SBICAP Securities has released its 1QF13 Quarterly Preview which identifies the best stocks to buy from various sectors in the economy: A preview from the report:
We expect auto companies in our universe to post EBITDA margin of 12.1% in 1QF13 compared to 12.8% in 1QF12 led by higher input cost adjusted to the currency. Auto universe have seen a volume pressure in 1QF13, and posted volume growth of 3.3% YoY, led by higher petrol prices. Where, M&M (new product launches) and Ashok Leyland (entry into LCV segment) posted a volume growth of 14.4% YoY and 43% YoY, respectively. In two wheelers space Hero Motocorp posted a single digit volume growth of 7.2% whereas, TVS Motors and Bajaj Auto de-grew by 3% and 1.1% YoY respectively led by lower contribution from exports. We expect two-wheeler segment will continue to grow in lower single-digit till 1HF13, led by higher base effect. Passenger vehicles has seen clear cut shift from petrol vehicles to diesel vehicles led by increasing maintenance charges for petrol vehicles. our top pick: M&M
Banks are likely to perform strong on the core income. For most of the banks, NIM is expected to remain flat, resulting in strong YoY net interest income. While business growth is expected to remain muted YTD, YoY growth may be close to RBI’s guidance of 17%. Asset quality would still remain a weak point for most of the banks, with an increase in restructured book as well as the outstanding GNPAs. Credit costs for most of the banks is likely to remain upwards of 1%. Overall a flat quarter for most banks. Private sector peers are expected to perform better than PSU players. On the housing finance side, while loan growth may remain flat YTD, the housing finance companies would see a benefit in the margins on re-pricing of fixed rate loans to floating. Top picks: Axis Bank, LICHF, SIB and Yes Bank
Dismal ordering activity has consistently put muted visibility on the Capital Goods players. We estimate 2% (YoY) increase in aggregate revenue of our covered universe during 1QF13e. Thermax and Mcnally are likely to see 6% and 20% rise in sales due to faster execution of existing orders and due to shorter cycle of orders. BHEL likely to post a flat performance during the quarter. Havells with aggressive entry into the consumer durable space likely to post 18% rise in sales during the quarter. However the profitability of the companies, dependent on order book likely to post dismal performance due to pressure on cost of working capital. We see 13% (YoY) decline in aggregate PAT of the companies under our coverage. Havells with new entry in to the durable space likely to do well during the quarter whrein we estimate 23% rise in PAT during the quarter. Havells is our top pick in the sector.
We expect cement companies under our coverage to post average EBITDA margins of 24.1%, lower than 27% in June 2011. Among the large cap companies, ACC and Ambuja Cements following calendar year are expected to show ~120bps YoY decline in EBITDA margins. The fall is much steeper for the South based companies like Madras Cements and India Cements. Cement prices have shown a healthy improvement in North, West and East. The pace of price increase is relatively slow in South India. Hence despite the impact of rising cost hurting most of the cement companies, margins of pan-India and North based companies will be impacted lower. South based companies will show improved performance sequentially as wind-mill segment will contribute to the revenues. For India Cements IPL contribution will be a further addition, however adverse currency movement will be a drag. Birla Corporation (BCORP) continues to be impacted severely by the mining ban that will add to its raw material cost pulling the EBIDTA margins down YoY. The High Court has upheld the decision of ban and the company management has decided to challenge the order implying a long-term (atleast 3-4 quarters) impact on the earnings
We expect healthy volume growth in the range of 8-15% for companies under our coverage barring ITC. We expect volumes for ITC to be flat due to high base effect and impact of steep price hikes. Overall growth for the sector will be led by a mix of both volume growth and increase in realisations to the tune of 4-5%. Major commodities used as raw materials have seen significant correction in this quarter ex. copra down by 37% YoY, palm oil down by 11% led by 18% correction in crude oil. However, packaging materials made out of HDPE are still up by 24% YoY curbing a large gross margin expansion. Although the INR has appreciated by 11% against US$, it is still down by 23% YoY, which negates the benefits of price correction in some cases like GCPL. Exception being TGB in which 65% of the business will benefit due to INR depreciation. At the operating level we expect to the benefits of gross margin expansion to flow into the numbers as none of them have passed on the benefits of input cost correction to the end user. Key things to watch out for will be 1) Strategy adopted by ITC to counter the steep hike in VAT rate in UP from 12.5% to 50% 2) Volume growth in cigarettes and the outlook by the management on the same 3) guidance on further price increases by all major companies 4) status update on sales to Canteen stores departments (CSD) and 5) update on macro/political situations in Bangladesh (key concern for Marico) , MENA (for Marico, Emami).
Infrastructure & Construction
Infrastructure sector has been marred by the high leverage, deteriorating working capital cycles, inflationary pressures, high interest rates, fewer new orders and policy paralysis. These multiple headwinds have not only slowed down the execution of projects, but also have impacted the profitability significantly, leading companies to post weak results. With this backdrop, we expect the construction companies to post revenue growth of 0-5% YoY during the quarter. We expect the asset developers to post 0-10% YoY revenue growth, driven by strong order book and ramp up in execution for under construction projects.
Delay in decision making from various government organisations has slowed down the award of new projects. New orders are likely to remain few, although the book-to-bill ratio of asset developers and construction companies provides good revenue visibility for the next 2-3 years.
High raw material prices, high interest cost and tight working capital is likely to weigh on the performance of companies this quarter as well, leading to decline in bottom line.
Key things to watch out during results: 1) update on the execution of key projects 2) new project bidding and its margins 3) raw material price impact 4) high interest cost impact 5) working capital and leverage levels 6) increase in traffic and 7) guidance for F13.
We expect weak performance to continue for another quarter: top-4 IT companies to report revenue growth of -0.3 to 2.5% in USD terms. Slower decision-making, elongated sales cycle and higher scrutiny in long-term investments and transformational / discretionary projects have impacted demand. Adverse cross-currency movements would put additional pressure on reported USD revenues. Sharp rupee depreciation would benefit IT companies. However, salary hike, visa costs and a poor demand environment would negate some benefits. We expect Infosys to cut its F13 USD revenue guidance to 6-8% (earlier 8-10%) considering adverse cross-currency movement, weak demand environment and macro-economic uncertainties. We advise investors to lighten their positions in any rally ahead of results. Key factors to watch – management commentary over demand environment specially BFSI / Europe, visa issues, comments on discretionary spending, pricing environment and hiring plan. We prefer Infosys, HCL Tech and Persistent Systems.
The first quarter is among the relatively small quarter for the media companies. For ZEE Entertainment we see high single digit growth in advertising revenues due to increase in market share in the Hindi GEC space. We see lower sports losses in the first quarter for ZEE. We estimate ZEE to post stable operating profit margins in the quarter.
We will see subdued performance by regional media companies in the print and television space. Sun TV is expected to show marginal ad growth, while DB Corp, Jagran Prakashan, HT Media and HMVL will see growth of 5-8%. Jagran Prakashan is expected to be ahead of peers on account of higher advertising growth and double digit circulation growth. Margins of these players will be under pressure due to new launches and forex losses.
Digitisation will drive the fixed component subscription revenues of broadcasters. However, Sun TV will continue to see flat cable revenues due to its ongoing issue with Arasu Cable. Dish TV will show better subscriber additions and lower churn as compared to earlier quarter. However its profitability will be impacted by the depreciating rupee and higher content & other costs. Hathway Cable and DEN Networks will see a turnaround in their performance in 2HF13 post the first phase of digitisation.
Multiplexes will see decent performance backed by higher occupancies with big release like Rowdy Rathore. PVR is expected to see occupancy of 33%, but lower average ticket prices of ~Rs150 in 1Q.
Metals, Mining & Pipes
1QF13 saw sharp rebound in steel consumption with a volume growth of 8.8% YoY to 18.2MT. The improved demand is led by long products segments driven by ongoing infrastructure projects. Steel prices for the quarter remained steady but we don’t rule out pressure in near term due to surge in import. We expect EBITDA margin to improve. However, due to depreciation of Indian rupee, we can see the reported PAT to be negative for the company having foreign currency loan leading to high MTM charges. Going ahead, we expect steel prices to remain subdued whereas margins will come under pressure due to rupee depreciation and increase in coking coal prices. Sequentially, base metal prices have declined 10-14% over last quarter as demand slumped globally. However, rupee depreciation will largely mitigated the fall in LME prices, leading to stable realizations. Nevertheless, we expect margins to decline sequentially as cost of production have increased.
Oil & Gas
Last quarter was characterised by huge volatility in oil prices, with oil prices falling sharply towards the end of the quarter. As the fall in oil prices came towards the end of the quarter, brent crude averaged US$109/bbl, down 10% QoQ. Benefit of oil price decline was offset by rupee depreciation, which depreciated by 8%. Gross under recoveries during the quarter are expected at Rs420bn, with no clarity on sharing formula among government, upstream and downstream companies. We have assumed provisional sharing of 33% among the three, although for the full year, we expect 40% burden on upstream companies and rest on government, with nil burden on OMCs. We expect ONGC and OIL to realise US$54/bbl compared to US$48/bbl and US$59/bbl respectively in 1QF12. OIL India’s volumes are expected to go down by 5% YoY due to shutdown at Numaligarh refinery. GAIL is expected to benefit from higher polymer prices due to rupee depreciation, while gas volumes are expected to decline to 116mmscmd. City gas distribution companies IGL and Gujarat Gas are expected to suffer from rupee depreciation and post QoQ decline in profitability. OMCs are expected to report losses as we expect 33% burden on OMCs on provisional basis, which should get reversed during the course of the year. In addition, OMCs are expected to report inventory and forex loss during the quarter.
The thermal power generation grew by a decent 10.9% in the first quarter of F13, primarily due to higher capacity addition in the last quarter of F12, compounding with a grueling summer at the start of F13e. All India generation grew by a decent 6.4% YoY during 1QF13. In our coverage universe, Neyveli Lignite, Power Grid and CESC are expected to show better performance. With the commissioning of the first unit of TPS-II expansion project, we expect a higher generation in F13e and expect Neyveli Lignite to report 16% rise in sales,and 4.3% growth in PAT. PGCIL is expected to report 26.2%/22.4% hike in Sales/PAT, due to higher capitalisation expected in 1QF13e. With the passage of the tariff hike for CESC in 4QF12, we expect it to post a 12.3%/40% rise in Sales/PAT.
NTPC: Generation was flat in 1QF13e for the national generator. We expect 11.4%/9.6% rise in Sales and PAT in 1QF13e.
NHPC: Generation to fall by 18% to 5.2bn units. Situation is likely to improve as cyclicality will improve generation in 2QF13e. Sales/PAT to be 2.3%/3.4% down at Rs15,253/7,640mn.
PGCIL: We expect capitalisation greater than Rs40bn in 1QF13e and estimate 26.2%/22.5% rise in revenue/PAT during 1QF13. We expect PGCIL to capitalise a mammoth Rs185bn in F13e.
Torrent Power: Torrent Power is expected to post Rs19.91bn/2.4bn and Sales/PAT in 1QF13e. We expect a de-growth of 3.8% YoY growth in the top line and a 31.1% de-growth in PAT to Rs2.4bn.
CESC: The generation for 4QF12e is expected to grow by a meagre 1.5% YoY to 2.4bn units. We expect Rs13.3bn/1.56bn of top line/bottom line in 1QF13e.
Neyveli Lignite: The 1QF13 generation of Neyveli is seen up at 4.8% YoY to 5.1bn unit. We expect 16%/4.3% rise in revenue/PAT at Rs13.4bn/3.6bn during 1QF13.
Except Bengaluru, absorption across metro cities in India continued to decline during the quarter. While the pace of approval has increased in Mumbai, conversion into launches will take few months. Sentiment in Mumbai property market seems to have improved compared to previous quarters and we expect the absorption to increase in the 2HF13. While Bengaluru is expected to have a stable absorption, we expect Mumbai to register strong growth on the lower base.
With a strong position in Mumbai, high level of transparency and a healthy balance sheet with good bargaining power, Oberoi Realty is our top pick in the sector.