Q1 preview indicates poor show from cement

Banks likely to post good results.

Company results for the quarter ended June is expected to be a mixed bag. Cement and power companies should show a decline in sales and profit, while banks and the information technology (IT) sector may show revenue growth in line with expectations.

Banks are expected to show growth in profit on account of increase in operating margins, while salary rises and rupee appreciation may put pressure on the net profit of IT companies.

The first quarter (April-June) earnings preview by Mumbai-based Karvy Stock Broking indicate that cement companies ACC, Grasim, India Cement, Shree Cement and UltraTech are expected to show a decline in year on year sales and profit. But Ambuja Cement should do well.

Cement prices across regions have started softening after touching the previous peak during April due to moderation in demand growth, coupled with incremental supply from new capacities. This could bring down the average price by 200-400 basis points on a sequential basis. Demand had surprised by rising 22 per cent in April, but got moderated during May and June, due to heat and the monsoon. Operating margins are expected to be under pressure due to fall in the average realisation and marginal increase in input costs.

The first-quarter result of banks would be better in earning quality on the back of much higher growth in core income and lesser treasury income and investment write-backs. Banks' asset quality and loan-losses provisioning could bring negative surprises.

During the quarter, Andhra Bank, Oriental Bank and Union Bank would report higher growth on net interest income levels. On net profit, Canara Bank, HDFC Bank, Oriental Bank and Union Bank would post better growth. The banks covered for the study were expected to report improvement in the net interest margin on a yearly basis, on the back of higher volume growth and base effect, but on a sequential basis, banks' margin could be subdued.

The declines in 10-year benchmark paper yield is likely to provide banks opportunities for treasury income and investment writebacks. A rise in non-performing assets could be a dampener.

Volume growth should remain strong for technology firms, with a sequential growth of 4-6 per cent. Revenues in dollar terms are estimated to grow by 3.8 per cent quarter on quarter and over 18 per cent, year on year. The hardening of the rupee against the euro (9 per cent this quarter) may hit the revenue target in rupee terms.

Given that Indian IT firms have negligible exposure to the economies of the countries currently in economic trouble in Europe — Portugal, Greece, Spain, etc — there has been no major impact of the debt crisis there on volume growth. In the short term, the major problems are likely to be more on the currency front, as the euro has hit a four-year low against the dollar.

The revenue growth for Infosys Technologies, TCS, Wipro and HCL

Firms in the sector are likely to grow over 10 per cent, year on year, and around 4-5 per cent, quarter on quarter. However, the top software companies are expected to report a decline in profits due to pay raises and rupee appreciation.