Sector Watch

Analysts expect the quarter ended March 2009 to an be an unexciting one for the four financial institutions, which expect to post a single-digit growth in net interest incomes (NII) and a decline in net profits during the period. Net interest margins are expected to come under pressure because of a mismatch in re-pricing of assets and liabilities, poor credit growth during the quarter as against a strong deposit growth and low yields in priority sector lending.

Edelweiss expects HDFC’s disbursement growth to be at about 10 per cent. The spreads are expected to improve due to a decline in the cost of funds. MOSL expects HDFC's disbursement growth to be muted at 4 per cent, compared with 22 per cent in the nine months ended December 2008. KRC expects HDFC to show a decline in interest income due to a reduction in lending rates. The NII and net profit growth rate of HDFC Bank is expected to be over 21 per cent.

Edelweiss expects an unchanged margin for HDFC Bank as the bank did not revise its prime lending rate. MOSL expects the bank to post lower treasury gains during the quarter as against a robust gain in earlier quarters. On a reported basis, net profit growth is expected to be around 37 per cent and, on an adjusted basis, it would be 29 per cent.

ICICI Bank may fare badly in the fourth quarter with a decline in NII and net profit. The net profit margin is expected to decline on lower treasury gains due to mark-to-market (MTM) provisions. Banking analysts expect loans to decline by 4 per cent due to a slowdown in retail loan growth. Deposits of the bank are expected to decline by 12 per cent on net repayments of bulk deposits in the quarter.

State Bank of India (SBI) is expected to post a 15 per cent rise in NII, while the net profit growth is pegged at 7 per cent. The bank is expected to show a decline in margins due to a rise in high-cost deposits during the third quarter. With deteriorating asset quality and exposure to riskier asset classes, MOSL expects non-performing asset (NPA) provisions to remain high. Edelweiss expects SBI's q-o-q credit growth to be strong, but margins will come under pressure due to re-pricing of loans.
 

Qtr ended	Y-o-Y sales growth in %				Y-o-Y NP growth in %
	Jun ‘08	Sep ‘08	Dec ‘08	Mar ‘09E	Jun ‘08	Sep ‘08	Dec ‘08	Mar ‘09E
HDFC	26.63	38.47	42.54	-12.58	25.56	-17.35	-15.73	-16.63
HDFC Bank	75.03	68.92	63.87	21.63	44.55	43.29	44.81	22.20
ICICI Bank	7.65	4.24	-0.96	-10.79	-6.07	1.16	3.41	-28.19
SBI	24.42	34.01	42.34	15.07	15.08	40.23	37.03	7.34
Total	23.79	28.33	31.16	7.29	14.04	19.49	19.48	-4.55

PHARMA

The Indian pharmaceutical sector is expected to post a lacklustre growth in the fourth quarter on the sales front due to the high base effect as the corresponding quarter of last year was buoyed by Sun Pharmaceuticals’ extraordinary sales.

The rupee’s fall of 6.5 per cent q-o-q is likely to affect the net profit of Ranbaxy Laboratories due to mark-to-market (MTM) translational forex losses on outstanding foreign currency loans and hedges.

Operationally, exporters are expected to benefit by recording higher top line growth, but significant forward cover options will prevent any major growth in profit. The worst is over for Indian generic companies and so expect improvement in Sun Pharmaceuticals’ performance.

Despite a favourable currency, Ranbaxy is expected to post a sharp fall in revenue due to the ongoing US FDA ban on some products as well as the significant forward covers taken in the past. A slowdown in emerging markets is also likely to adversely impact top line growth.

Ranbaxy is likely to report a loss at the operating profit level due to forex losses on outstanding foreign currency loans. MOSL analysts expect the company to report a net loss of Rs 270 crore. Excluding the MTM forex losses on foreign currency loans, the net loss could be Rs 165 crore.

Sun Pharmaceuticals is expected to post a 20 per cent-plus decline in net sales and profit in the fourth quarter due to the absence of exclusivity-based Pantoprazole and Oxcarbazepine supplies. Excluding patent challenge, the company’s net sales are expected to grow by 24 per cent. An expanding generic portfolio coupled with change in product mix in favour of high-margin exports is likely to bring in long-term benefits for the company.
 

Qtr ended	Y-o-Y sales growth in %				Y-o-Y NP growth in %
	Jun ‘08	Sep ‘08	Dec ‘08	Mar ‘09E	Jun ‘08	Sep ‘08	Dec ‘08	Mar ‘09E
Ranbaxy Labs	19.94	9.12	2.43	-8.22	-91.85	-	-	Loss
Sun Pharma	31.84	22.00	17.58	-20.07	24.58	55.59	-25.80	-23.10
Total	23.91	30.57	8.87	-13.31	-41.05	-	-	-44.87

SOFTWARE SERVICE

The three software companies in the BSE Sensex are expected to report a decline in quarter-on-quarter (q-o-q) revenues and net profit in the fourth quarter ended March 2009. The year-on-year (y-o-y) revenue growth is expected to be over 20 per cent, while their net profit is likely to grow by around 12 per cent.

Infosys Technologies, with the lowest hedges among its peers, will benefit the most from the rupee's depreciation, while TCS and Wipro are likely to report higher hedging losses in the fourth quarter. A technology analyst at MOSL expects Infosys’ q-o-q revenue in dollar terms to decline by 1.1 per cent. The q-o-q operating margin is expected to slide by 65 basis points (bps), owing to a decline in pricing and utilisation.

A KRC analyst expects Infosys to get a push from the depreciation in the rupee's value and outsourcing deals in the telecom vertical. Another analyst at Edelweiss expects Infosys to show a robust y-o-y revenue and profit growth of over 20 per cent.

In TCS' case, an MOSL analyst expects the firm's q-o-q dollar revenue to drop by 3.2 per cent, while operating margin is expected to be lower by 200 bps due to a decline in pricing. TCS experienced project cancellations during third and fourth quarters, which will affect billed volume in the current quarter. A KRC analyst expects TCS' operating margin to be impacted by higher employee costs. And, Edelweiss expects the company to report a decline in profit on pricing and forex losses.

As for Wipro, an MOSL analyst expects the Azim Premji-led firm to report a decline of 7.3 per cent in dollar revenue on a comparable basis. The operating margin is expected to slip by 140 bps on account of lower utilisation and pricing assumptions. Edelweiss expects Wipro to post a 17 per cent drop in y-o-y net profit on forex losses and a slower growth in revenue. KRC expects Wipro's revenue growth from telecom to suffer as global telecom operators reduce spending and headcount.
 

Qtr ended	Y-o-Y sales growth in %				Y-o-Y NP growth in %
	Jun ‘08	Sep ‘08	Dec ‘08	Mar ‘09E	Jun ‘08	Sep ‘08	Dec ‘08	Mar ‘09E
Infosys Tech	27.18	31.18	35.76	26.49	22.76	29