Market scents a bullish 2nd quarter

Brokerages see 25% rise in Q2 earnings of banking, auto and cement sectors.

The automobile, banking and cement sectors are likely to see 20 to 25 per cent increase in their topline for the quarter ended September 30 as India Inc is set to witness another round of robust results in the Q2 earnings season beginning this week with the results of Infosys to be declared on Wednesday.

According to earnings preview by brokerage houses, information technology, pharmaceuticals and oil and gas sectors could also throw up positive surprises in the second quarter.

The second quarter of 2006-07, which saw 17.4 per cent increase in benchmark share index BSE Sensex, has also seen significant upward revision in earnings estimate, as risks such as interest rate hikes and crude prices lowered, they said.

"Some of these risks have lessened during the quarter. The interest rate cycle has turned down, with 10-year G-Sec yields falling from a high of 8.4 per cent in July 2006 to the current levels of 7.6 per cent. Crude prices have dropped by nearly 20 per cent, in turn, improving the outlook for corporate earnings and current account deficit," said brokerage house Motilal Oswal Securities Ltd.

Among the sectors, cement is likely to beat others with a 38 to 40 per cent increase in topline, predicts a report by Sharekhan Ltd.

"The cement sector is expected to pick up from where its impressive Q1 performance ended. We expect the cement sector as a whole to report an impressive performance during Q2 owing to 9 to 10 per cent growth in the cement volumes and a huge 29 to 30 per cent rise in cement realisations. Hence, this sets a benchmark of 38 to 40 per cent growth in the topline," the report said.

Despite the seasonal slowdown in demand, cement prices have remained firm and are once again set to increase as monsoon retreats. "In fact, we estimate a price rise of Rs 20 Rs 25 a bag in the next 6 to 8 months," said BRICS Private Client Group, in its earnings preview.

On the automobile sector, Motilal Oswal report said major auto companies are expected to register a revenue growth of around 20 per cent, with EBITDA growth of 30 per cent YoY.

"Despite higher input costs in the second quarter of 2006, EBITDA margins increased by 440 basis points. We believe that strong volume growth in FY07 would help automobile majors to maintain their margins at 2006 levels."

"Input costs of players across the industry spiralled in the first quarter, but with easing metal prices, cost pressure is expected to reduce in Q2, hence we estimate operating margins to be stable," said a report by Angel Broking.

Another key sector which is expected to report good numbers is banking. Gaining from 46 basis points fall in the yield rates during the quarter, most of the banks are expected to lower their mark-to-market losses, the brokerage houses said.

"Better treasury incomes would allow public sector banks to write back provisions made for depreciation in their debt investment and thereby enable them to report higher profits in Q2," the Angel Broking report said.

On the IT sector, the Angel Broking report added, "Amidst fears of global slowdown in the years, we believe that IT discretionary spending will get affected. While data from the US economy have been mixed, the Indian software companies have been strong. We believe that strong results from IT majors will allay such fears, as they are a good indicator of the spending patterns of global corporations, which seem to be robust."