Q4FY11 preview: IDFC expects strong performance from manufacturing industries
Moneylife Digital Team 06 April 2011

Automobile growth should sustain, FMCG and pharma could see higher growth, while pipe manufacturers may be impacted by higher crude prices amid tensions in the Middle East, according to IDFC Securities  

Agri-related companies should perform well in the fourth quarter, following a good rabi season, according to IDFC Securities research. It expects revenues for United Phosphorus, one of the prominent companies in the sector, to grow by 8% y-o-y to Rs16.3 billion and EBITDA margins should improve by 200 basis points (bps) on an annual basis in the quarter. However, higher interest expenses will put pressure on net profit. Advanta India's earnings are likely to grow 12% and profit after tax (PAT) by 5%, it says in an earnings preview report published this week.

Jain Irrigation Systems appears upbeat on the fourth quarter, after a subdued performance in the previous two quarters. Revenue growth is expected to be over 30%, spurred by a 35%-plus growth in its micro irrigation systems business and over 20% growth in the pipes division. EBITDA margins are expected at 22%, translating into an expansion of 163 bps y-o-y.

The March quarter is pegged to be the strongest for the alcohol manufacturing industry. United Spirits is expected to post a 16% growth in revenues on the back of a 13%-14% volume growth, price increases and improved product mix. While extra neutral alcohol prices have remained stable in the fourth quarter, gross margins will be pressurised by higher glass prices. EBITDA margins of 15.6% are indicated for the period under review.

United Breweries is another outperformer with a 35% revenue growth and underlying volume growth of above 20%. Radico Khaitan is expected to see a volume growth of 13% leading to a revenue growth of 18%. EBITDA margins are expected to remain flat while lower interest cost is likely to support an 84% plus net profit growth in the three-month period ending March 2011.

The buoyancy in demand in the automobile sector is expected to remain bullish in Q4FY11. Passenger car and two-wheeler manufacturers are expected to sustain the 20% growth momentum, but the commercial vehicles segment may see a marginal slowdown on account of the high base effect.

Higher commodity costs are likely to cut margins of companies like Bajaj Auto, Tata Motors and Mahindra & Mahindra. Truck maker Ashok Leyland could gain the most on the back of its operating leverage, with a 61% q-o-q growth in volumes.
 
The domestic business of Tata Motors will face some pressure on margins while that of its niche segment-JLR-is expected to remain strong at over 16%. M&M is expected to witness a sequential decline in margins on account of higher contribution from the auto business and inclusion of Logan in standalone from January 2011.
 
Margins for auto ancillary units will remain steady as higher commodity prices offset operating leverage benefits. Bharat Forge and Bosch are expected to see strong revenue growth led by higher growth in the commercial vehicles segment and a bounce back in export volumes. Among tyre companies, Apollo Tyres will witness a 5% q-o-q growth in revenues on a higher domestic market share and price increases. Balkrishna Tyres will see a margin improvement on 4% sequential increase in volumes and price increases of 6% q-o-q.
 
The fast moving consumer goods (FMCG) industry is expected to witness a 19.5% growth in the fourth quarter of the just-concluded fiscal. While companies across the industry have resorted to price hikes to manage raw material costs, the price increases would not necessarily improve gross margins, according to IDFC Securities.

It rates Hindustan Unilever as an outperformer, with the company expected to post double-digit growth in volumes for a fifth consecutive quarter. But EBITDA margins could be at the lowest at 10.3%.

Cigarettes are expected to boost the growth of ITC since there has been no increase in excise duty in the recent Union Budget. Revenues are seen growing at 15% in the quarter. The ongoing conflict in the Middle East and North Africa is expected to have a marginal impact on revenue growth of Dabur and Marico. They are expected to report a revenue growth of 30% and 22%, respectively.

Most pharmaceutical companies are expected to see a growth of 12%-20% in the quarter under review. Recovery in domestic sales and formulations exports will benefit Cipla with a 14% y-o-y growth in revenues. Dr Reddy's revenues are expected to grow by 15% y-o-y on the back of Allegra d-24, Omeprazole and Tacrolimus sales and incremental contribution from Lansoprazole. Lupin's revenues are expected to grow 15% y-o-y on growth across all geographies and profit growth is estimated at 8%. Sun Pharma is expected to report 45% revenue growth on the back of sales contribution from Taro.

Glenmark will be boosted by contribution from new launches and growth in the US. Biocon's revenues are expected to grow 6% y-o-y on expansion of the biopharma segment and higher licencing income. Ranbaxy is expected to see a 15% decline in revenues on the back of a high base (exclusivity sales of Valacyclovir, even as Aricept sales for the quarter have been factored in). EBITDA margins of Ranbaxy are pegged at 14.1% for the quarter.

Rising crude prices and increasing rig count indicate that higher exploration and development capital expenditure could impact future revenue prospects of pipe manufacturers. EBITDA margins are expected to remain flat, but volume growth could rise marginally on a sequential basis. Also, the order book position of companies in this segment continues to rise sequentially, which is expected to see earnings grow in the next few quarters.

IDFC rates power equipment major Crompton Greaves as an outperformer, BHEL at neutral and ABB as an underperformer. Power equipment companies (except BHEL) are likely to report a 9% growth in revenues while operating margins are likely to fall by 100 bps. Earnings growth is expected to fall by 13%, y-o-y. BHEL's provisional performance is pegged at 32% to Rs25.2 billion-below expectations. EMCO is likely to witness a subdued performance on sluggish off-take by clients, while ABB's earnings will be pressurised by lower margins.
 
Power transmission companies are expected to post a 15% y-o-y growth in revenues on execution of order backlogs. However, higher interest costs will dent earnings growth to 10%.

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