Investor's Eye: Update - Q1FY2015 earnings preview, Q1FY2015 Retail earnings preview, Q1FY2015 Pharma earnings preview

 

Investor's Eye [July 09, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   SECTOR UPDATE   Q1FY2015 earnings preview  Earnings growth picks up; but positives already factored in consensus estimates for FY2015   Key points High double-digit earnings growth in Q1: On an aggregate basis, the Sensex companies are expected to grow at a healthy rate of 19% in Q1FY2015. Even after adjusting for the abnormal growth expected in the earnings of Sesa Sterlite (due to the merger of group entities) and of Tata Motors (due to a strong growth in the overseas operations) the aggregate earnings growth is expected to stand at close to 15% in Q1FY2015. Importantly, the operating profit margin (OPM) is also likely to be stable on an annual comparison basis despite the firming up of raw material prices and pressure on the gross profit margin (GPM) in certain sectors, like fast moving consumer goods (FMCG), pharmaceuticals (pharma) and industrials.  Growth to get more broad-based this quarter: Another positive sign is the broad-based nature of the growth in Q1FY2015. Unlike in the past many quarters, the growth contribution would come from across sectors in Q1FY2015 with only Reliance Industries Ltd (RIL) and capital goods stocks likely to report a decline in the net profit for the quarter. A lot factored in the consensus estimates; risks persist: Though we are positive on the revival of the earnings growth on the back of a gradual recovery in the economy and a better policy framework, but a lot of the positives are already reflected in the Sensex' consensus earnings growth estimate of close to 16% for FY2015. Thus, we do not see any scope for a meaningful upside to the estimates for the index stocks from here. On the other hand, a weak monsoon and the inability of the government to curtail inflationary pressure could result in a lower than expected growth in the earnings during the current year. Valuation; not lofty at all: Going by the consensus estimates, the Sensex trades at 15.3x its one-year forward earnings estimate which is largely in line with the long-term average valuation multiple. Thus, the market is not at all overheated despite the rally in the past few months. We, therefore, believe that any corrective phase should be looked at as an opportunity to increase exposure to equities to play the multi-year rally going ahead.      Q1FY2015 Retail earnings preview    Key points Barring jewellery players (Titan Industries and Tribhovandas Bhimji Zaveri), which are expected to post a decline in their revenues (owing to a very high base of Q1FY2014), we expect the retail players to post a double-digit revenue growth in Q1FY2015. The revenue growth is likely to be a combination of improving demand, realisation growth and expansion of the distribution reach (new store openings for players like V-Mart Retail, Jubilant FoodWorks, Page Industries, Shopper's Stop and Arvind). The operating performance is likely to be mixed, with the jewellery players witnessing a decline in the quarterly operating profit despite an improvement in their margins while the efforts by players like Raymond, Relaxo Footwears and Kewal Kiran Clothing to contain cost are likely to lead to a margin expansion. Jubilant FoodWorks' margin is expected to be hit by high inflation, lower same-store sales and high new store expenses. Likewise, the net earnings are also expected to post a mixed performance.  Taking cognisance of the improving sentiment and demand environment, we believe that retail players with strong consumer connect and brand equity, deep distribution reach and robust balance sheet are likely to emerge as winners in the next 12-18 months. The volumes would improve and they would experience operating leverage which would result in a disproportionate growth in their earnings. On the regulatory front, we expect gold import norms to be relaxed (a reduction in the customs duty expected in the union budget for FY2015) and the 80:20 norm to be removed by the end of FY2015 or mid FY2016 which will be conducive for the jewellery players. We remain positive on Titan Industries, Arvind and Relaxo Footwears.     Q1FY2015 Pharma earnings preview     Key points We expect the strong growth seen in the pharma sector in the previous quarter to continue in Q1FY2015 on the back of a robust performance of the pharma companies in the US market. On an aggregate basis, the pharma companies in our universe will see a revenue and profit growth of 28.4% and 25.5% respectively in Q1FY2015. The revenue growth would be driven by a 35% growth in the export of formulations while the domestic business will grow by close to 10%. Though the recent acquisitions by the key Indian pharma players and the absence of big products may taper the growth in the short term, but we maintain our positive stance on the pharma sector, given the long-term synergies from acquisitions and the strong product pipeline built by these players in the key markets. Top picks: Players like Aurobindo Pharma, Cadila Healthcare, Divi's Laboratories and Torrent Pharma are our preferred picks from the Q1FY2015 results perspective. 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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