Q4FY11 preview: IDFC expects core industries to do well despite pressures
Moneylife Digital Team 05 April 2011

IDFC Securities says engineering firms should perform the best on healthy execution of orders; it expects sustained growth in oil & gas, infrastructure and construction; but feels metals and cement are constrained by input costs and overcapacity

The fourth quarter earnings of the just-concluded financial year 2010-11 is expected to be a real test for domestic companies, due to pressures from rising crude prices in the wake of the ongoing turmoil in the Middle East and North Africa, the devastating earthquake that struck Japan last month and continuing worries about the debt crisis in the Euro zone. On the domestic front, high inflation along with high interest rates weighed on corporates.

According to a research report by IDFC Securities, earnings of Sensex companies are likely to witness a 17.5% year-on-year (y-o-y) growth in Q4FY11, led by non-commodities. Earnings of commodity-related commodities are likely slow down on account of a de-growth of 16.2% in metals.

While it is expected that sectors like telecom, power equipment and metals would see a fall in their margins, sectors like financials, oil & gas and automobiles are expected to have robust margins.

In the core sector, engineering companies are likely to post 29% y-o-y growth in Q4FY11 on the back of healthy execution of orders across companies. Better revenue mix is expected to spur operating margins, while companies are expected to post higher other income on better working capital management and generation of free cash flows. Net earnings (pre-exceptionals) for engineering companies are estimated to expand by 59% in the fourth quarter of 2010-11. Names like Voltas, Thermax India, Havells India, Engineers India and Elecon Engineering figure in the engineering segment.

Cement companies are expected to report a 4%-12% growth in revenues on the back of higher volumes. Margins are expected to expand sequentially on improved realisations. However, EBITDA per tonne is expected to fall sharply due to higher cost of raw materials, especially imported coal. IDFC Securities holds a bearish view on the sector, with Grasim as the outperformer and ACC, Ambuja and UltraTech as underperformers.

Construction companies are expected to post a revenue growth of 19% y-o-y for the quarter under review. On the other hand, operating margins are expected to remain flat. Higher interest could dent the improved operating performance of companies in this segment. A 15.5% growth in earnings is projected for construction companies. IDFC is positive about Jaiprakash Associates, IVRCL Infra and Nagarjuna Construction.

According to the research report, infrastructure developers should register 25% revenue growth, while EBITDA is expected to see a 42% expansion on improved operating performance. Earnings of infrastructure developers (pre-exceptional) are likely to be muted. MPSEZ and GIPL have been named as possible outperformers, while GVK has been rated as an underperformer.

In the metals sector, higher steel prices following product price hikes in the first two months of the quarter is expected to result in a sequential growth in realisations for companies. Higher product prices along with sequential growth in raw material prices will boost EBITDA margins. Increase in merchant power tariffs will enhance the top line for Jindal Steel & Power and Sterlite Industries. On the other hand, iron ore volumes for Sesa Goa are likely to decline 14% y-o-y to 6.3 million tonnes, in line with macro headwinds. On a positive note, average spot prices for 58%fe iron ore fines have increased by 20% q-o-q.

A strong quarter is forecast for oil & gas companies on strong volume growth across upstream, refining and petrochemicals, along with transmission & distribution, government payout to settle subsidy dues of state-owned oil retailing companies, strong realisations of private upstream and refining companies and ongoing strength in the domestic petrochemicals business.

Overall the oil & gas sector is expected to witness a 5% y-o-y growth in revenue and 18% rise in profit after tax. Reliance Industries is expected to see a 21% rise in profit after tax while ONGC is expected to post 37% growth in its fourth quarter earnings. This is despite a higher subsidy burden for ONGC at Rs69 billion for the quarter in focus, compared to Rs50 billion in Q4FY10. Higher refining margins are estimated for RIL ($10.3 per barrel) and Essar Oil ($7 a barrel).

Oil marketing companies are expected to post subdued numbers on account of huge under-recoveries (net profit de-growth of 23% y-o-y for the quarter). Gas transmission major GAIL is expected to witness transmission volumes of 122 million metric standard cubic metres of gas per day and profit-after-tax growth of 11% y-o-y. Gujarat Gas Company's net profit is estimated to grow over 10%, while Petronet LNG's net profit at more than 67%. Gujarat State Petronet's net profit is estimated at 30%, but sequential volumes will remain steady at 37.5 mmscmd.

IDFC Securities points out that power utilities will witness a 16% y-o-y growth in revenues and EBITDA should increase by 19% on an annual basis on the commissioning of new capacities, but lower contribution from operating plants. Net earnings (pre-exceptional) will fall by 3% y-o-y, due to higher interest and depreciation costs from new capacity additions.

IDFC has outlined a dismal picture for the realty sector in the fourth quarter of 2010-11. A 5% de-growth in top line and flat profit after tax due to higher interest costs, will offset operating margins of realty companies.

Among realty companies, DLF revenues will be boosted by Gurgaon plot sales and Unitech is expected to grow 22% q-o-q. Godrej Properties revenue recognition could be subdued as new launches reach recognition threshold in H2FY12. Sunteck Realty will see revenues coming from leasing income only, with no recognition from residential projects due to its accounting policy.

1 decade ago
IDFC is not such a good organisation. Atleast the PR agency they are using does not believe in INCLUSION , INCLUSIVE GROWTH.
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