Corporate India's encore

SPECIAL REPORT

After another strong performance in Q3, market experts believe that India Inc will grow at a robust pace in Q4 as well.

The performance of Indian companies in FY07 continues to surprise the doomsayers. If the pessimists thought that the base effect would catch up after three years of strong growth, then they are once again wrong.

In fact, as India Inc nears the end of FY07, the growth in revenues and profitability has been much better than the previous quarters.

This is evident from the data of total 1343 companies with sales of over Rs 5 crore during the December 2006 quarter (excluding banks, financial services companies and public sector oil companies) that have announced their third quarter results.

Sectors like cement, construction and real estate have done phenomenally well in all the three parameters""growth in sales, operating profit and net profit""followed by metals and telecom, while sugar has been the worst performer.

In terms of margin improvement, surprisingly media companies have done as well, while some of the auto and shipping companies have reported contraction in margins.

Market experts believe that the growth story is expected to continue in the next quarter as well thanks to strong demand and pricing power.

While they still prefer front-line sectors like cement, construction, software and telecom, some are also bullish on tyre, fertiliser and hotels.

On the other hand, market players are cautious about banks and real estate companies due to fear of rising interest rates in India spoiling the party.

Strong revenue growth...
The total 1343 companies reported a year on year (y-o-y) growth of 31.62 per cent in net sales in December 2006 quarter. This is highest in FY07 when compared to 30.5 per cent and 27.87 per cent y-o-y growth in September 2006 and June 2006 quarter respectively.

The robust growth has been contributed mainly by construction and real estate sector with a growth rate of 61 per cent. Real estate companies like Unitech, Anant Raj Industries and Ansal Properties have been among the top performers though large construction companies like Hindustan Construction, Nagarjuna Construction and IVRCL Infrastructure have comparatively reported a moderate growth.

Besides, construction and real estate, cement (Shree Cement, Gujarat Ambuja Cements, Madras Cements, UltraTech Cement), metals (Hindustan Zinc, Godavari Power, Shah Alloys, Jindal Stainless, Shree Precoated Steel), information technology (Tech Mahindra, Wipro, Infosys) and telecom companies (Bharati Airtel, Avaya Global and Shyam Telecom) are the next best performers, reporting a y-o-y growth of 51 per cent, 48 per cent, 38 per cent and 33 per cent in sales respectively. 
 

UNABATED GROWTH
(% change)	Q1FY07	Q2FY07	Q3FY07
Net sales	27.87	30.53	31.62
Total expenditure	27.16	28.66	27.97
Raw material (RM)	28.54	32.00	32.82
RM/Sales	47.12	45.05	45.00
Operating profit	31.28	40.48	51.17
OPM (basis points)	45.49	120.73	233.59
Net profit	33.59	46.05	61.68
NPM (basis points)	47.00	119.00	221.00

While construction, cement and metal sectors have gained tremendously due to the government's thrust on infrastructure besides demand supply mismatch in case of cement, rising disposable income and higher aspiration levels of Indians have benefited retail and telecom companies.

Also real estate companies grew leaps and bounds thanks to the housing boom due to easy availability of housing finance and relatively benign interest rates. Moreover, in every sector, large companies have followed their smaller counterparts by reporting comparatively moderate growth probably due to the higher base.

On the flip side, sugar is the only sector which has reported a decline in sales of 4.6 per cent, mainly due to lower sales growth of companies like Dhampur, Mawana and EID Parry. Sugar prices declined 13 per cent between October to December 2006.

However large companies like Bajaj Hindusthan and Balrampur Chini have reported growth in sales, thanks to their large capacities and integrated operations (namely power co-generation and distillery).

Besides sugar, the fertiliser sector has been the next worst performer as it reported just 2 per cent growth, largely due to decline in sales of mid-sized companies like Chambal Fertiliser and GNFC and marginal growth in case of large companies like Tata Chemicals, Zuari Industries and National Fertilisers. 
 

TOP FOUR SECTORS
Sector / % chg	Net  sales	Operating profit	Net  profit
Construction
Unitech	483	2832	3190
Ansal Properties	188	230	255
Nagarjuna Construction	47.2	75.6	52.8
Hindustan Construction	17.6	19.9	-3
Cement
ACC	46	208	107
UltraTech	59	244	790
Gujarat Ambuja	72	137	278
Shree Cements	153	270	272
Metals
Hindustan Zinc	171	265	306
Sterlite	48	24	43
Tata Steel	20	27	41
SAIL	29	80	124
Information Technology
Wipro	44	37	47
Infosys	44	45	49
TCS	42	35	40
Satyam	30	30	-30

...stronger operating profit growth
The cement sector outperformed the construction sector marginally in terms of operating profit growth, though it lagged behind the latter in net sales growth. The reason? Growth in realisations and volumes went up faster than the increase in costs. While costs increased 27 per cent in December 2006 quarter, sales growth almost doubled at 51 per cent.

While cement companies like Birla Corporation, Prism Cement, Deccan Cements, Gujarat Ambuja, Shree Cement, UltraTech and ACC reported strong growth in operating profit, companies like Unitech, Lok Housing, BSEL Infrastructure, Ganesh Housing and Ansal Properties have done the same among construction and real estate sector.

The other sectors that have done well include pharmaceuticals (Dr Reddy's, Ipca Labs, Ranbaxy, Nicholas Piramal and Glenmark Pharma), metals (Lloyd Steel, Ispat Industries, Hindustan Zinc, Hindustan Copper and Jindal Stainless), telecom (Himachal Futuristic, Tata Tele, Avaya Global and Bharti Airtel), media (Zee Entertainment, NDTV, Deccan Chronicle and Balaji Telefilms) and engineering (Elecon Engineering, Alstom Projects, McNally Bharat and Thermax).

Here again, sugar has been the worst performer as most of the companies except Triveni Engineering and Dwarikesh reported a major decline in operating profits.

Also sectors like paints (Asian Paints and Kansai Nerolac) and shipping and logistics (except GE Shipping, Essar Shipping, Container Corporation, ABG shipyard, Bharati Shipyard which did well) reported a marginal growth in operating profit.

Companies reporting strong operating profit growth have also seen their operating margins expand. Surprisingly, media has fared better. Analysts attribute this to rising spend on advertising and promotional activities by the companies as they grow in a booming economy. Also, robust equity markets have benefited business channels and higher ad rates have helped companies in the print media.

On the other hand, besides sugar, companies in the auto (Gabriel India, TVS Motors, Lumax, Hero Honda Motors and Bajaj Auto), and power (Reliance Energy, Neyvelli Lignite and CESC) sectors have seen a slight decline in margins.

Says Rajen Shah, chief investment officer, Angel Broking, "Margins of auto companies were impacted more due to intense competition than because of rising input costs." Adds Sandeep Nanda, head of research, Sharekhan, "Higher crude oil prices impacted fuel costs of power companies." 
 

SECTOR-WISE PERFORMMANCE
Sector / % chg	No of  companies	Net  sales	Operating  profit	OPM (Basis points)	Net  profit	NPM  (Basis points)
Construction	37.00	61.52	182.00	1051.60	248.78	815.00
Cement	28.00	51.35	188.50	1377.65	242.52	1047.00
Retail	4.00	48.12	41.99	-37.33	87.17	132.00
Metals	102.00	40.72	69.00	466.76	99.19	479.00
IT	96.00	38.36	40.25	34.28	38.80	7.00
Telecom	15.00	33.15	62.55	532.00	98.29	475.00
Hotells	21.00	27.69	38.40	323.47	2.41	-610.00
Pharma	73.00	26.85	72.14	557.50	61.35	370.00
Tyres	6.00	26.42	50.00	143.88	113.67	128.00
Media	30.00	26.27	60.81	663.50	100.47	855.00
Auto and auto ancillaries	92.00	25.57	17.52	-82.00	16.12	-65.00
Power	43.00	24.23	22.83	-23.83	26.73	35.00
FMCG	52.00	20.26	20.90	11.39	29.40	104.00
Engineering	45.00	19.61	50.86	258.41	51.24	194.00
Shipping	17.00	14.45	5.02	-254.70	-5.40	-413.00
Fertiliser	18.00	2.01	16.73	136.00	47.31	152.00
Sugar	33.00	-4.62	-48.19	-718.50	-70.36	-636.00
OPM: Operating profit margin NPM:  Net profit margin

Robust earnings growth
Construction (Unitech, Valecha, BSEL Infrastructure and Ganesh Housing) and cement (Prism Cement, India Cements, UltraTech Cement, Madras Cements and Birla Corporation) has again topped the charts of net profit growth.

This has been followed by paints (Asian Paints, ICI India and Berger Paints), diversified (Kesoram, Grasim and Voltas), tyres (Ceat, JK Industries and Apollo Tyres), media (Zee Entertainment, HT Media, TV Today, Deccan Chronicle, Sun TV and Balaji), metals (Gujarat Mineral Development, Jindal Stainless, Hindustan Copper, Hindustan Zinc, Madras Aluminum, JSW steel and SAIL) telecom (Avaya Global, Bharti Airtel, MTNL, Himachal Futuristic and ITI) and retail (Pantaloon and Provogue).

In terms of improvement in margins, companies in the cement, media, construction, diversified, metals, telecom, pharma (Ipca labs, Dr Reddy's Labs, Panacea Biotech and Torrent Pharma) and engineering (Praj Industries, Alstom Projects, McNally Bharat and Thermax) sectors are the top performers.

On the flip side, sugar (Simbaholi, Mawana and Dhampur), and shipping (Mercator Lines, Shreyas Shipping and Shipping Corporation) have again reported a decline in profit while mid-sized hotels (EIH and Jaypee Hotels) have reported a marginal growth in profit.

In terms of decline in net profit margin, apart from sugar and hotels, shipping and auto (Force Motors, Escorts) have reported contraction in margins. 
 

BOTTOM FOUR SECTORS
Sector / % chg	Net  sales	Operating  profit	Net  profit
Sugar
Bajaj Hindustan	4	-40	-29
Balrampur chini	17	-9	-52
Dhampur Sugars	-37	-58	-83
EID Parry	-28	-86	-89
Fertiliser
Tata Chemicals	4	4	19
Natioanl fertiliser	6	-10	-7
GSFC	7	11	27
Chambal	-25	-14	-10
Shipping
Container Corpn.	18	26	21
GE Shipping	1	85	2
Mercator	-7	-54	-72
Varun Shipping	-13	-21	-25
Auto
Bajaj Auto	28	1	24
Hero Honda	15	-20	-20
Maruti	18	9	11
M&M	16	9	3

What to expect next quarter?
According to Angel's Shah, "The performance of Indian corporates in the fourth quarter is expected to continue to be robust. Even in FY08, earnings of Sensex companies are expected to grow at 15-16 per cent""which is quite reasonable. Hotel, tyre and fertiliser sectors look good."

He adds that hotels also provide an opportunity to play a little on the real estate sector and the existing demand-supply mismatch offers strong support for sustainability of business growth.

According to him, even tyre companies are expected to report a robust y-o-y growth of 25 per cent and 50-100 per cent in sales and net profits in the fourth quarter.

Also, fertiliser companies are expected to witness sustained growth of 18-20 per cent in the earnings in the next four to five years due to the government's thrust on boosting agricultural output.

Sharekhan's Nanda also expects the strong growth to continue in the next quarter.

Says he, "While IT, cement, FMCG, telecom and capital goods will continue to perform better, investors need to be cautious about sectors like banks and real estate, which will be impacted by rising interest rates."