SHAREKHAN SPECIAL
Q4FY2007 earnings preview
Key points
- The Sensex earnings are expected to grow by 37% year on year (yoy) for Q4FY2007. However, excluding oil the earnings are expected to grow by 34% driven by the earnings in the software, cement and banking sectors. These three sectors are expected to contribute 42% of the Q4FY2007 Sensex earnings excluding oil. On a quarter-on-quarter (q-o-q) basis the expected growth is only 1.2%, which indicates expectations of some slowdown in the earnings momentum.
- Strong earnings growth is expected in the pharma sector mainly due to a very low base. On the other hand information technology (IT) earnings will be affected due to the sharp appreciation in the rupee. Auto numbers are not expected to be great due to margin pressure and a slowdown in the volumes.
- Strong year-on-year (y-o-y) earnings growth is expected from Reliance Communications, Bharti Tele, Ranbaxy, Dr Reddy’s Laboratories, Grasim and Tata Steel.
- Two-wheeler majors Hero Honda and Bajaj Auto are expected to report a y-o-y decline in the profits.
- Some of the non-Sensex companies where high growth is expected are Dabur Pharma, Syndicate Bank, Polaris and India Cements.
- In the absence of any major surprises, the fourth quarter results of the Indian companies may not be a trigger for the market, but the market will keenly await the guidance on the FY2008 prospects of the corporate sectors, especially automobiles, banks and the other interest rate sensitive sectors.
Q4FY2007 Auto earnings preview
Automobile companies reported a mixed performance in terms of sales volumes for Q4FY2007, maintaining the trend of the past two quarters. The growth in four-wheelers has outpaced that in two-wheelers. Rising interest rates and tightening liquidity have taken their toll on the automobile sector, as the growth rates are beginning to slow down. Competitive pressures continue in the two-wheeler segment even as volume growth has slowed down. Among the heavyweights, Bajaj Auto Ltd (BAL) has reported a sales growth of a meagre 1% whereas Hero Honda Motors has reported a rise of 10.8% in its sales for the fourth quarter. The four-wheeler segment has continued on its growth path, with the commercial vehicle (CV) segment reporting a growth of 25% for the quarter (with the exception of March). The passenger car segment has grown by 20% in the quarter. The segment is expected to see a flurry of activity with a number of new launches planned in this fiscal. Maruti Udyog's car sales have grown by a strong 29.6%; the overall sales of Mahindra & Mahindra (M&M) are up by 18.8% and Tata Motors' commercial vehicle sales have increased by 22.4%.
The operating profit margins (OPMs) are expected to have been under pressure for the whole sector considering the high raw material prices. The margin pressure would be most evident in the two-wheeler segment due to the intensified competition as well as various sales promotion activities and discounts being offered by the major players during the period.
We expect M&M, Tata Motors, Ceat, Ahmednagar Forgings and SKF India to be among the lead performers in the sector for Q4FY2007.
STOCK UPDATE
Hyderabad Industries
Cluster: Apple Green
Recommendation: Book Profit
Current market price: Rs230
Book profit
Result highlight
- Hyderabad Industries Ltd (HIL) has delivered a disappointing performance yet again in Q3FY2007. Lower than expected sales, the company's inability to pass on the costs to the consumers and higher raw material costs affected its performance during the quarter.
- In Q3FY2007, the net sales rose by 4.7% to Rs100 crore. Not only was the company unable to pass on the higher costs to the consumers, but it also faced a lot of competitive pressures, leading to a loss in its market share. The operating margins have come down drastically from 11.7% to 3.5% due to the very high cement prices, as cement is the key raw material. Consequently, the operating profit for the quarter declined by 69% to Rs3.46 crore.
- With all the asbestos majors adding capacity, there is overcapacity in the industry, leading to more competitiveness. This has capped the pricing power of the companies, and they are unable to pass on the impact of the higher raw material costs to the consumers. We expect this scenario would continue to adversely affect the company going forward, and expect the margin pressure to continue as all the players gun for a higher market share.
- At the current levels, the stock discounts its FY2008E earnings by 10x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6x. At these levels, the stock does not look attractive and hence we are closing our recommendation on the stock. We had initiated the stock at a price of Rs163, and the stock has given a return of 41%.