While growth signs are visible in the economy, robust earnings growth across sectors is a couple of quarters away

The results in the September 2009 quarter are likely to confirm the trend of gradual recovery from last year’s December quarter lows. Despite concerns over the scant rainfall, inflation and weak fiscal situation of the government, successive quarters of robust GDP growth (6.1 per cent in June quarter) and strong IIP numbers (6.8 per cent in July) have a created a base which could lead to an increased demand for goods and services.

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Says Hitesh Agrawal, head research, Angel Broking, “Stable economic conditions is a reflection of the improvement in consumer sentiment, availability of credit and most importantly stimulus measures that cushioned the fall in demand and helped boost sales volumes. Operational efficiencies and lower interest costs helped improve earnings growth.”

While sequential earnings growth is flat to positive, profitability hinges on the oil and gas sector as far as y-o-y growth in concerned. While the September quarter preview of Motilal Oswal Securities indicates that if expected earnings of oil refining and marketing companies are removed, profit growth would have slid into the negative at -12.4 per cent for their universe of 117 companies, thanks to a poor performance by metals sector.

With regards Sensex, while the combined profit growth of the 30-companies is expected to be largely flat, the combined EPS are expected to decline by 5-10 per cent. This is because some companies had raised funds through the equity route, leading to a dilution in their respective equity capital.

The biggest gainers in the quarter on a y-o-y basis both in terms of sales and net profit growth on the back of high volumes, improved order book and efficiency gains are the auto, infrastructure, FMCG and cement sectors. The losers of the pack are metals, realty and engineering. On a q-o-q basis, however, metals and engineering firms are expected to post strong growth numbers on the back of demand recovery and order books.

While the markets have already given thumbs up to the recovery with the Sensex moving over 76 per cent since the start of 2009, will earnings play catch up? The other question is, while the recovery has hardly been dramatic, are valuations expensive? After recent upgrades, some as high as 25 per cent if we are to look at an 2010-11 EPS of between Rs 1,050-1,100, the Sensex is trading at 15-15.7 times, which however is fairly priced. Compared with other emerging economies, Indian markets are, however, trading at premium valuations. Read on to know more on how the individual sectors and within them the top companies are expected to fare.

AUTO: Higher sales in September across categories have confirmed the trend of rising demand on the back of improving business climate. While passenger cars and two wheeler sales continue to impress (up 10.2 per cent and 7 per cent, respectively) CV sales too are looking good, though the growth at 0.5 per cent in September is marginal. The improved business outlook has helped the BSE Auto index outperform the Sensex spurting over 89 per cent to the latter’s 75 per cent in the last one year.

Going ahead easier credit norms, and a low base will ensure strong y-o-y growth for most companies. While revenues for the quarter should see a boost due to higher volumes, cost efficiency and lower commodity prices should help improve profitability. Despite concerns on the monsoon front, strong rural demand continues to boost the fortunes of companies such as Maruti Suzuki and especially Hero Honda.

BANKING: A slower credit pick-up has ensured that loan growth decelerated during the quarter; credit growth stands at 13.4 per cent as on September 11, 2009. Nevertheless, banks have observed a pick-up in housing and vehicle loans. Coming off a high base, net interest income growth should be muted for banks like SBI and ICICI Bank. With other investment avenues becoming attractive, deposits have moderated to around 20 per cent from 22 per cent in Q1 2009-10. With lending rates stable during Q2 2009-10, and a decline of about 50 basis points in deposit rates during the quarter, NIMs should see a stabilisation with an upward bias.

In Q1 2009-10, restructured assets were 2.5-5 per cent of the total loans of large state-owned banks and analysts expect that PSU banks have completed a large part of loan restructuring and significant negative surprises are not expected in Q2. However, private banks like ICICI Bank could report additions to the restructured loans pool in this quarter. As G-sec yields rose 5-50 bps across maturities, treasury gains are not expected to be as hefty as there were in Q1 FY10. Consequently, PSU banks like PNB would see lower profit growth of around 15 per cent in Q2 compared to over 60 per cent in Q1.
 

CEMENT: New capacities going on stream and late onset of monsoons helped push volumes across the board. For example, both Grasim and UltraTech operated at higher capacities. Grasim is thus, expected to report the highest growth in despatches at 27 per cent. A pick up in housing in rural and semi-urban areas as well as thrust on infrastructure has helped the cement industry report higher despatch volumes by around 12-13 per cent y-o-y in Q2.

The revenue growth for the top companies should hover 14-17 per cent, with the help of better pricing, which is up 5.5 per cent y-o-y on an average. The new supplies however, have dampened prices in the South and West recently. Central and Western regaions had seen a sharp price rise of 15 per cent and 10 per cent, respectively. Going ahead, North and Central India focussed companies would score over others, owing to higher volume growth and stable realisations

CAPITAL GOODS & ENGG : The power sector is currently acting as a cushion to the Indian engineering companies as industrial capex is yet to show revival for new orders. Announcement of new power projects led to higher demand for power equipments from utility companies, including from the T&D space by Power Grid and others. Thus, helping the equipment makers, which have large exposure to power sector, such as BHEL, Crompton Greaves, Kalpataru Power and others to show better growth in order inflow.

Besides volumes, analysts also expect the operating margins to improve given the lower metal prices and positive effect of easing high cost inventory. The benefit of lower commodity prices will be higher for companies like BHEL, Crompton Greaves and ABB. Also, the availability of funds and lower interest rates will benefit these companies as they require longer working capital.

Among companies, BHEL has the highest visibility in the terms of order book and it is expected to report 170-200 basis improvement in margins given the easing high cost of raw material inventory. Others like L&T also benefitted on account of higher spend in the power sector and orders from the hydrocarbon sector. The company is expected to report strong growth in revenue and net profits.

CONSTRUCTION & INFRA: Infrat-ructure companies continue to grow as result of a strong order book. The benefits of lower commodity prices and higher availability of funds will reflect in this quarter. Also, lower interest rates and marginal reduction in working capital should augur well for earnings of the companies.

Companies like Punj Lloyd, HCC, Nagarjuna Construction were among the few who raised funds through the QIP route. Post the elections and the stimulus package announced by the government, the infrastructure companies have been able to improve their order book intake, which had slipped in 2008-09. Projects from road, urban infrastructure, power (hydro) and irrigation witnessed high activity. The largest number of orders were awarded from the road sector as a result of which the companies like IRB Infra, HCC, GMR and others benefited.

The companies are expected to show decent growth in revenue followed by higher margins resulting in strong growth in net profits. GMR could report strong revenue growth fuelled by power division due to availability of gas, but analysts believe that the growth in profits will be marginal due to rise in effective MAT rate to 16.99 per cent against the 11.33 per cent.

FMCG: Even as price growth was absent, most companies are expected to deliver double-digit revenue growth due to robust volumes. Companies have also been focusing on consolidating their market shares through higher advertising spend, that also aided in churning out better volumes.

There was also consumer down-trading in select categories like toilet soaps, detergents and edible oil over the last few quarters and a below par monsoon would further accentuate it in the future quarters. Analysts expect HUL to witness pressure on volumes in the soaps and detergents category due to down trading; its personal products category could deliver robust double-digit growth.

For ITC, cigarette volumes could increase by 5 per cent. Lower prices of raw-materials like palm oil, copra, LAB y-o-y would help players like Marico and GCPL to improve their margins. Nevertheless, higher prices of sugar and milk could lead to some pressure for players like Nestle, but its higher pricing power would help it to protect margins, whereas Britannia might not have that comfort. Better control on operating expenses is expected to help Colgate deliver 30-35 per cent growth in net profits.

IT: The markets spotted the green shoots for IT sector in Q1 2009-10 results. Since June 2009, the BSE IT index outperformed the Sensex delivering nearly 45 per cent as against the latter’s 15 per cent. Most of the exuberance was based on the recovery hopes, now October results would confirm if this renewed confidence is over-rated. To begin with, Infosys reported numbers last week, which were better than its own guidance. It raised the future guidance and said it would be hiring more employees as compared to estimated earlier.

Concerns of weak demand and pricing pressures though exist; these would not deter IT companies to post positive sequential growth, say the analysts. As per estimates, the top IT companies could deliver revenue growth of 2-4.5 per cent after two consecutive quarters of negative growth earlier. The improvement in the global macro-economic indicators could suggest that the worst might be over in terms of decline in revenues. The top IT companies would be able to protect margins, as they had tweaked various levers like employee rationalisation, utilisation levels and renewed off-shoring. Wipro and TCS are expected deliver better profits (1-2 per cent) sequentially.

METALS: The metals space has seen improving fundamentals on a sequential basis due to the stimulus packages announced by various governments and resultant recoveries seen in some major consuming countries. This has also led to recovery in demand, which is partly on account of restocking. Domestic steel companies have hiked steel prices leading to 8-10 per cent gain in quarter ending September 2009.

Overall, steel companies will see sequential improvement in quarter ending September 2009, though the margins and net profits are expected to be significantly lower as compared to last year. Amongst companies, Tata Steel’s European operation is expected to report lower operating losses of about Rs 900 crore in September quarter against Rs 1,850 crore losses in June 2009 due to cost cutting, higher utilisation and relatively better prices in the European markets. JSW Steel is expected to benefit due to higher volumes (67 per cent y-o-y growth) and better utilisation at its US operation. Also, lower coal and iron ore prices will help JSW Steel and SAIL in this quarter.

Non-ferrous companies are expected to show better realisations sequentially due to higher metal prices at the LME, which have recovered by about 50-100 per cent since their lows. However, since they are still lower by about 20 per cent on y-o-y basis, companies are expected to report a decline in operating margins compared to last year.

OIL & GAS: Increase in Brent crude oil prices during Q2 is likely to boost the fortunes of companies like ONGC. Although gross realisations will fall sharply as crude prices have nearly halved y-o-y, its net realisations are expected to be higher due to lower subsidy burden.

Assuming the government entirely bears the cooking fuel subsidy, the upstream players would have to share only the auto fuel subsidy in Q2. In Q1, auto fuel subsidy was borne by upstream companies and as the government did not compensate for domestic fuel subsidy, oil marketing companies (OMCs) like IOC, whose profitability depends on issue of oil bonds, will have to depend on the quantum of oil bonds issued in future. Motilal Oswal Securities analyst says, “In Q2, we expect the government to compensate OMCs for Q2 and Q1 as well.”

For RIL, the refining outlook looks weak and its gross refining margins are expected to halve y-o-y to $6-7 per barrel in Q2. Petchem prices have shown a mixed bag with polymer margins down and polyester margins up. Positively, KG gas volumes have been ramped up to 32 mmscmd, which along with Reliance Petroleum numbers should cushion consolidated performance in Q2 on a y-o-y basis.

PHARMACEUTICALS: While the quarter will see double-digit growth for a majority of top pharma players, Ranbaxy and Sun Pharma will see a dent in income due to ongoing FDA issues. The absence of forex losses means most players will report healthy profit growth. Dr Reddy’s is expected to see a 12 per cent increase in revenues on the back of a Rs 100 crore push from the sale of the authorised generic, Imitrex (for migraine) in the US market.

The improvement in the economic environment in CIS countries, which had hitherto suffered from destocking and credit problems, should benefit players such as Ranbaxy and Dr Reddy’s. Better global economic outlook will also be positive for CRAMS players as MNC pharma companies enhance their research and outsourcing budgets. Strong exports aided by a weak rupee as compared to September quarter last year and robust domestic sales should ensure good growth in revenues and profits for the sector.

POWER: The power generation companies are expected to report decent growth in revenue on the back of higher generation and better utilisations along with higher tariffs. During July and August 2009, all India power generation volumes grew by 7 per cent on y-o-y basis. The PLF in the month of August stood at 72 per cent for the thermal based power plants. CLSA estimates NTPC’s revenue to rise 26 per cent driven by increase in generation and fuel prices and, new tariff order. Whereas, Tata Power’s earnings (adjusted for exceptional items last year same) should rise by 11 per cent on a y-o-y basis.

REALTY: Analysts expect the big companies to report a decline in revenues and net profits. IDFC-SSKI analysts expect the decline in topline of DLF and Unitech due to lower revenues recognised based on project completion method, and hence, the consequent impact on net profit.
 

TELECOM: Fare cuts driven by Tata Docomo’s per second billing is likely to help the sector boost volumes by adding over 4 crore subscribers in the September quarter, which will result in a growth of about 23 per cent q-o-q. The two dual-technology operators are resorting to fare cuts to promote their GSM services, and improve subscriber numbers and enhance their under-utilised networks.

The outcome of this is expected to lead to a double-digit drop in average revenue per user (ARPU) in 2009-10 as well in as usage due to subscriber duplication or dual SIM usage. As a consequence of this, q-o-q, ARPUs for the largest three listed players, Bharti Airtel is expected to drop (5 per cent) to Rs 264, RCOM (down 3.8 per cent) to Rs 210 and Idea (down 5 per cent) to Rs 220.

While revenue growth q-o-q is expected to range between 2-4 per cent for the three players, net profit is likely to come down for Bharti Airtel and RCOM q-o-q due to lower finance (forex) income (unlike the previous quarter when they had forex gains). Interest costs are likely to dent Idea’s profits.

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