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Taking off
The economic recovery and a low base should help India Inc post robust profit growth for the December quarter. - Nitish invites India Inc to invest in Bihar - Correction to stay on course - Bulls to hold sway above 17,380 - Wkly Tech Analysis: Bulls to hold sway above 17,380 - Sensex hits 22-month high; mid-, small-caps shine - Mid-cap, small-cap indices ourperform Sensex After four consecutive quarters of reporting a decline in net profit, the Sensex companies are expected to turnaround in the quarter ending December 2009. The combined profits of the 30 Sensex companies are estimated to grow by over 16 per cent for the quarter as compared to the same period last year. While this would be its best performance in the last seven quarters, a good part of this double-digit growth in profits is on account of the low base of last year’s quarter when profits had fallen for the first time in recent years. Positively, profits will be higher by roughly 10 per cent as compared to the September 2009 quarter, which indicates that the recovery is for real. For the 12 months ending March 2010, the earnings growth for Sensex companies is still expected to remain flat in the region of Rs 810-820, but is seen rising significantly by about 32 per cent to Rs 1,080 in 2010-11. Considering this, the Sensex is currently trading 16 times its 2010-11 estimated earnings, wherein analysts believe that most of the recovery in the earnings is already factored in. Meanwhile, the good news is that on the back of the economy gathering pace, a host of sectors including automobile, cement, construction, FMCG and metals are expected to post robust performance. Even beyond the Sensex, companies are expected to report robust performance. For instance, as per Motilal Oswal Securities, 118 companies (excluding oil refiners and marketers) are expected to report a year-on-year growth of 18 per cent in sales, 29 per cent in EBIDTA and 23.5 per cent in net profit. The only laggards are likely to be real estate and telecom sector companies. Read on to understand how the individual sectors and the top companies are expected to perform for the December 2009 quarter. Auto After a disastrous third quarter in 2008-09 when volumes dipped to record lows for most manufacturers, the recovery is expected to be strong. On a low base of the year ago quarter, the country’s auto makers saw strong volume growth in the quarter topping it off with a 67.5 per cent year-on-year (y-o-y) increase to a million vehicles in December 2009. The stimulus measures, tax breaks and cheaper credit all aided economic recovery helping pent up as well as delayed demand come back into the market. While the top line for the sector is likely to grow by about 60 per cent, the cancelling out of operational leverage due to higher volumes by increasing raw material prices will mean flat, or slightly lower, operating profit margins on a sequential basis. The trickledown effect of the high revenues and a surge in operating profit will see net profits grow over two times y-o-y. Due to the low base, commercial vehicles will be the best performing segment within the auto space and utility maker M&M is likely have the highest growth in sales and profits among auto majors. Banking & housing finance With credit off-take at the lowest levels—it was 10.5 per cent at one point in time during December quarter – in the last one decade and a half, net interest income (NII) growth for most public sector banks like PNB and SBI would be muted. Expect their NII to grow at 10-15 per cent due to the high base of December 2008 quarter. Comparatively, private sector banks like HDFC Bank and Axis Bank and NBFCs like HDFC are expected to deliver better performance. However, credit growth is expected to pick-up in the fourth quarter with an increase in the economic activity. Having said that, net interest margin, which is expected to decline on a y-o-y basis (to some extent due to the high-base of last year), could show an improvement sequentially of about 10-25 basis points due to re-pricing of deposits at lower rates in the recent months. Compared to last year, the December 2009 quarter could see lower contribution of treasury income to the overall profits of banks. With yields strengthening by about 40 basis points during the quarter, most banks would take a hit on their investment portfolio. On the asset quality front, incremental slippages are expected to be lower this quarter. However, relative provisioning would be higher in the case of public sector banks compared to their private cousins. Overall, the sector is expected to report subdued profit growth with a majority of banks likely to report a marginal decline or single-digit growth in profits. Capital goods & engineering Led by improving industrial capital expenditure and spending on infrastructure (including strong capex in power sector), most companies are seen posting improved profitability. Among other highlights, improving execution, lower commodity prices and healthy order intake should help the companies in December quarter. Among companies, BHEL is expected to post strong net profit growth led by about 200 basis point improvement in operating margins helped by lower material cost. L&T, too, is expected to report over 20 per cent growth in profits; however, it is expected to book about Rs 150 crore of profit on account of sale of Satyam shares. ABB is likely to report a decline in profits due to higher depreciation and interest costs. Going forward, companies particularly in the power sector given the higher ongoing investments and fresh orders expected in the T&D space. Companies with international exposure such as KEC International and Crompton Greaves will benefit from new orders have started flowing and funds availability for projects is improving. Cement A recovery in housing demand helped cement volumes grow 9 per cent y-o-y to 48.7 million tonnes in the December quarter. The industry added about 40 million tonnes of new capacities in 2009, which resulted in flat cement prices on a y-o-y basis. With capacity utilisation down 500 basis points to 82 per cent, cement prices declined by over 5 per cent dragging down realisations sequentially. For the quarter, higher volumes will ensure that the topline of cement companies will increase by 6 per cent y-o-y. ACC’s despatches were down 2 per cent y-o-y as the company faced capacity constraints but operating profit margins are likely to decline by about 300 basis points sequentially due to a fall in realisations. Ambuja Cements is expected to limit the fall in realisations to about 4 per cent due to a change in market mix in favour of the domestic market. Despite hiving off of the sponge iron unit, Grasim’s standalone revenues are expected to grow 10 per cent y-o-y due to higher cement and VSF volumes. Operating profit margins are seen improving due to higher realisations and cost savings in the VSF business, says a Motilal Oswal report. Thus, Grasim overall profit growth will be faster. Construction & Infrastructure Improved execution led by availability of funds and faster execution of government projects post the state and central elections should reflect in improved growth for companies. Most companies are expected to report improved operating margins driven by lower commodity prices. The growth in net profits would be even higher as the impact of lower interest cost will now be visible with many companies having easy access to cheaper funds. Among companies, Nagarjuna Construction is expected report robust revenues and improve its operating profit margins by about 200 basis points. JP Associates, too, could report better results led by higher revenue on account of execution of power project as well as the Yamuna Expressway. Its cement business will contribute to higher revenue helped by a 50 per cent volume growth. As the government speeds up investments, there is a pick up in orders in segments like roads benefiting companies like IRB, IVRCL and HCC. Profitability will further improve given lower commodity prices, decline in interest cost, improving working capital cycle and higher execution. FMCG Most companies are expected to report another quarter of double-digit volume growth. Nevertheless, the value growth would be lower as the price hikes taken in the year-ago quarter no longer adds significantly to overall growth. Thus, the sector is expected to report a topline growth of around 14-15 per cent. HUL is expected to be a laggard in the December quarter; however, the trend looks up as the company is focusing more on the mass segments for volumes (volume growth at around 4 per cent). ITC is expected to report robust volume growth of 6-6.5 per cent in cigarettes and better performance of its FMCG, agri and hotel businesses, which should help the company deliver over 20 per cent increase in profits. Meanwhile, Dabur’s numbers are expected to be better y-o-y helped by the consolidation of Fem Care business. To garner higher market share and sustained growth, FMCG companies launched new products as well as variants to woo customers. On the profitability front, benign commodity prices should lead to a y-o-y increase of 100-400 basis points in EBITDA margins for companies. IT services The top four IT companies are expected to report a marginal decline (or at best flat) in revenues sequentially in the December 2009 quarter as compared to 4-5 per cent growth in revenues in the September quarter. Pressure on the billing rates as well as rupee appreciation could impact their financials for the quarter. Nevertheless, analysts believe that Infosys’s dollar revenues could grow at about 3.7-4.5 per cent on account of positive cross currency movements. However, IT companies are expected to report a sequential decline of around 80-180 basis point in operating margins on account of salary hikes, an increase in sellingPages: [1] 2