Sector watch

PHARMA: Double-dose growth

A majority of the companies in the pharmaceutical sector, with the exception of multinational companies (MNCs), are likely to post double-digit growth in sales. The rupee deprecation will increase these companies’ export revenue but affect the net profit of those with overseas borrowings. Excluding the forex impact, net profits of these companies are expected to grow by over 30 per cent.

According to Motilal Oswal Research, the sales growth is likely to be strong at 22.8 per cent, while net profit is expected to register single-digit growth. MNC pharma companies are expected to report only 4 per cent growth in sales, owing to part-divestment of the consumer healthcare business of Pfizer and the fine chemicals business of GSK Pharmaceuticals.
 

	Sales		Net profit
	Q1-09*	Q2-09E	Q1-09*	Q2-09E
Motilal Oswal	23.91	22.10	-12.62	6.90
Edelweiss	23.91	20.10	-12.62	12.10
Religare	23.91	29.60	-12.62	28.10
Citigroup	23.91	13.70	-12.62	15.10
Sharekhan	23.91	23.40	-12.62	-2.20
Prabhudas Liladhar	23.91	26.10	-12.62	10.80
*Actual,                                             E:Estimates               Growth rate: in %

According to research analysts, despite exports accounting for over 50 per cent of the pharmaceutical industry's revenues, the weaker rupee would aid the top line of drug firms only partially as most of them have hedged their outstanding receivables at the 41-42 level to a dollar even as the Indian currency is hovering around the 48-mark. Sun Pharma would be the biggest beneficiary of the weaker rupee as it has not hedged aggressively against the rupee at higher levels.

Despite a strong top line growth and a robust operating performance, the pharma sector's net profit is expected to decline by over 2 per cent on account of expected mark-to-market (MTM) losses for Ranbaxy Laboratories, Orchid Chemicals and Pharmaceuticals and Ipca Laboratories.

Outlook

A lower penetration of generic drugs in some regulated markets along with $100 billion worth of drugs going off-patent in the next five years, will drive the sector's growth. Moreover, restructuring initiatives undertaken by companies will add to their profitability.

CAPITAL GOODS: Margin blues

For the second quarter ended September 2008, analysts at Motilal Oswal expect the capital goods sector to deliver a revenue growth of 27 per cent, even as the growth in net profit is seen lower at 18.4 per cent. Margins of capital goods companies are under pressure as a result of higher raw material prices, mostly on account of high-cost inventory in the past two quarters.

The depreciation of the rupee during the second quarter by over 7 per cent is expected to increase the import cost for companies. However, a decline in prices of steel and copper in the international market should bring in some good news, boosting their operating margins.
 

	Sales		Net profit
	Q1-09*	Q2-09E	Q1-09*	Q2-09E
Motilal Oswal	39.85	27.00	33.87	18.40
Edelweiss	39.85	28.40	33.87	10.00
Religare	39.85	25.90	33.87	17.10
Citigroup	39.85	34.30	33.87	30.30
Sharekhan	39.85	26.50	33.87	21.90
Prabhudas Liladhar	39.85	26.10	33.87	10.80
*Actual,                                  E:Estimates                             Growth rate: in %

According to an Edelweiss analyst, segments across the capital goods sector may see their margins narrowing, owing to lower project execution in the second quarter. Power transmission tower and engineering, procurement and construction (EPC) companies are likely to be impacted by higher interest rates, which are set to hit their net margins in the second quarter. Bharat Heavy Electricals (Bhel) is likely to report a 190-basis point decline in margin due to a delay by sub-contractors. Larsen and Toubro's (L&T’s) net profit may grow by 43 per cent, fuelled by higher other income. Thermax's margin is likely to be impacted as its order backlog is primarily covered under fixed contracts, says the analyst.

Order books of Suzlon, Crompton and Siemens have stagnated in the past nine months, with Suzlon facing issues related to cracks in its wind turbine blades in the US market and Siemens hit by a lack of major orders.

Outlook

Tight liquidity and funding concerns are likely to keep revenue growth, profitability and order accretion under check for the sector in 2008-09. While capacity utilisation remains high across industries, investments are likely to slow down due to a looming threat on profitability. This essentially translates into lower growth in FY09 and FY10. The long-term structural story of infrastructure creation in India remains intact, but the current cyclical slowdown could last longer than expected.

FMCG: Bucking the slowdown

Most FMCG companies are expected to see strong revenue growth on the back of price hikes across product portfolios, either directly or through a combination of innovative ways.

The slowdown in the sector is not visible as yet, barring a few value-for-money categories such as soaps. However, analysts expect lower growth in sales of mass-market products, like detergents and toothpastes, while the premium product range is likely to remain unaffected.

Companies with a strong, loyal consumer base, high pricing power and a higher proportion of sales of premium brands will be able to tide over the current situation more effectively.
 

	Sales		Net profit
	Q1-09*	Q2-09E	Q1-09*	Q2-09E
Motilal Oswal	19.84	18.90	5.31	12.70
Edelweiss	19.84	18.20	5.31	9.50
Religare	19.84	22.10	5.31	8.80
Citigroup	19.84	19.80	5.31	18.90
Sharekhan	19.84	18.30	5.31	6.50
*Actual,                                       E:Estimates               Growth rate: in %

According to an FMCG analyst at SBI Securities, despite selective price hikes, the operating profit is expected to grow at a slightly lower pace due to high raw material and packing costs and higher advertising expenditure to support new launches.

The net profit growth is expected to be higher than that of the operating profit, owing to a lower tax rate for most of these companies sourcing their goods from tax havens.

An FMCG analyst at Sharekhan says that many companies have effected steep price hikes across product categories to protect their margins against rising raw material costs. However, the rising inflation has affected the sales volume of most of the FMCG products.

Outlook

Analysts expect companies to post strong top-line growth on the back of rising disposable income of consumers, new launches and price hikes effected in the past few months. With prices of key inputs softening in recent months, the pressure on gross margins is likely to subside in coming quarters.

The depreciating rupee could dilute the gains accruing from softening of input prices for companies importing raw materials. A good monsoon this year is expected to aid growth in rural sales. However, the input cost inflation, lower sales and a moderation in volume growth on account of price hikes across product categories remain a concern.

AUTOMOBILES: On the slow lane

Automobile companies are likely to report mixed growth in volume in the second quarter of 2008-09, with two-wheelers hitting the road to recovery, whereas cars and commercial vehicles witnessing the impact of an economic slowdown.

Higher prices of key raw materials, such as steel (up 32.5 per cent), aluminium (higher by 15 per cent) and rubber (costlier by 29 per cent), are expected to impact margins of auto companies.
 

	Sales		Net profit
	Q1-09*	Q2-09E	Q1-09*	Q2-09E
Motilal Oswal	18.40	7.90	-9.02	-13.60
Edelweiss	18.40	11.10	-9.02	8.80
Religare	18.40	8.30	-9.02	-13.70
Citigroup	18.40	8.90	-9.02	-4.00
Sharekhan	18.40	8.90	-9.02	-15.70
Prabhudas Liladhar	18.40	11.60	-9.02	-16.10
*Actual,                                                  E:Estimates                Growth rate: in %

According to an analyst at Motilal Oswal, margins are expected to decline by 160 basis points, Maruti Suzuki and Ashok Leyland taking the biggest hit. An auto analyst at Sharekhan Research sees better growth in the two-wheeler segment in the second quarter, owing to low growth base in the year-ago period and a decreasing dependence of buyers on borrowed funds.

The B and C passenger car segments are set to bear the brunt of rising interest rates, which are likely to bring down their sales numbers in the second quarter. Sales of the commercial vehicle segment may also be affected, owing to higher interest rates, as this segment mostly grows on borrowed funds. The overall economic slowdown is also set to hit the segment during the second quarter.

Outlook

An Edelweiss analyst expects growth in demand to improve for passenger cars and remain steady for two-wheelers during the third quarter as the festival season sets in, leading to a host of new model launches.

With commodity prices likely to soften going forward, the margin pressure is expected to ease in the coming quarters. For FY09, analysts expect slower 5-10 per cent growth in earnings for major players.

Two-wheeler manufacturers, however, will be an exception and are likely to post profit growth of 15-20 per cent as they will benefit from tax exemptions for their new plants coming up in tax-free zones.

TELECOM: A mixed bag

The telecom sector's top-line growth is expected to remain strong around 36 per cent on continued buoyancy in subscriber addition, even as average returns per user (ARPUs) continue to witness downward pressure. The cost of network expansion and a full impact of cuts in STD tariffs are likely to be reflected in the second-quarter numbers of the companies. They may add to margin pressure, resulting in a 128-basis point fall in their operating margins.

Analysts expect mixed results from listed telecom companies -- Bharti Airtel, Idea Cellular and Reliance Communications (RCom). Bharti Airtel is expected to post decent growth in revenue and profit, while RCom is likely to record a modest rise in net profit on account of high provisioning for interest and depreciation. Idea Cellular may register modest revenue growth, while its margin will be under pressure as a result of a cut in long-distance tariffs and capital expenditure on account of the launch of its Mumbai services.
 

	Sales		Net profit
	Q1-09*	Q2-09E	Q1-09*	Q2-09E
Motilal Oswal	25.97	37.8	2.99	18.4
Edelweiss	25.97	33.8	2.99	24.6
Religare	25.97	37.5	2.99	18.3
Citigroup	25.97	33.4	2.99	26.8
Prabhudas Liladhar	25.97	37.5	2.99	19.4
*Actual,                                          E:Estimates       Growth rate: in %

A Sharekhan analyst expects the telecom sector to post robust volume growth on the back of a rise in the subscribers' base. Profit margins may be affected because of rising costs and falling ARPUs.

The foreign exchange movement is likely to result in mark-to-market losses for Bharti Airtel at around Rs 150 crore. RCom has changed its accounting method for the impact of forex fluctuations, which has resulted in capitalisation of Rs 109-crore realised loss and Rs 950-crore unrealised loss.

Outlook

According to an Edelweiss analyst, regulatory measures will determine the course of telecom companies in the next two quarters on account of a proposed increase in spectrum charges and 3G spectrum auctions.

The auction of 3G spectrum is expected around December and 3G services would be launched within nine months of allotment. With limited spectrum availability and a large number of bidders, there is a risk of overbidding in select circles with relatively higher affordability levels.

CEMENT: Cracks on the wall

The cement industry is likely to grow slow in the second quarter because of a lower demand, particularly in northern and central regions of the country. Besides, recent floods in many parts of the country have hit production of cement companies that have their units in these regions. Demand, in general, has also been impacted by a slowdown in the housing sector.

According to Sharekhan Research, the South will lead with 11.7 per cent growth in despatches, spurred mainly by Kerala and Andhra Pradesh. Central India may be the only region to post a decline in cement despatches, with consumption for the second quarter expected at 5.37 million tonnes as against 5.63 million tonnes in the second quarter of 2007-08.

Cement (including clinker) exports are expected to decline by 5 per cent to 1 million tonnes on account of a continued focus on the domestic market.
 

	Sales		Net profit
	Q1-09*	Q2-09E	Q1-09*	Q2-09E
Motilal Oswal	10.64	9.20	-20.34	-19.90
Edelweiss	10.64	10.00	-20.34	-18.20
Religare	10.64	8.10	-20.34	-20.10
Citigroup	10.64	6.40	-20.34	-10.60
Sharekhan	10.64	7.70	-20.34	-16.20
Prabhudas Liladhar	10.64	9.80	-20.34	-15.90
*Actual,                                                E:Estimates       Growth rate: in %

Cement companies' profit margins are likely to decline as prices have remained almost unchanged despite a significant increase in energy and freight costs. Imported coal prices have gone up by 22 per cent, although domestic coal rates have remained unchanged.

According to analysts, cement prices, which were unchanged in most regions in July and August, rose in September this year. Cement firms hiked prices to combat a rise in the cost of raw materials, power and freight.

A surge in the cost of freight and power during the quarter is expected to result in a decline of 10.9 per cent in cement firms' operating profits. Consequently, their net profits are expected to drop by 16.2 per cent.

Outlook

With a capacity addition of 33 million tonnes expected during the current year, the overall capacity utilisation for the industry is estimated to be 93 per cent against 102 per cent in FY08.

This may enable companies to hike prices marginally in the current year across regions, except the North. However, the real impact of capacity expansion is likely to be felt in FY10, which is estimated to see a further capacity addition of 45 million tonnes.