>Oct-Dec 2011 Earnings Preview: Sector Specific Expectations- Cement, Construction, Capital Goods, Utilities, Metals & Mining and Oil & Gas (Brent Crude Price & Singapore GRM)

 CEMENT
The cement companies under our coverage are expected to post a growth of 5% YoY and 7% QoQ during Q3FY12 despite insignificant uptick in the infrastructure segment. Low base and improved rural demand are key drivers. Operating margins of the companies are likely to improve as high as 100-700 bps due to a significant improvement in average realization (18-26% growth on YoY) mainly triggered by solid jump in realization in the Southern region. However, a continued operating cost pressure viz- raw materials, power & fuel and transportation has negated realization growth to an extent and is expected to persist in the coming quarters. The industry saw strong pricing power mainly on account of a suitable production discipline maintained by industry players. However, the sustainability of pricing should be the key factor in the coming quarters, for which we strongly believe that industrial capex should pick up and expedite infrastructure activities. We continue to prefer ACC and Ultratech over Ambuja among large players and maintain our BUY rating on India Cement and JK Cement.

CONSTRUCTION
The construction companies under our coverage are expected to report revenue growth of 12% YoY and 19% QoQ in Q3 FY12. JP Associates and Unity Infra are to be the main driver, which are expected to grow by 19% and 18% YoY, respectively followed by 13% growth in Simplex Infrastructures Ltd. We believe this quarter is going to be crucial for the construction sector in the wake of substantial movement of exchange rates, which may be a standstill for companies having exposure to foreign loans. JP Associates is expected to be impacted most due to its unhedged FCCB of US$354mn (due for redemption in Sept 2012).


Key things to watch out for this quarter: 1) pace of execution pick up post the monsoon, 2) effect of exchange movement in the P&L, 3) impact of high interest costs, and 4) working capital management contemplated by many companies in the last two-three quarters.

CAPITAL GOODS
We expect overall order inflows for the capital goods sector to slow down, continuing the trend witnessed in the September quarter. We expect both BHEL and L&T to see a y-o-y decline in order inflows, which is likely to lead to order book depletion for both. At EBIDTA levels, we expect margin pressures to flow in, though not very significant, as the quarterly revenues would be dependent on the existing order book, which should have better margins than the new orders.


The key data points to watch out would be the management commentaries on order inflows going forward and the balance sheet position of these companies, particularly on the working capital side.

UTILITIES
We expect NTPC and Powergrid to post modest growth in line with their capacity expansion. As usual, there would be one offs and provisional write backs and write offs, resulting in an adjusted profit number.


Key data points to watch out would be gross block addition for each of the companies and balance sheet position of these companies, particularly on the working capital side.

METALS & MINING
Ferrous metals: Volume growth (QoQ): We expect flat sales volume growth for Tata Steel, SAIL and JSW Steel ltd.  Realization trend: During Q3FY12, domestic flat steel prices showed no growth q-o-q, whereas long steel products prices were up about 2% q-o-q. We expect steel companies to report flat to about 1% QoQ growth in realization. Raw material prices: Average iron ore prices during Q3FY12 were USD129/MT (63.5% fe – FOB India), declining by 21.6% QoQ. Coking coal contracts for the quarter were done at USD285/MT as compared to USD305/MT during Q2FY12. Profitability: Raw material prices during Q3FY12 were lower as compared to Q2FY12 and steel realizations were flat QoQ. Nevertheless, the significant QoQ depreciation of the Indian Rupee vs the USD by 11% resulted in higher cost of coking coal imports, which dampened the benefits of lower dollar denominated raw material prices of iron ore and coking coal during the quarter.


Non ferrous metals: Realization: Aluminium, zinc, lead and copper prices fell QoQ by 13%, 15%, 19% and 17%, respectively to USD2090/MT, USD1897/MT, USD1982/MT and USD7488/MT during Q3FY12 (YoY prices were also down for all commodities by 11%, 18%, 17% and 13%, respectively).


OIL & GAS


Brent price averaged at US$109.31/bbl, down 3% Q-o-Q but 26% up Y-o-Y in Q3 FY12. Regional GRMs were down 13% sequentially but 45% Y-o-Y at US$7.98/bbl. Crude prices have been resilient despite the global economic slowdown mainly due to supply side issues, particularly in the OPEC region + concerns of impending sanctions against Iran that may disrupt supplies in the near term.


Refining margins come off recent highs
Average Singapore refining margins for Q3 FY12 stood at US$8/bbl v/s US$9/bbl in Q2FY12. This was mainly due to weak product cracks, particularly gasoline (down US$6.6/bbl QoQ) and naphtha (down US$7.1/bbl QoQ). Also, light-heavy spreads (Dubai-Brent) too contracted US$2.6/bbl QoQ. However, Indian refiners are expected to post steeper declines in refining margins mainly led by steeper decline in light-heavy spreads and a decline in product cracks with a higher weightage in the Indian product slate.


Reliance Industries (RIL) is expected to post US$2.3/bbl QoQ decline in GRMs in Q3 to US$7.9/bbl. This is mainly due to i) higher decline in LPG, naphtha cracks, which have a higher weightage in RIL’s product slate and increase in FO cracks, which have a lower weightage; and ii) QoQ lower light-heavy crude spreads (mainly Arab Heavy-Dubai and Oriente-Dubai).


Under recoveries
We model `313bn of under-recoveries in Q3 FY12 – `134bn towards LPG/ kerosene and the balance `179bn towards auto fuels. We assume upstream companies to contribute 33% and R&M companies to contribute the balance in Q3FY12. We have not assumed any government contribution to the overall subsidy in Q3 in addition to the already announced `300bn subsidy in H1. R&M companies are expected to account for the `150bn subsidy support from the government in Q3.


We expect R&M companies to post losses of ` 110.43bn in Q3, mainly due to higher under-recoveries and lack of government subsidy support. The PAT numbers are subject to change as and when any additional support from the government is announced. However, R&M companies may write back MTM forex losses on foreign currency denominated debt incurred in H1 in their Q3 results. The impact of this would be `9.07bn for BPCL and ` 23.1bn for IOC. This write-back, if done, would restrict the losses to `33.35bn and `11.3bn for BPCL and IOC, respectively. However, our base case numbers do not include the impact of this write-back.


Rupee depreciation
Rupee averaged at Rs 51.0 in Q3 FY12, a fall of 11.4% Q-o-Q. For December month, it averaged at `52.6, a drop of 3% compared to average of Q2 FY12. The rupee depreciation is hitting revenues of state-run oil marketing firms as the weakening of the rupee against the dollar by Re 1 impacts costs of diesel, kerosene and cooking gas by ` 9,300 crore per annum.


RIL: RIL is expected to post QoQ decline in PAT mainly due to fall across its business segments viz. Refining, Petchem and E&P. We expect RIL to report PAT of `47bn, a decline of 18% QoQ and 9% YoY.


ONGC: We expect ONGC to report PAT of Rs 81bn in Q3, a YoY growth of 14% but a decline of 6% QoQ. The QoQ decline is mainly due to an increase in subsidy burden by 47% QoQ to `84bn, led by the steep depreciation in the rupee.


Cairn India: We expect Cairn India to report PAT of `21bn in Q3 FY12 v/s Rs 20bn in Q3 FY11. The muted growth in Q3 FY12 PAT despite much higher crude prices (up 27% YoY) is mainly due to the impact of royalty on RJ crude, which will be accounted in this quarter but was not accounted in Q3 FY11 (cumulative impact of royalty from start of production till Q2 FY12 was accounted in Q2 itself). Hence, the numbers are not strictly comparable on a YoY basis.

RISH TRADER