Investor's Eye: Special - Q3FY2014 earnings review, Q3FY2014 Auto earnings review

 

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Summary of Contents   SHAREKHAN SPECIAL Q3FY2014 earnings review   Exporting sectors continue to drive earnings growth Key points Robust earnings growth supported by export-driven sectors: In Q3FY2014, on an aggregate basis, the earnings of the Sensex grew by 19.6%, which was not only higher than the consensus growth estimate but also the highest in several quarters. As expected, the bulk of the growth came from the export-driven sectors such as automobiles (Tata Motors-the Jaguar and Land Rover business), information technology (IT) services and pharmaceuticals (pharma). On the other hand, an improvement in the breadth of the earnings was clearly visible as 23 companies out of the 30 companies in the index registered a growth in the earnings on an annual comparison basis. However, many companies in sectors like cement, telecommunications (telecom) and metals delivered weak results that failed to meet the expectations, which were already conservative.  EBITDA margin on the mend: Led by a drop in the commodity prices and appreciation in the domestic currency against the dollar (from Q2FY2014 levels) the EBITDA expanded by 18.4% YoY for the Sensex companies. Consequently, the EBITDA margin (ex banks) improved by 57 basis points (BPS) sequentially to 18.8%. Sectors like capital goods, energy and IT saw a sequential expansion in their EBITDA margin. However, margin pressure was witnessed in the pharma (Cipla), power and metal segments. Revenue growth sustains momentum: The revenues of the Sensex companies expanded by a healthy 14.2% year on year (YoY), similar to that seen in Q2FY2014. Again, the revenue growth was mainly driven by the export-driven sectors like IT, pharma and automobiles that benefited from a weaker rupee (compared with Q3FY2013). The improved demand in the global economy partly masked the demand deterioration in the domestic economy. Other sectors like telecom and capital goods reported revenue growth in mid teens while the revenues of Reliance Industries and the power sector grew in single digits.  Upgrades exceed downgrades but no evidence of a sustained reversal in trend: In view of the better than expected numbers of several companies, the ratio of the upgrades exceeded the downgrades in Q3FY2014. While export-driven sectors have been the mainstay of the earnings performance in the past few quarters (accounting for about 35% of the index' earnings), not much has changed for the domestic consumption based businesses that struggle on account of weakness in demand, high interest rates and policy uncertainty. However, the consensus earnings estimate for FY2015 for the Sensex largely remains unchanged in view of the turbulence in the other emerging markets and uncertainty with respect to the general election ahead. Currently, the Sensex trades at 13x its FY2015E earnings (one-year forward) which is around 10% discount to the long-term average valuation multiple. Outperformers (better than expected results) Underperformers (weak results) ICICI Bank, Axis Bank, Federal Bank SBI, Union Bank GSK Consumers, Marico Bajaj Corp, Tata Global Wipro, HCL Tech, Persistent Systems CMC UPL, UltraTech Punj Lloyd (most construction companies), India Cements Relaxo, Zee Entertainment Bharti, KKCL, Sun TV L&T, Crompton Greaves, PTC V-Guard, Thermax Aurobindo Pharma, Cadila Health, Torrent Pharma Cipla, Dishman Pharma Tata Motors, Maruti Suzuki Ashok Leyland, Greaves Cotton   Q3FY2014 Auto earnings review   Key points Despite muted revenues, the automobile sector witnessed a healthy double-digit growth in the earnings during Q3FY2014. Subdued commodity prices and cost-control initiatives helped automobile companies improve their margins. Tata Motors and Maruti Suzuki outperformed (though Maruti Suzuki suffered after the Q3 results due to the Gujarat plant issue) while Ashok Leyland disappointed.  We expect the automobile volumes to remain under pressure in the near term as the macro-economic factors (a lower economic growth and higher interest rates) remain challenging. The recent excise duty cuts are likely to provide some relief (and result in some preponement of buying as it will be in force for a few months as of now). But it is not enough to lead to a revival in the automobile demand. Amongst the large-caps we prefer Mahindra and Mahindra (due to a strong tractor demand and the launch of new products in the automobile segment) and Maruti Suzuki (because of new launches and increased localisation). Amongst the auto ancillaries, Apollo Tyres (owing to subdued rubber prices and a strong demand in Europe) and Suprajit Engineering (not under active coverage) are our preferred picks.  Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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