Results preview: Expect 3.7% YoY revenue growth during quarter, says Kotak’s Dipen Shah

Updated: January 7, 2015 5:41 PM

We expect stocks under our coverage (ex-banking / NBFCs) to report revenue growth of about 3.7% on a YoY basis.

Kotak Securities, Kotak Securities news, NBFC, RBIMarkets have been very volatile and have come off in the past few weeks on increasing global concerns. (PTI)

We expect stocks under our coverage (ex-banking / NBFCs) to report revenue growth of about 3.7% on a YoY basis. Among sectors, IT, Cement, Logistics and Auto are expected to predominantly propel this growth. Auto sector has seen volumes grow on a YoY basis, though it is partly due to the low base. On the other hand, some of the infrastructure and investment-heavy sectors like power and capital goods are expected to be a drag largely due to the lower investment activity in infrastructure, fuel linkage issues and weak demand. Revenues of oil & gas sector are expected to be lower largely due to the lower crude prices, which may impact revenues of Cairn India and refineries. For banks / NBFCs, net interest income is expected to grow at 13.0% YoY, with private banks growing at 20.1% YoY while PSU banks likely to report moderate growth (9.3% YoY). Credit growth for the banking system has continued to remain sluggish at ~10% mark (10.6% YoY as on December 12, 2014), below the RBI’s projection of 15%. Similarly, deposit growth has also been moderate at 10.2% (as on December 02, 2014). Moderation in loan growth is largely driven by subdued performance of large corporate portfolio (sub 10% growth) while retail segment continues to grow at ~15% YoY.

We expect NIM to remain stable QoQ on back of lower interest reversal due to stable asset quality along with comfortable liquidity conditions. We have seen sharp decline in the wholesale rates during Q3FY15, which could help NBFCs (which are largely wholesale funded) and banks having higher share of wholesale deposits in reducing their cost of borrowings. Apart from sharp appreciation in the equity market, steep fall in the yields (60-65 bps at longer end; 30-40bps at shorter end) are likely to translate into strong trading gains.

Margins are expected to be almost flat for our coverage universe (ex-banking / NBFCs)

EBIDTA margins for the sectors under our coverage are expected to be almost flat. Companies in Auto, Cement and Logistics sectors are expected to drive the overall improvement YoY, whereas those in capital goods, oil & gas and IT are expected to drag. The YoY rupee appreciation (marginal) should impact margins in the IT sector. We expect fresh slippages to stabilize during Q3FY15 while restructuring to remain elevated as the restructuring pipeline continues to pile up. Although, private sector banks are better placed with significant exposure to retail assets, we will be closely watching the corporate book – especially exposure to sensitive sectors.

Focus areas

Domestically, we will focus on the order bookings of capital goods and construction companies. There has been some improvement in the business confidence post the recent reform initiatives from the Government. The same needs to be translated into project initiations and order bookings. Management commentary on momentum of decision-making and order placements will be important for us.

The asset quality issues of banks were addressed to some extent during 1HFY15. We will closely watch these numbers and the amount of restructured assets of banks. Banks may prepone restructuring of stressed assets to 3QFY15 and 4QFY15, with a view to avoid higher provisioning which is applicable wef FY16. We will also closely track comments of the managements of IT companies on the CY15 IT budgets of clients.

Conclusion

Markets have been very volatile and have come off in the past few weeks on increasing global concerns. Foreign flows have also been negative in December 2014. With 3Q results expected to be largely lack-lustre, global events will likely continue impacting markets. Government’s action on getting reforms on track (within or outside the budget), as well as potential decline in interest rates are the likely triggers for a re-rating in the medium-to-long term We opine that, if the markets have to move up, it will need to have more confidence in the medium-to-long term growth rates of Corporate India. Growth rates will move up once the reforms initiatives start yielding results and interest rates come off. Disappointment in earnings or on future outlook may result in corresponding specific corrections.

Dipen Shah, Analyst, Kotak Securities

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