The performance of India Inc for the quarter ended June 2009 is unlikely to be significantly different from the previous two quarters, at least in the trend in declining profits. With aggregate profits expected to fall, June 2009 will be the third consecutive quarter to report an earnings decline. Various estimates project the aggregate earnings of the 30-companies comprising the market barometer, the BSE Sensex, to decline between 7-18 per cent on a year-on-year (y-o-y) basis for the June quarter. Notably, the reported earnings are expected to be propped up by non-operational items.

In a recent report, Sandeep Gupta of Edelweiss Securities says that the reported earnings will get a boost from mark-to-market gains. “The rupee’s appreciation (about 6 per cent) is likely to result in higher reported profits in the quarter as companies may write back the MTM losses on derivatives and forex currency liabilities; the benefit on the latter will come with a lag for companies that have adopted the amended AS 11 standards.” Adjusting for such transactions and exceptional items, expect the aggregate profits of companies to decline for the quarter.

Also Read   Related Stories News Now - D-Street may remain subdued this week - Markets ignore positives, end flat - Equity funds set all-time record - Railway Budget pulls market 255 pts ahead - Sebi should regulate entire financial mkt - Markets at a glance

Also Read   Related Stories News Now - Markets end flat - Turbulence ahead for airlines despite oil price drop - Weak rupee may bring cheer to NRIs, expats - LIC buys PSU stocks, sells pvt sector blue-chips in Q4 - Banks may lower deposit rates as inflation eases: Report More

The key sectors that are seen negatively influencing the aggregate results include metals and real estate, thanks to lower prices. Navin Agarwal and Rajat Rajgarhia of Motilal Oswal Securities wrote that excluding metal and real estate (total of 10 companies), the aggregate earnings of the remaining 110 companies (the brokerage tracks) will grow at a healthy rate of 15 per cent y-o-y.

While the broader trend is not exciting as a large number of sectors are expected to witness a slower profit growth (or even a decline) as compared to its respective sales growth, there are signs of recovery in some sectors. Additionally, the pressure on margins is seen reducing led by lower input costs. Thus, if domestic demand picks up (on a broader level), which experts believe should happen in the second half of 2009-10, expect India Inc to do better.

Among sectors seen positively contributing to earnings growth in the June 2009 quarter are banking, FMCG, cement and importantly, the downstream oil companies, which are likely to report a substantial jump in earnings led by lower losses on sale of retail fuels. Overall, expect the performance to vary across sectors, and within sectors across companies (See tables). To know more, read on.

Auto

On the back of softer interest rates, new product launches and excise duty cuts, sales volumes in the auto sector have been showing a healthy uptrend in the first half of the calendar year. The June 2009 quarter saw all sectors barring three wheelers (down 2 per cent) and medium and heavy commercial vehicles (M&HCV; down 38 per cent) register healthy growth rates year-on-year. Two wheeler sales for the quarter were up 8 per cent y-o-y and 10 per cent q-o-q with the biggest beneficiary of the demand being Hero Honda. Price increases in the first half of the calendar year and tax breaks on sales from the Haridwar plant should benefit the company.

The dip in commodity prices (steel, copper, rubber, etc) is likely to benefit all the players in the sector, with most gains coming in the June quarter. Analysts estimate that commodity prices will see a rising trend in the coming quarters. Riding on new product launches, current demand and exports, Maruti Suzuki has seen its volumes improve 16 per cent in the June quarter. Tata Motors is bearing the brunt of the slowdown in the CV space with M&HCVs volumes down 27 per cent y-o-y. The 15 per cent y-o-y growth in LCVs helped it to keep its overall volume decline down to 10 per cent. Higher LCV volumes coupled with an improvement in CV sales due to extension of accelerated depreciation till September 30, should help the company (standalone numbers) post recovery in the second half of the current fiscal. M&M recorded 16 per cent growth in volumes for June quarter due to the merger with Punjab Tractors and a 12 per cent y-o-y growth in utility vehicles.

Banking & financial services

Advances growth in June 2009 quarter was the lowest in over five years (grew at 15.1 per cent y-o-y as on June 26). In the same period, deposits grew at a robust 22 per cent. Consequently, the incremental credit to deposit (CD) ratio fell to a multi-year low of 51.5 per cent, which reflects lack of demand for credit. The lower CD ratio, a shift in lending-mix towards corporate and a cut in lending rates (faster than deposit rates) would put pressure on net interest margins for the sector. Analysts believe that banks have been parking surplus liquidity in low-yielding securities, which will also add to the margin pressure.

To protect margins, banks have started cutting deposit rates as well. A moderation in loan growth and margin squeeze would put pressure on the core earnings. While HDFC Bank reported a single-digit growth in NII in June 2009 quarter given the slowdown in loans, analysts expect ICICI Bank to report a marginal growth in core earnings due to subdued loan growth.

Last year, many banks booked losses on their treasury portfolio. However, in June 2009 quarter, banks should see an uptick in treasury gains from their AFS (trading) portfolio. This ensures a robust growth in net profits, especially for public sector banks. A higher growth in trading gains would boost profits of SBI and PNB. Asset quality pressures may have got a temporary reprieve from RBI, nevertheless expect an increase in restructured loans. Thus, expect an uptick in loan loss provisions for most banks. However, NPAs for HDFC would be in check, say the analysts.
 

Capital goods and engineering

Given its co-relation with corporate capex cycle, the economic slowdown is likely to reflect on the results of capital goods and engineering sector during the June quarter. Barring larger companies like BHEL, most others are expected to report a subdued performance. BHEL’s, revenues are expected to rise by 25 per cent driven by a robust order back log of over Rs 120,000 crore. Although raw material costs have declined, the higher cost of inventories will restrict any visible improvement in margins. However, BHEL is expected to report a rise in margins, which to an extent will be aided by relatively lower wages (the company provided over Rs 100 crore in June 2008 quarter towards hikes). For ABB, the slowdown in industrial capex is likely to result in a moderate topline growth, while higher interest and depreciation charges could mean a fall in net profit. Siemens is expected to be impacted due to the industrial slowdown. For Suzlon Energy, the reported topline could be higher (by 80-100 per cent) due to REPower. Adjusted for the same, the growth is likely to be muted. Besides, the company’s order book may be lower as compared to recent quarters, considering order inflows and estimates of orders executed in last few months.

Construction

Due to the overhang of economic slowdown and uncertainty over elections (slowdown in private capex as well as delay in government-led projects like in roads sector), construction companies are expected to report a subdued growth (perhaps decline) in new orders during the June 2009 quarter. However, on the back of strong order books, most companies are expected to report healthy topline growth; average growth pegged between 20-25 per cent y-o-y for the quarter. The overall improvement in the liquidity situation, lower interest rates and benign input prices provided cushion and should help many companies report an improvement in operating profit margins. At the net level, interest outgo is likely to be higher and is seen impacting profit growth for a large number of companies.

FMCG

Continuing robust demand from rural markets is expected to help FMCG companies sustain decent volume growth across most categories (except for soaps and detergents). However, given a benign input price environment, companies had initiated price cuts (or grammage increases) as well as promotional offers. Hence, as the price-led growth diminishes (seen in earlier quarters), topline growth is likely to be relatively lower, while profits are expected to grow faster.

For ITC, its cigarettes business is expected to report a reversal in volume trend to positive growth (1-4 per cent), besides an improvement in margins on account of better product mix. Although its non-cigarette FMCG businesses will continue to report losses, these should be relatively lower. On the other hand, HUL’s volumes are also expected to see some recovery (especially in soaps and detergents) on the back of price cuts and increased grammage, besides aggressive promotions in personal care businesses say analysts. The company is also expected to gain substantially from lower input costs. Analysts expect Dabur to sustain volume growth on the back of strong sales in personal care products and good show from its international operations. For Marico, while its Parachute business should report a volume growth of 7-9 per cent, the Saffola business should see recovery, which along with lower input costs should boost margins.While volume growth for Nestle is aided by culinary products (Maggi) and chocolates (lower-priced products), the price of some of its inputs are up (milk and sugar). Thus, margin expansion is likely to be the least among peers and profits will be driven by topline growth.

Metals

With the global economy reportedly getting out of the December quarter lows, most metal companies are expected to report a better performance but on a sequential basis (compared to March 2009 quarter). Globally, the moves to de-stock inventory, lower input costs and the rise in metal prices in recent months will benefit the companies on a sequential basis. However, the performance on a y-o-y basis is far from comfortable. A Motilal Oswal Securities report says that average global prices of zinc, aluminium, copper and lead are down 30 per cent, 50 per cent, 44 per cent and 36 per cent, respectively on a y-o-y basis during the June 2009 quarter.

Thus, for aluminium and alumina producers Hindalco and Nalco, the fall in realisations would mean a near 60 per cent y-o-y decline in profits. For Hindalco, the subdued TC/RC margins (copper business) are likely to add to the pressures. For Sterlite, analysts at Edelweiss Securities believe the company will benefit from sale of excess power from Balco’s smelter-1 captive power plant (merchant basis) after partially shutting down the aluminium facility.

For steel producers, the situation is not very different, except that their profits are likely to come down by a relatively lower margin as compared to base metal producers. Analysts at Motilal Oswal Securities estimate SAIL’s volumes to rise by 13.2 per cent while realisations to be lower by 22 per cent on a y-o-y basis. Lower realisations and high-cost coking coal inventory would thus, lead to a sharper fall in profits. Similarly, a volume growth of 25 per cent will help Tata Steel restrict the fall in net sales to under 10 per cent. On a consolidated basis, the impact of fall in production (due to weak demand) at its UK-based subsidiary, Corus, should result in a 43 per cent fall in sales (Rs 24,800 crore) and 88 per cent decline in net profit (Rs 500 crore) estimate Motilal Oswal’s analysts.

Oil & Gas

The oil and gas sector is expected to report a mixed performance given the substantial decline of nearly 50 per cent in average crude oil prices (thus, realisations) and refining margins as well as the regulated pricing environment prevailing in India. While lower prices will mean lower realisation for oil producers like ONGC and Cairn, the latter is expected to report a sharper decline in profits. ONGC will also gain from a significantly lower subsidy burden (estimated to decline by 90 per cent), which it dolled-out in the form of discounts to oil marketing companies (OMCs). Thus, its net realisations will fall by only 13 per cent y-o-y estimate analysts at CLSA.

OMCs are expected to gain substantially from lower crude prices. The under-recoveries (losses) on auto fuels which these companies faced in June 2008 quarter would also have shrunk substantially. Analysts expect the companies to bear only about 20 per cent of the under-recoveries, with the balance coming from oil bonds and discounts (ONGC). Thus, the quantum of oil bonds reported by OMCs will have a bearing on their profits. Some benefit on crude oil inventories is also expected. However, the lower gross refining margins (GRMs) could offset part of OMC gains.

Reliance Industries (RIL) is likely to report a decline in GRMs ranging from $1-3 to about $7-9 per barrel, while the petrochemicals business is likely to report lower margins due to weak economic conditions globally. These pressures are likely to be offset on account of the start of gas production from KG-basin, wherein analysts have estimated an output of 14-16 mmscmd at $4.2 per mmbtu.

Pharmaceuticals

While most exporters and CRAMS companies are likely to see their revenues dented due to the 6 per cent appreciation of the rupee since March, for some such as Ranbaxy, this will be offset by the dollar denominated loans. Expect the larger pharma companies to grow by about 15 per cent driven by exclusivity as well as generic sales from the US and some of the semi-regulated markets. Domestic markets will continue to record about 11-14 per cent growth. Ranbaxy and Sun Pharma are likely to be affected by the action of US FDA and could witness a substantial decline in revenues from the US. While liquidity concerns have eased in semi-regulated markets, companies such as Ranbaxy and Dr Reddy’s, which have the largest exposure among all Indian pharma companies to markets such as Russia, are expected to be impacted by the economic slowdown and longer working capital cycles. Local currency depreciation is likely to compound the problems further. Further, CRAMS companies (Divi’s, Dishman and Jubilant) will be affected by the inventory destocking/correction by global pharma MNCs and the problems being faced by biotech companies in Europe.

Realty

After two quarters of negligible sales, realty sector is likely post higher volumes in the June quarter (on sequential basis) on the back of price cuts and the focus on the affordable housing segment. However, on y-o-y basis, lower property prices and weak demand should lead to a sizeable dip in revenues for real estate companies, which along with higher interest costs should result in lower profits.

In the recent past, the QIPs and other equity issues have eased the liquidity situation of some of the players and brought down their debt. DLF, which had raised $777 million in May, now plans to raise about Rs 5,500 crore in the current fiscal to bring down its Rs 12,000 crore debt. Unitech, too, has been successful in bringing down its debt to 1.1 times its equity in the June quarter from 1.9 times in the March quarter. While these moves will ease the balance-sheet concerns, a recovery of their fortunes is some way off. While the response to some of the affordable housing projects has been encouraging, the sector is still struggling to improve its position in the office and retail commercial space. The commercial and premium housing segments are closely linked with economic recovery and will be impacted till there is a turnaround in the business front.
 

Telecom

Given the healthy subscriber additions with total base inching towards 500 million, the June quarter would aide robust topline growth. However, some gains will be offset due to a drop in average revenue per user (ARPU) led by the 10-20 paise (per minute) cut in termination charges effective April 1, 2009. While revenues will get impacted, EBIDTA margins are likely to get some cushion due to lower costs. Both Reliance Communications and Bharti Airtel are likely to report mark-to-market forex gains due to the 6 per cent appreciation in the rupee. Expect net margins of RCOM and Idea Cellular to be under pressure due to interest and depreciation charges on account of large scale expansion. Going ahead, while most metrics are expected to stabilise as operators expand their presence in rural areas, the key risks are higher auction prices for 3G and the implementation of mobile number portability.

With inputs from Sarath Chelluri

New Ipad Application :Business Standard's all new IPad App Click here to download for free Other Stories      - Markets end flat - Turbulence ahead for airlines despite oil price drop - Weak rupee may bring cheer to NRIs, expats - LIC buys PSU stocks, sells pvt sector blue-chips in Q4 - Banks may lower deposit rates as inflation eases: Report

Tags : BSE Sensex | Sandeep Gupta | Navin Agarwal | Rajat Rajgarhia | Motilal Oswal   Read Business news in  Advertisements -  Benefits Upto Rs. 2.36 Lakhs on the Fully Loaded TJet Petrol. -  Journey on, We are by Your Side. Click here to know more -  2 Lac Apartments, 1 Lac House / Plots. Click here -  Benefits Upto Rs. 2.36 Lakhs on the Fully Loaded TJet Petrol. -  Watch The Film Here. Click here to know more.. -  Leader in Passenger Car & Automobile Tyres. Click here -  1 billion in saving for Unilever without any tangles. -  A Brand New Server at a Price That Fits Your Budget. Click here -  Learn How One City is Running on FOOD SCRAPS. -  One Partnership Endless Possibilities. Click here to know more -  Helping doctors detect diseases earlier, saving costs & extending lives. -  36 Lakhs can get you a pool of Luxuries. Click here -  Which is the best plan for your daughter -  Check out the TRUE COLOURS of your Stocks, Now for FREE! -  One of the leading business schools in the world.Know More