
270
275
14.1
11.7
15.8
5.9
23.5
17.4
Crompton Greaves
Buy
260
187
3.9
8.6
11.3
70.2
21.7
16.5
L&T #
Buy
1,840
1,535
52.9
60.1
70.7
15.6
25.5
21.7
KPTL #
Buy
245
235
9.5
11.6
14.9
25.2
20.3
15.8
Thermax #
Hold
1,100
1,048
18.5
26.6
32.8
33.2
39.4
32
FY16E
Finolex Cables
Buy
285
268
12.4
14.6
16.3
14.7
18.4
16.4
V-Guard Industries
Hold
1,200
1,133
23.5
29.3
35.9
23.6
38.7
31.6
Va Tech Wabag
Buy
1,900
1,506
40.9
47.3
59.2
20.3
31.8
25.4
# stand-alone
Sharekhan Special
6
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Cement
Key points
 For Q3FY2015 we expect the revenues of the cement companies under our coverage (active and soft both) to show
a growth of 15% largely supported by a rise in both volume and prices (a moderate price increase in the southern,
northern and western regions) during the quarter. In spite of a decline in the realisation, the OPM of the companies
in the west and the south is likely to remain stable YoY on account of operational efficiency and a decline in the
cost of diesel and imported coal. We expect The Ramco Cements and JK Lakshmi Cement to report a strong
earnings growth on account of a Y-o-Y increase in the cement prices in their operating regions.
 Cement prices had softened in October and November of 2014 due to a slowdown in demand, however prices have
firmed up again in selected regions. After the end of the festival season the demand environment has remained
moderate but a slowdown in capacity addition, a decline in the cost of coal and diesel and firm cement prices are
likely to support the OPM, leading to a surge in the earnings due to the base effect.
 Going ahead, the key monitorables are a revival in the demand for cement across the country and a sustained
improvement in the price of cement. Our channel checks also suggest a moderate demand environment after the
monsoon and the festival season whereas cement prices have sustained or risen marginally in most places barring
some areas in the south where the prices saw a steep uptrend towards the end of Q3FY2015.
 UltraTech Cement remains our preferred pick in the cement sector. Among the mid-caps we prefer JK Lakshmi
Cement.
Q3FY2015 results snapshot
Rs cr
Company
Net sales
OPM (%)
Adj. PAT
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Grasim
7,873.4
7,066.6
11.4
0.1
14.3
13.9
34
33
420.8
331.9
26.8
1.1
UltraTech
5,764.7
4,786.4
20.4
7.1
15.7
16.0
-25
30
385.3
369.8
4.2
6.5
Shree Cement
1,660.6
1,318.1
26.0
3.3
19.8
20.5
-71
-136
92.7
118.7
-21.9
-19.8
India Cements
1,135.0
1,036.5
9.5
0.3
13.1
13.9
-86
-276
-15.7
-2.4
NA
NA
The Ramco Cements
892.5
868.1
2.8
-6.2
19.5
17.8
166
-324
46.7
25.5
83.1
-47.9
JK Lakshmi cement
608.8
502.6
21.1
6.3
15.6
12.6
299
5
34.6
14.1
145.4
-2.8
17,946.8
15,578.4
15.2
2.5
15.5
15.3
25
-18 1,001.9
857.6
16.8
-2.4
Total
Valuations
Company
Reco
Price
CMP
EPS (Rs)
PE (x)
target (Rs)
(Rs)
FY14
FY15E
FY16E
FY14
FY15
FY16
Grasim
Buy
4,020
3,445
212.0
208.2
232.0
16
17
15
UltraTech
Buy
2,935
2,731
74.8
93.8
103.7
37
29
26
Shree Cement
Hold
9,500
9,139
248.3
271.5
398.2
37
34
23
The Ramco Cements
Buy
420
319
5.2
10.4
15.5
61
31
21
India Cements
NA
NA
86
-1.2
4.4
6.4
-74
20
13
JK Lakshmi cement
NA
NA
393
10.0
15.6
20.9
39
25
19
Sharekhan Special
7
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
FMCG
Key points
 Revenue growth to remain in low double digits: We expect the revenue growth of FMCG companies under our
coverage to remain in low double digits (barring Marico and Bajaj Corp) in Q3FY2015. The sales volume growth of
most of the companies is yet to see a substantial revival and is likely to remain in line with that of Q2FY2015. The
ongoing festive season didn’t provide the anticipated push to the sales of the FMCG companies in the last three to
four months. Also, the benefits of increasing product prices are reducing as the companies have avoided any fresh
price hikes in the wake of the softening commodity prices.
 Lower raw material prices to push profitability: The prices of some of the key commodities including palm oil,
copra, linear alkyl benzene, milk and milk powder, soda ash and high density polyethylene have declined in the last
four to five months. Most of the FMCG companies would gain from the decline in the raw material prices and witness
an improvement in the gross profit margin in Q3FY2015. However, the larger benefits of the falling raw material
prices would come in from Q4FY2015. We expect the FMCG companies to invest a large part of the gains in
advertisements and promotional activities to improve the sales in the coming quarters.
 Outlook–a revival in sales volume another two quarters away: The festive season didn’t bring any cheers for the
FMCG companies. However, we expect the sales volume of these companies to improve in a quarter or two as
inflation is receding and consumer sentiment is improving (especially in the urban markets). Also, we expect the
discretionary companies such as Speciality Restaurants and Cox & Kings to be the larger beneficiaries of the revival in
the macro environment and perform well in the coming quarters. The decrease in the raw material prices provides an
opportunity for the FMCG companies to redefine their strategies and improve their sales in the near future. The
upcoming Union Budget would be keenly monitored and any indication of an early implementation of the Goods and
Services Tax would be the key positive for the FMCG companies.
 Valuations remain stretched, maintain selective stance: The valuations of the FMCG companies remain stretched.
We continue to like ITC in the large-cap FMCG space due to its discounted valuations compared with some of the large
FMCG companies. We maintain our positive bias on Marico mainly on account of its long-term growth prospects and
strong earnings visibility in the near term. In the discretionary space, we maintain Cox & Kings as our pick as the
travel and tourism segment in India is expected to see a substantial revival in the near to medium term.
Q3FY2015 results snapshot
Company
Rs cr
Net sales
Q3
FY15E
OPM (%)
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
Net profit
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Companies under coverage
HUL
7,866.0
7,037.8
11.8
5.4
15.9
14.8
112
161
1,079.3
946.5
14.0
13.4
ITC
9,838.4
8,726.9
12.7
9.0
37.3
37.6
(35)
(138)
2,653.7
2,385.3
11.3
9.4
937.1
839.1
11.7
(12.8)
7.7
7.0
71
(691)
93.5
79.8
17.2
(41.7)
GCPL
2,195.2
1,978.9
10.9
7.2
16.6
15.7
95
-
226.2
195.6
15.6
(3.6)
Marico
1,476.9
1,200.7
23.0
3.2
16.6
16.8
(18)
299
168.1
135.4
24.2
42.2
Jyothy Laboratories
362.7
313.8
15.6
(1.4)
12.3
13.2
(85)
323
36.4
22.5
61.8
44.5
Zydus Wellness
106.9
97.3
9.8
3.7
28.5
27.5
95
342
29.5
26.7
10.3
7.9
Dabur India
2,159.8
1,909.3
13.1
11.9
16.5
15.6
89
(171)
287.4
244.2
17.7
(0.5)
Britannia Industries
2,019.0
1,793.0
12.6
12.6
10.8
8.9
189
(35)
139.7
100.3
39.3
(1.8)
188.9
158.2
19.4
0.7
30.7
27.6
307
241
50.8
39.4
28.9
6.4
26,962.0
23,896.7
12.8
23.2
22.7
52
4,713.6
4,136.2
14.0
448.0
407.7
9.9
-
26.9
25.8
109
-
19.1
(0.6)
-
-
86.0
72.2
19.1
14.9
14.6
15.1
(54)
604
7.2
6.7
6.9
-
GSK Consumers
Under soft coverage
Bajaj Corp
Total
Other companies under coverage
Cox & Kings
Speciality Restaurants
* Cox & Kings’ estimates are not comparable on a Y-o-Y basis due to divestment of camping business at the end of Q2FY2015.
# PAT of most of the companies including HUL, Marico, GCPL and Cox & Kings is adjusted for an exceptional item.
Sharekhan Special
8
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Valuations
Company
Reco
Price
CMP
EPS (Rs)
target (Rs)
(Rs)
FY14
FY15E
PE (x)
FY16E
FY14
FY15
FY16
Companies under coverage
HUL
Reduce
710
756
17.2
18.3
20.5
44.0
41.3
36.9
ITC
Buy
415
368
11.0
12.5
14.8
33.5
29.4
24.9
GSK Consumer
Hold
6,005
5,896
160.4
137.0
162.1
46.0
43.0
36.4
GCPL
Hold
1,030
970
25.6
31.1
38.1
37.9
31.2
25.5
Marico
Buy
340
330
7.5
9.2
11.5
44.0
35.9
28.7
Zydus Wellness
Hold
875
804
25.2
24.9
29.8
31.9
32.3
27.0
Jyothy Laboratories
Hold
285
261
4.7
8.5
11.6
55.6
30.8
22.5
Cox & Kings
Buy
395
306
19.5
27.8
25.9
15.7
11.0
11.8
Speciality Restaurants
Hold
222
196
2.7
5.0
9.7
72.4
39.1
20.2
-
398
10.2
10.4
13.5
39.1
38.3
29.5
Soft coverage
Bajaj Corp
Not rated
Dabur India
Not rated
-
235
5.3
5.9
7.2
44.3
39.8
32.6
Britannia Industries
Not rated
-
1,882
31.1
46.6
58.4
60.5
40.4
32.2
IT
Key points
 A seasonally soft quarter, further dampened by cross-currency head winds: Given the furlough and holidays, the
December quarter is usually a soft quarter for the IT sector. This time around the quarter’s performance was further
affected by cross-currency head winds, as the euro, the pound and the Australian Dollar depreciated by close to 6%,
5% and 7.8% respectively against the US Dollar during the quarter. We expect the reported revenue growth of the top
four IT companies to be in the range of 0.3-1.1%, though the constant-currency growth should be in the range of 2.23.1% quarter on quarter (QoQ). Tata Consultancy Services (TCS) will continue to lead the pack with a 3.1% quarter-onquarter (Q-o-Q) growth (including the Mitsubishi joint venture). However, on an organic basis HCL Technologies will
deliver the highest growth of around 2.9% QoQ among the top four, followed by Infosys with a 2.7% growth and Wipro
with a 2.2% Q-o-Q growth. Among the mid-cap coverage space, Persistent Systems is expected to report a 4.7%
sequential growth while FirstSource Solutions Ltd (FSL) is expected to deliver a 0.9% Q-o-Q fall.
 Stable margin trend: Despite the rupee tail wind, we do not expect any material gain on the margin front. For
Q3FY2015 TCS is likely to report a 14-BPS improvement in the earnings before interest and tax (EBIT) margin as
compared with a 52-BPS improvement for Infosys. For Wipro, the adjusted EBIT margin for the IT services business
is expected to remain stable on a Q-o-Q basis at 21.5% against 21.4% in Q2FY2015 while a staggered wage hike will
affect the margin in HCL Technologies’ case. However, operational efficiency and currency gain will keep the
margins broadly stable; we expect the margins to decline by 31BPS QoQ. In our mid-cap coverage universe,
Persistent Systems and FSL are expected to deliver a margin improvement of 173BPS and 10BPS QoQ respectively.
 Key issues to watch out for: (1) Focus on the management commentary on the IT budget for CY2015 and the
overall demand commentary; (2) outlook for the energy and utilities, and manufacturing verticals owing to a steep
fall in crude oil prices; (3) outlook for reinvesting currency gains in the business, given the recent depreciation in
the rupee; and (4) the hedging policy, given the volatile cross-currency movements.
 Valuation: In the last one month CNX IT has corrected by close to 6% owing to the fear of growth tapering off in
FY2016 and the negative impact of cross-currency head winds. We believe FY2016 will see an overall improvement
in the demand environment driven by an improvement in the US geography. Though it could fall short of the
expectations, but it will be better compared with FY2015. The recent underperformance of the IT stocks has
already priced in the negatives and offers an opportunity to buy them for a decent return in the next 12 months.
Our order of stock preference in tier-I space will be Infosys, TCS, and Tech Mahindra (unrated) and in the mid-cap
space we like Persistent Systems and FSL.
Sharekhan Special
9
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Rs cr
Q3FY2015 results snapshot
Particulars
Revenues
QoQ (%)
Infosys
13,751.8
3.1
5.6
28.8
55
TCS
24,498.4
2.9
15.0
28.7
14
Wipro
12,008.3
2.8
6.5
22.6
135
HCL Technologies
YoY (%)
EBITDA (%) QoQ (BPS) YoY (BPS)
Net profit
QoQ (%)
YoY (%)
103
3,268.5
5.6
13.7
(267)
5,477.3
3.6
5.7
(41)
2,192.8
5.2
8.8
8,952.6
2.5
9.4
24.9
(20)
(107)
1,833.6
-2.1
22.6
Persistent Systems
493.8
6.4
14.1
22.3
173
(532)
74.4
4.3
15.8
Firstsource Solutions
781.4
1.0
-2.3
12.4
10.1
71.4
59.1
-3.4
22.4
#blended margins
Valuations
Company
Price
CMP
Reco
target (Rs)
(Rs)
FY14
FY15E
FY16E
FY14
Infosys
Buy
2,540.0
1,974.0
94.6
109.9
123.0
20.9
18.0
16.0
TCS
Buy
3,010.0
2,545.0
97.7
109.5
127.9
26.0
23.2
19.9
Wipro
Buy
645.0
552.0
31.8
35.8
40.8
17.4
15.4
13.5
HCL Technologies
Buy
1,780.0
1,607.0
90.3
107.3
118.5
17.8
15.0
13.6
Persistent Systems
Hold
UR
1,740.0
62.3
78.1
90.3
27.9
22.3
19.3
Buy
51.0
35.0
2.9
3.7
4.7
12.0
9.4
Firstsource Solutions
EPS (Rs)
P/E (x)
FY15E
FY16E
7.4
UR - Under review
Oil & Gas
Key points
 The third quarter of FY2015 witnessed one of the sharpest falls in the price of crude oil which corrected by more
than 25% QoQ and by around 30% YoY during the period. Crude oil prices have fallen sharply because the global
demand-supply dynamics have turned unfavourable due to higher production in the USA and the decision of the
Organization of Petroleum Exporting Countries to retain its production level despite continued weakness in the
price of crude. This would affect the domestic oil & gas sector in many ways. The upstream companies would
report a weaker realisation while the oil marketing companies (OMCs) may report inventory losses for the quarter.
In the meanwhile, the Singapore gross refining margin (GRM) moved up by around 45% YoY and 30% QoQ in the third
quarter. We believe the sharp fall in crude oil prices may trim the premium in the refining margin enjoyed by the
complex refiners over their peers as the spread between light crude and heavy crude would reduce. We have built
in a GRM of $8.3 per barrel for RIL for Q3FY2015 and expect the company’s petrochemical margin to remain stable.
 Despite the weakness in crude oil prices the subsidy burden of the upstream companies had remained unchanged
in second quarter which had significantly affected their net realisation and consequently their profitability in
Q2FY2015. In the following quarter the global crude oil prices plummeted further, dragging down the gross realisation
of these companies. Hence, the subsidy-sharing figures would be the key determinant of the profitability of the
public sector upstream companies in the third quarter of FY2015. We have built in a net realisation of around $50
per barrel in our Q3FY2015 estimate for Oil India ltd (OIL).
 The new government has bitten the bullet and deregulated diesel which is a significant reform and is likely to have
a positive impact on the profitability of the upstream companies and OMCs. Further, the revised gas price would
also continue to be positive for the upstream companies and boost their earnings from the next year. However,
with the government revising the excise duty on several occasions, the full benefit of the same could not be passed
on to the OMCs. Nevertheless, the market is looking for clarity on the fixing of the subsidy-sharing formula which
would thus be a monitorable. We remain positive on OIL, which could be one of the key beneficiaries of the recent
reforms; besides RIL is going to benefit from its ongoing capex plan in the petrochemical and refining businesses.
Sharekhan Special
10
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Q3FY2015 results snapshot
Rs cr
Company
Net sales
OPM (%)
PAT
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
RIL
86,038
103,521
-16.9
-10.8
9.4
7.4
207.6
90.2
5,224
5,511
-5.2
-9.0
OIL
2,762
2,730
1.2
26.0
41.4
47.3
(594)
444.5
808
903
-10.6
32.8
GAIL
15,200
16,039
-5.2
7.6
10.9
14.3
-341.7
-550
1,170
1,700
-31.2
-10.2
ONGC
19,900
20,850
-4.6
-2.7
64.1
63.2
94
1,329
6,350
7,126
-10.9
17.0
Coverage
Non-coverage
Valuations
Company
CMP
Price
Reco.
target
Coverage
RIL
OIL
Non-coverage
GAIL
ONGC
EPS (Rs)
CAGR
PE (x)
FY14
FY15E
FY16E
FY14-16E
FY14
FY15E
FY16E
989
591
1,190
720
Buy
Buy
69.6
49.5
73.8
55
82.4
71.4
9.1
20
12.1
11
11.4
9.9
10.3
7.6
431
342
NA
NA
NR
NR
34.5
25.8
33.3
30.8
36.3
37.3
2.6
20.2
12.5
13.3
12.9
11.1
11.9
9.2
Pharma
Key points
 The growth in the pharmaceutical (pharma) sector is expected to remain healthy in Q3FY2015 on the back of a
recovery in the domestic and Latin American businesses of the Indian players in our pharma universe. The absence
of exclusivity-type products, a fewer number of product approvals in the USA during the quarter, the US Food and
Drug Administration (USFDA)'s adverse inspection report on the key Indian facilities and an adverse geo-political
environment in the Commonwealth of Independent States (CIS) are some of the factors that will restrict the
growth. But a stronger traction in the base business and the integration of the newly acquired entities (by Aurobindo
Pharma and Torrent Pharmaceuticals) will substantially mitigate the impact of these factors.
 On an aggregate basis, the pharma companies in our universe will see a revenue and profit growth of 20% and
11.8% respectively in Q3FY2015 (as compared with 20% and 18% in Q2FY2015). The OPM of our universe is expected
to decline by 100BPS due to the high base effect of Q3FY2014 (caused by the launch of generic Cymbalta).
 The long-term outlook for the industry remains strong as a sizeable number of products have yet to come in the
generic space, the key players have in the pipeline strong products that are pending approval from the key
regulatory agencies and the emerging markets are witnessing a better economic outlook. However in the short
term, the growth is likely to be hindered by the actions of the USFDA on the key manufacturing facilities of Ipca
Laboratories and Sun Pharmaceutical Industries, a slower rate of drug approvals in the USA and an adverse geopolitical situation in the CIS region.
 Top picks: Players like Cadila Healthcare, Cipla and Lupin are our preferred picks from the Q3FY2015 result’s
perspective.
Sharekhan Special
11
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Q3FY2015 results snapshot
Rs cr
Company
Aurobindo Pharma
Net sales
OPM (%)
Adj. PAT
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
3,019
2,141
41
5
20.5
30.1
-958
-162
400
415
-4
-3
Cadila Healthcare
2,144
1,883
14
2
20.0
18.1
194
4
287
217
32
0
Cipla
3,013
2,581
17
9
21.9
18.1
382
175
395
284
39
32
Divi's Lab
836
687
22
1
38.1
42.4
-427
154
241
223
8
9
1,812
1,601
13
8
19.9
20.9
-99
-150
216
215
1
31
847
815
4
9
18.9
24.5
-556
226
99
133
-25
40
3,503
3,015
16
10
25.2
25.4
-27
-108
588
476
24
-7
278
240
16
-0.9
19.0
19.4
-35
-163
34
31
11
-15
Sun Pharma
5,124
4,287
20
8
46.0
46.1
-8
51
1,697
1,531
11
8
Torrent Pharma
1,274
990
29
6
20.9
21.2
-28
-58
180
178
1
-9
21,848
18,240
20
7
28.1
29.1
-102
22
4,138
3,702
11.8
6
Glenmark Pharma
IPCA Lab
Lupin
JB Chemicals
Total
Valuations
Company
Reco
CMP
EPS (Rs)
(Rs)
FY14
FY15E
PE (x)
FY16E
FY14
FY15
FY16
Aurobindo Pharma
Buy
1,127
47.2
56.6
65
24
20
17
Cadila Healthcare
Hold
1,647
39.2
55.1
75.5
42
30
22
Cipla
Hold
618
17.3
19.4
27.2
36
32
23
Divi's Lab
Hold
1,653
61.1
62.9
77.7
27
26
21
Glenmark Pharma
Buy
741
28
32.6
42
26
23
18
729
37.8
36.5
52.4
19
20
14
1,408
41
56.8
64.8
34
25
22
IPCA Lab
Hold
Lupin
Buy
JB Chemicals
Hold
202
12.8
16.3
18.5
16
12
11
Sun Pharma
Buy
819
27.6
30.7
34
30
27
24
Torrent Pharma
Buy
1,148
39.2
48.4
56.5
29
24
20
28.4
24.1
20.3
Sector
Power
Key points
 For Q3FY2015 we expect CESC to report healthy numbers YoY driven by a double-digit tariff hike despite a weaker
volume growth. However, we expect its earnings to grow by close to 10% YoY. The adjusted net profit of PTC India
is estimated to grow by around 14% YoY. Its reported earnings are estimated to show a sharp fall on a Y-o-Y basis,
as the reported earnings of Q3FY2014 had included a one-time surcharge of Rs51 crore from the Uttar Pradesh
State Electricity Board. Power Grid Corporation of India is expected to deliver a healthy earnings growth of 18%
while NTPC is likely to report a 15% Y-o-Y decline in its earnings for Q3FY2015.
 The new government is moving in the right direction to clear the key hurdles in the power sector. One of its most
important moves has been the formulation of an e-auction process for the coal blocks whose allocations had been
cancelled by the Supreme Court last year. The pace of work on this front needs to be appreciated. We believe the
outcome of the upcoming coal auction would be a monitorable event in the near term. Further, the other efforts
of the government to improve domestic coal production by improving Coal India’s output and allocating fresh
mines to new companies are going to be watched in the long run. We continue to like CESC (on which we have a Buy
rating with a price target of Rs800) and PTC India (we reiterate our Buy rating on the stock as it is a bargain at the
current price; our price target for it is Rs130).
Sharekhan Special
12
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Q3FY2015 results snapshot
Rs cr
Company
Net sales
Q3
FY15E
YoY
%
OPM (%)
QoQ
%
Q3
FY15E
YoY
BPS
Adjusted PAT
QoQ
BPS
Q3
FY15E
YoY
%
QoQ
%
Coverage
CESC
1,296.0
7
-21
24.8
46.9
-73.1
117.0
9
-39
PTC India
2,593.0
-1
-38
1.8
177.4
177.4
41.0
14
-47
18,378.0
-2
11
23.5
-116.6
493.4
2,435.0
-15
16
4,407.0
19
6
85.5
117.0
-42.3
1,237.0
18
2
FY14
FY15
Non-coverage
NTPC
Power Grid Corporation
Valuations
Company
Reco
Price
CMP
BPS (Rs)
PBV (x)
target (Rs)
(Rs)
FY14
FY15E
FY16E
FY16
Coverage
CESC
Buy
800
691
560
607
647
1.2
1.1
0.9
PTC India
Buy
130
93
85
89
95
1.1
1
0.9
Non coverage*
NTPC
NR
NA
145
105
109
116
1.4
1.3
0.9
Power Grid
NR
NA
139
66
73.5
82.6
2.1
1.9
0.8
*Bloomberg estimate
Retail
Key points
 Despite Q3FY2015 being a quarter that saw many festivals (the third quarter is the best quarter for retail players
as retail products are sold at full price), the demand was lower than expected. Thus, on an average we expect the
retail players to report a low double-digit revenue growth (barring Titan, which is expected to post a decline in
revenues owing to the absence of the Gold on Harvest scheme). Notably, V-Mart Retail (V-Mart), Page Industries
(Page), Century Plyboard and Relaxo Footwears (Relaxo) are likely to post a robust revenue growth of 30.8%,
27.3%, 20.9% and 19% respectively.
 The margin performance is expected to be mixed. Century Plyboard is likely to post the steepest margin expansion
of 340BPS YoY followed by KDDL (up 131BPS) because of better absorption of fixed costs. Arvind, Jubilant FoodWorks
(Jubilant), Kewal Kiran Clothing Ltd (KKCL) and Bata India (Bata) are expected to witness margin erosion for
various reasons including inventory losses in case of Arvind, higher store expense in case of Jubilant, supply chain
issue in case of Bata and a lower revenue growth resulting in lesser absorption of the fixed costs in the case of
KKCL. The earnings growth would mirror the operating performance for the retail players barring Century Plyboard.
An increase in the finance cost (on account of the rupee’s depreciation) would derail the earnings growth momentum
of Century Plyboard. We expect a hit of Rs7.6 crore on account of the same. Adjusting for the foreign exchange
(forex), the earnings are expected to grow by 39% YoY.
 Even though the discretionary players are likely to report a sombre revenue performance, we believe that the
structural demand drivers are getting positive for the sector (in terms of lower inflation, reduction in interest
cost, the positive sentiment across earnings and employment growth). This is likely to result in a robust volumeled growth ahead. Thus, we believe that the retail players with a strong consumer connect and brand equity, deep
distribution reach (employing a judicious mix of online and store presence) and robust balance sheet are likely to
emerge as winners in the next 12-18 months. Their volumes would improve and they would experience operating
leverage which would result in a disproportionate growth in their earnings. Amongst our coverage universe, we
remain positive on Century Plyboard, KDDL and Relaxo, while on the soft coverage front we hold a positive view on
V-Mart, Arvind and Titan.
Sharekhan Special
13
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Q3FY2015 results snapshot
Company
Rs cr
Net sales
OPM (%)
Adj. PAT
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
1,383.0
1,206.8
14.6
(4.9)
12.1
12.1
(9.0)
22.9
61.2
57.1
7.1
(11.6)
309.9
260.5
19.0
(7.10)
11.2
11.2
1.3
247.1
13.6
10.6
28.7
21.4
96.0
87.0
10.4
(26.1)
19.4
19.8
(37.3)
(812.8)
11.5
10.6
8.1
(52.7)
Century Plyboard**
366.9
303.5
20.9
(9.4)
15.3
11.9
339.8
(48.7)
27.5
19.7
39.3
(23.1)
[email protected]
127.0
107.0
18.7
29.0
10.2
8.9
130.8
(203.2)
3.9
2.2
77.4
28.9
Arvind
2,052.9
1,774.3
15.7
4.5
13.1
14.4
(125.1)
78.4
102.9
102.7
0.1
6.9
Titan Company
2,523.7
2,675.8
(5.7)
(29.8)
10.4
10.1
30.3
117.1
174.6
182.6
(4.4)
(27.3)
Bata#
632.0
554.4
14.0
15.3
16.1
18.0
(187.6)
449.2
64.4
59.5
8.2
65.1
Page Industries
388.7
305.5
27.3
(2.0)
20.0
19.3
68.3
(48.6)
46.6
34.6
34.4
(6.7)
Coverage
Raymond
Relaxo Footwears
Kewal Kiran Clothing
Soft coverage
Jubilant FoodWorks
531.8
456.6
16.5
6.1
13.3
14.8
(146.2)
112.0
34.5
33.6
2.6
18.9
V-Mart Retail
255.9
195.6
30.8
77.0
12.5
13.2
(71.7)
871.9
18.3
14.1
29.7
381.1
TTK prestige
409.2
369.4
10.8
7.1
12.5
12.5
1.4
40.9
31.1
30.3
2.5
11.1
** Century Plyboard has an open position with respect to a dollar debt (around Rs180-200 crore), thus based on our calculation, a depreciation in the
rupee would result in a hit of Rs7.6 crore on its financials for Q3FY2015. Our estimates for Q3FY2015 are after adjusting for the forex element. The
reported earnings are likely to be flat YoY.
@ KKDL’s Q3FY2014 numbers are pro forma numbers which are derived from the stand-alone numbers and the Ethos press release, as the company
started posting quarterly consolidated results from Q1FY2015 onwards.
# Bata India has a calendar year end, so the results are for Q4CY2014.
Valuations
Company
CMP
Price
Rec/view
target
Coverage
Raymond
Relaxo Footwears
Kewal Kiran Clothing
Century Plyboard
KDDL
Soft coverage
Arvind
Titan
Bata
Page Industries
Jubilant Foodworks
V-Mart Retail
TTK Prestige
529
690
1,930
154
268
UR
UR
UR
200
300
264
375
1,286
11,420
1,321
534
3,570
NR
NR
NR
NR
NR
NR
NR
Hold
Buy
Hold
Buy
Buy
Positive
Positive
Neutral
Neutral
Neutral
Positive
Neutral
EPS (Rs)
CAGR
PE (x)
FY15E
FY16E
FY17E
FY14-16
FY15E
FY16E
FY17E
18.2
14.1
56.3
5.8
10.7
21.9
18.3
70.2
8.1
14.7
29
25
90.1
10.9
19.6
11.0
31.9
18.3
46.0
25.6
29.1
48.9
34.3
26.6
25.0
24.2
37.7
27.5
19.0
18.2
18.2
27.6
21.4
14.1
13.7
16.0
9.5
36.7
179.6
20.2
18.1
108
20.6
12
40.1
233
27.7
24.3
135
23.7
14.5
51
303
39
35.6
181
18.3
20.9
17.8
28.7
26.6
38.2
26.4
16.5
39.5
35.0
63.6
65.4
29.5
33.1
12.8
31.3
32.1
49.0
47.7
22.0
26.4
11.2
25.9
25.2
37.7
33.9
15.0
19.7
Sharekhan Special
14
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Telecom
Key points
 Voice volume and robust data uptick to drive revenue performance: The telecommunications (telecom) service
providers (Bharti Airtel and Idea Cellular) are expected to post a good growth led by a pick-up in volumes along
with a mild uptick in the realisation. We expect Bharti Airtel and Idea Cellular to post a sequential growth of 2.8%
and 4.1% in traffic respectively. This strong growth in traffic can also be attributed to a seasonally weak Q2 after
which the festive season leads to an increase in volumes for the telecom players. Along with a growth in the voice
traffic we expect the data growth momentum to continue. Thus, we expect both Bharti Airtel and Idea Cellular to
a post a sequential growth of 20% and 18% in data volumes with flat realisations. The consolidated revenues for
Bharti Airtel and Idea Cellular are expected to grow by 2.8% and 5.2% sequentially respectively in Q3FY2014.
 Margins to expand led by better cost absorption: The consolidated margins for both Idea Cellular and Bharti
Airtel is expected to improve YoY owing to better absorption of semi-fixed expenses like network operating, sales
and distribution costs. We expect Idea Cellular and Bharti Airtel to report a margin of 33.9% and 33.6% for Q3FY2014.
Bharti Airtel’s consolidated margins would be affected by margin erosion in the African business (the company has
divested its tower assets which will help it on the balance sheet front but also result in rental payments, affecting
the margins). Despite this Bharti Airtel’s OPM is expected to expand by 126BPS YoY while on a sequential basis the
same is expected to decline by 14BPS.
 Bharti Infratel to post strong results; led by tenancy growth: Data-led capex drive by the telecom operators
coupled with Reliance Jio tenancies coming to play would improve the tenancy, thereby boosting growth for Bharti
Infratel. We expect Bharti Infratel to post a 3.9% sequential growth in revenues, with marginal improvement of
5BPS in the margin and a 3.8% sequential growth in the net earnings.
 Currency and data led momentum to drive growth for Tata Communications: A depreciating currency is a tail
wind for Tata Communications (as 80% of its voice revenues is earned in dollars). This combined with a decent data
growth (we expect a 10% Y-o-Y growth in data volumes) would result in a 3% sequential growth in the consolidated
revenues with a margin improvement of 50BPS QoQ.
 Spectrum auctions key monitorable: The auctions of 2G and 3G spectrums coincide with the announcement of
the Q3 results; hence we believe that along with the financial results the outcome of the spectrum auctions and
the other regulatory developments will continue to hog investors’ attention.
 Stock performance to remain volatile till auctions: Despite the improved business environment getting reflected
in the financials, the telecom service providers (Bharti Airtel and Idea Cellular) have not participated in the recent
rally and grossly underperformed the benchmark indices (both have declined by 14% and 12% respectively over the
last three months). We understand that the underperformance is on two counts: (a) the approaching launch of
Reliance Jio’s 4G services (in early 2015) and the expectations of a collaboration between Reliance Communications
and Reliance Jio for the same; and (b) the uncertainty over the pricing and the quantum of spectrum to be
available for the upcoming auctions in 2015.
We also take cognisance of these risk factors, but believe that the same are already getting reflected in the
valuations. We expect mixed news flow and volatility with a negative bias in telecom stocks till the auctions get
over in the next month. Therefore, we advise against taking large trading positions in telecom stocks. For investors,
the pre-auction volatility is likely to offer a decent accumulation opportunity. We have a Hold rating on Bharti
AIrtel and a positive view on Idea Cellular and Tata Communications.
Q3FY2015 results snapshot
Rs cr
Company
Net sales
Q3
FY15E
YoY
%
Operating profit
QoQ
%
Q3
FY15E
YoY
%
QoQ
%
OPM (%)
Q3
FY15E
Adjusted PAT
YoY
%
QoQ
%
Q3
FY15E
YoY
%
QoQ
%
Bharti Airtel
23,493.4
7.0
2.8
7,884.4
11.2
2.3
33.6
126.0
(14.4)
1,283.4
32.7
(15.7)
Idea Cellular
7,963.3
20.4
5.2
2,697.6
31.2
8.3
33.9
278.9
97.2
779.2
66.6
3.1
Bharti Infratel
3,044.8
11.5
3.9
1,269.7
12.5
4.5
41.7
38.9
23.0
483.0
17.7
3.8
Tata Communications
5,225.7
4.6
3.0
808.2
(1.0)
6.5
15.5
(87.2)
50.6
57.3
92.1
(38.0)
Cont..
Sharekhan Special
15
January 08, 2015
sharekhan special
Q3FY2015 earnings preview
Valuations
Company
Reco
Price
CMP
Bharti Airtel
Hold
Idea Cellular
EPS (Rs)
EPS
PER (x)
target (Rs)
(Rs)
FY14
FY15E
FY16E
CAGR
FY14
FY15
450
362
9.8
14.7
16.5
29.8
36.9
24.6
21.9
Positive
190
152
5.6
7.7
9.0
27.0
65.2
47.0
40.4
Bharti Infratel
Neutral
NR
345
8.0
10.3
12.5
25.0
45.3
35.1
29.0
Tata Communications
Positive
NR
427
3.5
6.3
7.8
22.6
103.4
57.5
46.4
FY16
Miscellaneous
Q3FY2015 results snapshot
Rs cr
Company
Net sales
OPM (%)
Adjusted PAT
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
Q3
FY15E
Q3
FY14
YoY
BPS
QoQ
BPS
Q3
FY15E
Q3
FY14
YoY
%
QoQ
%
United Phosphorus
2,970
2,647
12.2
13.5
19.3
18.7
60.0
70.0
282
266
6.0
54.1
Bharat Electronics
1,388
1,201
15.6
7.3
14.5
14.8
(26.0)
535.0
218
192
13.7
48.3
Ratnamani Metals
421
347
21.3
(4.0)
19.8
18.6
120.0
(30.0)
45
36
26.5
(7.7)
Gateway Distriparks
235
247
(4.7)
(19.2)
26.5
25.4
111.0
(243.0)
46
32
44.5
24.9
IRB Infrastructure
954
877
8.7
8.0
56.6
49.6
705.0
(259.0)
121
109
11.7
(0.4)
Gayatri Projects
453
422
7.6
48.0
14.5
12.1
244.0
(127.0)
10
1
1,742.4
142.3
51.0
Pratibha Industries
ITNL
Technocraft Industries
ZEE Entertainment
Sun TV Network
Eros International
Supreme Industries*
677
555
21.9
(5.1)
14.0
13.5
2,124
1,966
8.0
41.4
26.8
24.8
57.0
11
7
60.0
10.8
199.0 (1,420.0)
63
62
2.1
(57.2)
196
186
5.3
6.0
15.9
7.8
810.0
56.0
20
14
41.8
7.5
1,211
1,188
1.9
8.3
28.0
25.0
300.0
(120.0)
242
214
13.3
6.4
545
507
7.3
6.9
77.0
73.0
390.0
(8.0)
199
185
7.9
28.8
506
433
17.0
111.0
29.0
1,044
975
7.1
37.5
13.0
31.0
(210.0)
(139.0)
102
92
10.5
102.8
15.0
(160.0)
60
67
(10.4)
174.0
* June ended
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
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Sharekhan Special
16
January 08, 2015
Compliance Officer: Ms. Namita Amod Godbole; Tel: 022-6115000; e-mail: [email protected] • Contact: [email protected]