Chemicals, IT sectors seen doing well in Q3

According to various equity analysts, the earnings growth this quitter (October-December quarter) will be led by chemicals, technology and transportation sector. But the growth will be weighed down by the large-cap energy, FMGC and banking sectors.

The year-on-year (Y-o-Y) earnings growth will trail the top-line growth. While technology sector is expected to be one of the leaders in earnings growth, the results are likely to be tempered by the gains the rupee had made during the October to December quarter.

The current stock prices of the IT sector companies have factored in the earnings for 2006. So further stock movements will be driven by surprises in the actual earnings announcements.

Sector analysts say that even among the front-line IT companies there is likely to differences in performance.

An analyst with a domestic broking firm said, "Among the frontline IT companies, while Infosys is expected to surprise with a minimum growth of 7.5 per cent in bottomline in Q3, Satyam may actually report a sequential growth in bottomline."

With MphasiS BFL claiming its inability to meet its profit guidance, the tone has already been set for the IT sector earnings for the third quarter.

According to domestic broking firm, Prabhudas Liladher, the third quarter performance may not be as strong as the second quarter performance.

"We expect the resurgence of the Indian IT companies to continue piggybacking mounting volumes," a report from the broking firm said.

Tech companies are expected to report a string of operational growth, but higher wage costs, appreciation in the rupee, high depreciation and lower other income will result in a muted net profit for some of the companies.

In order to stay at the top, companies will have to juggle around with their revenue mix, resource location, complexity of services. And those who find the right balance in all these would have sustainable margins.

"We expect the frontliners to climb higher on the level of their complex service offerings, deliverables, and execution parameters and edge closer towards achieving a global mind share and dominance," said the Prabhudas Lilladher report.

Analysts at Prabhudas Lilladher say that construction sector is expected to report the sharpest rise in the net profit, followed by telecom, automobiles and metals on a quarter-on-quarter basis. The firm has recommended to be overweight on banks, cement, information technology, pharmaceuticals and telecom sector.

Automobiles sector is also expected to be one of the leading growth drivers. However, there is likely to be a moderation in earnings growth because of the impact on the prices of the raw materials, according to Kotak Securities.

Amitabh Chakraborty, head of research, PGC, Kotak Securities said, "Of the companies we track, we expect the bottomline to grow at around 8.8 per cent year-on-year and 3.5 per cent on sequential basis. However, the current quarter results will be mixed with cement and auto sector stocks recording good results."

Prabhudas in its analysis had said that for the December quarter, "Driven by aggressive festive promotion offers, most of the leading automobile companies have shown a better than expected sales volumes "

The reduction in oil prices in November also fueled demand, especially for passenger and commercial vehicles. The net profit is expected to rise by nearly 30 per cent, with over 24 per cent increase in the sales volume.

Despite the run up in the scrip prices, the banking sector is likely to rise further with banks expected to report higher interest income, lower depreciation losses and moderate provisioning for non-performing assets. All these will impact the bottomline positively.

Metals such as aluminium, copper and steel have been on an uptrend in the latter part of 2004 with domestic aluminium companies raising prices. Steel producers tried benchmarking domestic prices to international prices, while copper also moved up.

All this will have a positive impact on the results for the third quarter and analysts have maintained a buy on stocks such as Tata Steel and Hindalco.