Result Expectation Q4 FY09

Q4FY09 is likely to be a sequentially better quarter for India, in terms of overall real growth. Strong consumption growth remained intact during the quarter with the positive impact of GOI’s VI Pay Commission and reduction in the trade deficit as compared to the previous quarters. As Q4FY09 results are approaching, we have following expectations for different sectors and companies.

 

 

Automobiles

During the fourth quarter, the automobile sector is expected to do well on the back of strong sequential volume gains as compared to the sluggish previous quarter, particularly in the passenger car and two-wheeler segments. Generally, in the fourth quarter, sales pick up because of the year-end demand and attractive discounts being offered by the automakers to clear the stock. In addition to this, the sales volumes were mainly driven by the positive impact of the implementation of the sixth pay commission and robust agricultural income. Moreover, major public sector banks also contributed to the growth by easing finance availability and lending at lower rates. The announcement of various stimulus packages by the government also provided some remedy for the automobile sector especially the commercial vehicle segment that has been hit hard by the slowing demand. Margins are also expected to go up because of the softening prices of key raw materials like steel, aluminum and rubber. Hero Honda and Maruti Suzuki will do good as these two giants have been least impacted by the slowdown and have gained as consumers shifted to value-for-money, tried and tested products in difficult times. Tata Motors is likely to remain on the edge due to continued shrinkage in the commercial vehicle market.

 

Banking

Banking sector is likely to remain subdued as there was fall in advances and deposits on the back of people shifting from savings and current account to FDs, which increased the cost of funds for the companies. Thus banking sector will face contraction in net interest margin. Moreover, during the quarter, margins were hit by increase in NPA also. As the prices of the government securities are indirectly proportional to yields, banks are expected to suffer losses on the available for sale portion of their g-sec portfolios. The g-sec gains were one of the most important reasons for the good performance of banks in Q308. The numbers would therefore be even worse on a quarter-on-quarter basis.

 

 

Capital Goods

Capital goods sector is on the road to recovery. The margins are expected to improve on account of decrease in raw material prices of steel, copper, aluminum etc. Moreover, the capital good majors has a strong order book of 2-5 times of their sales as government infrastructure activities are still going on even in recession.

 

 

Cement

On the back of strong dispatch growth and better price realizations, cement sector is expected to release good results in Q4’09. Companies like Ultratech Cements and Ambuja Cements are expected to benefit from softening of the coal prices in the international market as these companies import one third of their coal requirements. Due to the sluggish prices in the central and eastern markets, ACC is expected to book some loss. Grasim, again, is expected to report slow performance because of the difficult operating environment in its fibre and pulp business.

 

FMCG

FMCG sector is likely to pull off a healthy performance in the coming quarter. Along with the growth in volumes, value growth will be the primary driver of revenues. The easing raw material prices have reduced the pressure on margins. FMCG companies enjoy a strong pricing power, which is evident from the fact that in case of rising input costs, companies either increase the product prices or reduce the pack sizes to sell their products. But currently, when the raw materials are easing out, the companies do not reduce the product prices till the time they witness any slowdown in demand. Sector saw strong demand coming from rural market due to gains from sharp increase in crop prices, farm loan waiver and also higher spends on national rural employment guarantee schemes.

 

Information Technology

We expect IT companies to report decline in revenues on account of drop in volumes, declining realizations, several project cancellations, delays in order intake and adverse cross currency fluctuations. However, the weaker rupee will support the top line when expressed in rupees.

 

Media

In broadcasting and print businesses, revenues are mainly driven by the two segments- advertisement and subscription. The revenues of the advertisement segment is likely to be hit badly because of the corporate earnings slowdown as companies are spending less on advertising due to the economic slowdown.

 

Metals

There was a slight revival in demand because of the factors like better seasonal demand, destocking at the user end, lesser imports and pre-election activities. The demand from steel consumers is usually high during year-end time as companies attempt to complete maximum portion of their projects. The non-ferrous metal producers are likely to be hit badly due to a sharp y-o-y decline in base metal prices. Though the rupee depreciation would offset the loss to some extent, the overall impact on topline would be negative.

 

Oil and Gas

The Oil and Gas sector is likely to report better numbers because of the stable oil prices and improving margins. Therefore, the refining business will not experience any inventory losses. RMCs would be reporting significant profits due to issuance of oil bonds. BPCL is likely to post healthy profits as compared to the last Qtr. Reliance Industries had a planned refinery shutdown in January, which will bring down the company’s top line and bottom line, although its margins may be better. ONGC results will be impacted because of the decline in production and lower crude oil prices. Even if we assume no subsidy burden during the quarter, the high cost structure and annual extraordinary write-offs are likely to bring down the net profits for ONGC. GAIL is expected to throw good numbers on the back of its growth in natural gas transmission segment.

 

Pharmaceuticals

As Pharmaceutical sector is supposed to be a recession proof sector, this sector is expected to report a modest performance in this quarter. The rupee’s depreciation to the level of Rs. 52 is positive for the export-oriented sector but companies did not see any major demand on export front so the key driver for the growth will be the domestic formulations business. Most of the companies faced delays in obtaining approvals on ANDAs filing from USFDA because of the increased stringent compliance. Sun Pharma is expected to report lower PAT in this quarter, because of the fact that it enjoyed drug exclusivity in the last quarter of FY08. Though Cipla’s export volumes have declined but still the company can post a positive earning figure.

 

Power

Power sector is supposed to post a decent growth because of higher plant load factor, lower fuel cost, higher tariffs due to increased fuel cost and higher other income. The outlook for the sector remains robust in the light of easing of finances, which would lead to faster financial closure for upcoming projects. Moreover, the fuel cost is expected to remain on the lower side because the coal prices have come down internationally.

 

Real Estate

The real estate sector is expected to take a beating like never before during the March’ 09 quarter. Sales will continue to remain subdued till the sentiment turns positive. Sales are expected to be down by more than a half of what they were in the March ‘08 quarter. Real estate companies are facing slow sales because of the unsold inventory, absence of new launches, and increasing interest costs. Some companies entered into affordable housing vertical also, which ultimately would bring low margins, high interest coat and depreciation.

Telecom

The telecom sector has seen robust subscriber additions during March ‘09 quarter. While top line story is likely to remain good but margins can be impacted because of the entry of operators and upfront costs. In the first two months of the March ‘09 quarter, telecom giants like Rcom, Idea and Tata Tele reported substantial acceleration in subscriber additions. Bharti, as a most consistent player in the industry, is likely to report a good growth in top line and bottom line. Idea Cellular is likely to register fastest growth among the listed telecom companies and Tata Communications will see an increased other income as it sold 1% stake in one of its subsidiaries.