Investor's Eye: Special - Q2FY2014 Capital Goods & Engineering earnings preview, Q2FY2014 Telecom earnings preview

 

Investor's Eye [October 04, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   SHAREKHAN SPECIAL Q2FY2014 Capital Goods & Engineering earnings preview  Tough business conditions; weak performance Key points  Sales to show a flattish performance; BHEL and Thermax to drag down growth: The aggregate revenues of our coverage universe are estimated to be flat at Rs28,477 crore in Q2FY2014. However, excluding the weak performance of Bharat heavy Electricals Ltd (BHEL), the performance of our coverage universe would be much better with the revenues increasing by around 10%, which would be largely supported by Larsen & Toubro (L&T; up 11%), V-Guard Industries (V-Guard; up 26%) and Crompton Greaves (Crompton; up 14%). On the other hand, BHEL and Thermax are expected to report a weak top line performance. Current environment to reflect adversely on margins across the companies: Given the prevailing macro-economic environment, the pressure on margins would be more pronounced across the companies under our coverage. The estimated decline of 350 basis points on the aggregate margins could lead to a 29% fall in the operating profit during the quarter. The decline in the operating profit margin (OPM) would be driven by a negative operating leverage in BHEL and some softness in L&T's margin too.  Aggregate PAT expected to decline by 17% despite support of higher other income: During Q2FY2014, the profit after tax (PAT) of our coverage universe is expected to decline by 17% year on year (YoY) to Rs1,955 crore, despite a 29% year-on-year (Y-o-Y) decline in the operating profit due to a healthy other income growth. Excluding BHEL, the PAT is expected to grow by 7% on an annual comparison basis. Healthy order inflow driven largely by L&T: Amid the challenging environment, the order inflow showed a healthy growth of 9% YoY and 23% quarter on quarter (QoQ) to Rs38,569 crore in Q2FY2014. Moreover, this is the highest order inflow announced in any quarter in the last two years but was largely driven by L&T and is not a broad-based recovery. Thus, the book-to-bill ratio for most of the companies continues to taper down. Cautious view retained on sector; L&T and V-Guard are our preferred picks: Despite the recent positive developments in terms of addressing the issues affecting the power sector and giving preference to the domestic manufacturers for the ultra-mega power projects, we believe that the current business environment would remain tough for the industrial/capital goods companies. Consequently, we retain our cautious view on the sector. Within the companies under our coverage, L&T and V-Guard are better positioned and our preferred picks.   Q2FY2014 Telecom earnings preview  Weak quarter led by seasonality Key points  A seasonally weak quarter: The earnings of telecommunications (telecom) services providers are generally weak in the July-September quarter due to the seasonality aspect. Thus, we expect the growth in the mobile revenues of the two actively tracked service providers (Bharti Airtel [Bharti] and Idea Cellular [Idea]) to be weak. We expect Bharti and Idea to report a sequential volume decline of -2.5% and -3% respectively, while the realisations are expected to remain firm with a marginal uptick (Bharti +1.2% quarter on quarter [QoQ]; Idea +1.5% QoQ). Muted revenue performance: The low volume would lead to a muted performance in key indicators like minutes of usage (MoU) and average revenue per user (ARPU). Also, the low volume would result in a muted revenue growth. We expect Bharti's Indian mobile business to post a 3.3% quarter-on-quarter (Q-o-Q) decline in the revenues, while Idea is expected to post a decline of 1.2% QoQ in its consolidated revenues  Margins to remain strong: The reduction in the churn rates, a lower subscriber acquisition cost (SAC), strong data growth and sustenance of tariffs are likely to keep the operating profit margin (OPM) strong for these players. We believe the margin of Bharti's Indian mobile business will be at 32.1%, while Idea's overall margin is expected at 31.2%. Bharti Infratel and Tata Communications: We also present our Q2FY2014 earnings estimate for Bharti Infratel and Tata Communications. We expect Bharti Infratel to post a revenue growth of 1.7% QoQ, with an OPM of 40.2% and earnings growth of 2% QoQ. Tata Communications is expected to show a revenue growth of 4.9% QoQ (largely led by the data and voice businesses), with the blended margin at 13.8% and a net loss of Rs38.4 crore. Positive bias maintained: In the wake of an improvement in the business operational fundamentals (read tariff improvement, data uptick, revenue market consolidation) and relatively less harsh regulatory moves (though recently there have been differences between the Department of Telecom and Telecom Regulatory Authority of India [TRAI] regarding the spectrum pricing), we maintain our positive stance on the sector.  Idea, Bharti and Tata Communications are our preferred picks: We believe that Idea being a pure wireless player, and having a strong brand equity and superior execution capability is likely to enjoy a disproportionate benefit on account of an improving business environment. Hence, we maintain our positive view on the stock. In case of Bharti, the performance of the domestic business continues to be strong but a muted performance of the African venture coupled with the currency head winds on account of its foreign exchange (forex) loans compel us to maintain our Hold rating on the stock with a price target of Rs395 (valued at 7.5x FY2015 enterprise value [EV]/EBITDA). We also like Tata Communications as its core voice business has achieved a peak investment cycle (generating cash) while the data business is fast growing. Also, the talks of divestment in the loss-making African subsidiary Neotel to Vodacom leads us to remain positive on Tata Communications. 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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