Sensex cos to report flat growth in income in Dec quarter

BSE Sensex companies can look forward to a net profit growth of 5.8% on a y-o-y basis

The third quarter results season is here with analysts expecting the BSE Sensex companies to report a flat net income growth on a year on year basis with metals and real estate companies pulling down the earnings of Corporate India. We take a look at top sectors and how analysts are expecting them to perform during the December quarter. Excluding energy, the BSE Sensex companies can look forward to a net profit growth of 5.8% on a year on year basis and 10.7% on a quarter on quarter basis. Here is a sneak peek on sectors and its winners and losers:

Automobiles

Analysts expect auto companies to report a muted December quarter for FY15 with revenue growth of 5% on a year on year (yoy)  basis, EBITDA growth of 10% yoy and PAT growth of 2% yoy.  Auto companies will report 60 basis points yoy improvement in EBITDA (earnings before interest, tax, depreciation and amortisation) margin, aided by the positive impact of currency movement and a richer product mix, as per Kotak Institutional Equities.

Winners & losers: Bajaj Auto and Mahindra & Mahindra are likely to report a sharp decline in net profits while Hero Motocorp and Maruti Suzuki are likely to report strong earnings growth in the large-cap space. In the mid-cap universe, Eicher Motors, Wabco India and Bharat Forge are likely to report strong earnings growth.

Banks/Financial Institutions

Analysts expect net profits of banks to grow by a strong 28% yoy mainly due to a higher contribution of treasury income. The public banks will  report strong earnings growth, 40% yoy, and private banks to report 18% yoy earnings growth. Analysts expect fresh impairments to remain broadly similar to those in 2QFY15 with a large share of slippages coming from the restructured-loan portfolio. Recoveries from the stressed asset portfolio would be the key trend to monitor.

Winners & Losers: The decline in interest rates to benefit NBFCs and housing finance companies like HDFC and LICHF.  Auto finance companies such as Shriram Transport and Mahindra Finance will continue to report weak performances.

Consumer products

For the third quarter of FY15, analysts estimate revenue growth of 11% yoy, similar to the past several quarters, and expect volume growth to remain soft. Overall, analysts expect EBITDA growth of 17.6% for our consumer universe and 17.4% growth in PAT for the quarter—the strongest in the past 6-8 quarters, aided by strong tailwinds.

Winners & Losers: Analysts expect ITC’s cigarette volumes to decline 5% yoy and model 12.5% topline growth in the FMCG business. Analysts expect HUL's domestic FMCG business to report  11% revenue growth yoy, driven by volume growth of 6% and 5% price mix-led growth.  Britannia, Asian Paints, Pidilite, Colgate and Bajaj Corp  will  post good earnings growth while Titan, Jubilant Foodworks and SRL are likely to post muted earnings (weak discretionary spending and company-specific factors).

Industrials

Analysts expect modest revenue growth for L&T due to material contribution from recently won large orders in FY 2016. L&T is likely to report steady margin. For BHEL, analysts expect modest revenue growth on improved execution of power projects. Margin trends, order inflows and commentary on the investment scenario will be main variables to monitor.

Winners & Losers: Sadbhav Engineering’s (standalone) revenues may continue their strong growth due to pick-up in implementation of recently started road projects and start of execution for recent mining project wins. Concor is expected to report strong volume growth and increase in pricing. Lower gross margins from December will impact overall profitability for the quarter.

Pharmaceuticals

Analysts expect domestic formulation growth to be strong across the industry. US sales will continue to drive overall revenue growth due to launch schedules and a benign pricing environment with Sun Pharma benefitting from Taro's price increases, which will be partially offset by increasing competition for products like doxycycline, repaglinide and sumatriptan. Analyts expect Lupin to continue its scale-up in the US, driven by seasonality for its core cephalosporins portfolio as well as recent Celebrex launch.

Winners & Losers: Dr Reddy's will  report muted growth due to competition in Dacogen, which will be partially offset by the Valcyte launch; Cipla is expected to benefit from the recent Xopenex launch (through Dr Reddy's) and Baraclude's 180-day exclusivity (through Teva), which analysts believe will be booked in the API division. Given a US$2.2 bn exposure to cross currencies for the sector, analysts expect currency movements to be critical with Dr Reddy likely to have the biggest impact, given its Russia/CIS and Venezuela exposures and companies facing headwinds from yen depreciation.

Source: Kotak Institutional Securities