Banking, FMCG, power and capital goods are the sectors to watch out for
In what could be seen as a positive sign in a recessionary phase, corporate India looks set to deliver a mixed bag when it declares results for the fourth quarter ended March 2009.
Banks, capital goods, engineering, fast moving consumer goods (FMCG), software services, oil marketing, power, two-wheelers and telecom companies are expected to lead the sales and profit growth of India Inc in the fourth quarter, according to research analysts at domestic and foreign broking houses. Besides, cement, construction and infrastructure and oil and gas firms are likely to maintain their year-on-year (y-o-y) profit.
These analysts, however, anticipate companies in sectors such as auto ancillaries, automobiles (heavy, medium as well as light commercial vehicles), hotels, media, metals, pharmaceuticals, realty, shipping, sugar and textiles to post poor results in the fourth quarter. (Click here for ANALYSTS’ ESTIMATES table)
Oil marketing companies, including ONGC, the sole crude oil supplier to public sector refineries, are expected to show robust growth of 1,100 basis points (bps in margins on the back of falling crude oil prices. Two-wheelers and sugar firms may report margin expansion by over 150 bps each due to decline in cost of raw material for auto-making and firm price trend in sugar. FMCG, power and retail firms too are likely to show a modest rise in operating margins in the quarter.
The depreciation in the value of rupee is expected to benefit software services and pharmaceuticals companies, but mark-to-market (MTM) losses on hedging of export revenue and translation losses on foreign currency loans are likely to impact the net profit of these two sectors. While software services companies may post a marginal decline in margins, the fall for pharmaceutical firms is expected to be a sharp 435 bps.
Oil and gas suppliers such as Gail, Gujarat Gas and Petronet may report an average decline of 630 bps in their margins, while the banking sector may show a 400-bps fall due to the decline in treasury income. Auto ancillaries, automobile (commercial vehicle), shipping, media and telecom sectors are expected to post a margin decline of 200-250 bps each due to a rise in cost of production.
According to the analysts, metals (ferrous and non-ferrous) and realty firms are likely to post poor results due to the fall in realisations and decline in demand. In fact, ferrous and non-ferrous metal companies are likely to post a sharp decline in sales and profit during the quarter.
Operating margins of non-ferrous metal firms may decline sharply by over 1,500 bps, while steel companies may report a 1,000-bps fall. The drop in demand for houses and commercial space is likely to hit realty firms, which are expected to show 1,200-bps fall in margins.
The accounting policy for forex losses may be changed and companies have requested suspension of the requirement for recognition of such losses on MTM basis. If this exemption is granted, Tata Steel and JSW Steel may reverse their forex losses of Rs 770 crore and Rs 800 crore respectively reported in earlier quarters.
Aluminium, copper and zinc producers such as Hindalco, Hindustan Zinc and National Aluminium are expected to post a 37 per cent decline in net sales, while their net profit is likely to plunge by 66 per cent. On the other hand, integrated steel firms such as JSW Steel, Steel Authority of India (Sail) and Tata Steel are expected to post a modest decline in net sales, but the fall in their net profit is likely to be in the range of 25-70 per cent.
However, steel product makers such as Jindal Saw, Jindal Steel & Power, Maharashtra Seamless, Man Industries and Monnet Ispat are expected to show growth in sales and profit.
Pharmaceutical companies are expected to report a 14 per cent increase in net sales and 35 per cent decline in net profit due to a general slowdown in the domestic market and the high-base of the fourth quarter of 2007-08. A pharma analyst at Motilal Oswal Securities (MOSL) expects Dr Reddy's Laboratories and Ranbaxy to show net losses. Merrill Lynch Research too echoes the MOSL view and indicates a net loss for both the companies.
The operating profit margin (OPM) of the pharma sector is expected to shrink by 435 bps, largely driven by a reduction in the margin of Biocon, Glenmark Pharmaceuticals, Piramal Healthcare, Ranbaxy and Sun Pharma. Rising staff costs and forex losses on trade receivables may cause margin pressure on Cadila Healthcare and Torrent Pharmaceuticals.
Capital goods and engineering firms such as Bharat Heavy Electricals (Bhel), Crompton Greaves, Jaiprakash Associates and Larsen & Toubro (L&T) are expected to post over 20 per cent growth in sales. However, for other players such as ABB, Cummins India, Emco, Thermax and Voltamp, the growth is expected to be moderate due to lower order flows and execution road blocks.
According to an analyst at Sharekhan, one of the major concerns that have dragged the net sales of capital goods companies has been the slowdown in private capital expenditure and slower order inflows. While Bhel and L&T continued to report strong order inflows, the same for mid- and small-size companies was poor.
Coming to construction and infrastructure, these firms are expected to report a sales growth of over 27 per cent on the back of strong revenue growth from GMR Infra, IVRCL Infra, Lanco Infratech, Madhucon Projects, Patel Engineering and Simplex Infra. However, GVK Power and Unity Infra are expected to post slower growth.
Moreover, the net profit of the sector is likely to be unchanged for the quarter y-o-y due to a 50-bps decline in operating margin, led by higher cost of raw materials. The sector would have performed much better but for the margin pressure.
| ESTIMATED GROWTH IN Q4 REVENUE | |||
| Gainers | % chg* |
Losers | |
While GMR Infra, Madhucon, Pratibha Industries and Simplex Infra are likely to report rise in profits, Gammon India, IVRCL Infra, Nagarjuna Construction and Patel Engineering may see their profits fall.
| ESTIMATED GROWTH IN Q4 NET PROFIT | |||
|
Gainers | % chg* |
Losers | % chg* |
| Oil marketing | 455.52 | Realty | -80.11 |
| Two wheelers | 20.69 | Non Ferrous | -65.57 |
| IT | 11.16 | Steel | -53.99 |
| FMCG | 11.12 | Auto MCV-LCV | -52.22 |
| Power | 9.22 | Media | -33.58 |
| * % change over Q4 of 2007-08 | |||
According to the research analysts, oil marketing companies are likely to have a bumper quarter with no inventory losses and over-recoveries in auto-fuels. Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) are expected to show net profits in the range of Rs 2,000-4,000 crore, while Indian Oil Corporation (IOC) is likely to post a net profit between Rs 2,200 and 9,000 crore.
The fourth quarter witnessed a wide swing in crude oil prices from the lows of about $35 per barrel to a high of about $55 per barrel. However, the West Texas Intermediate (WTI) crude averaged at $43.2 per barrel during the quarter. Lower crude oil price environment is beneficial for domestic oil marketing firms as well as the government as under-recoveries go down with subsequent reduction in quantum of oil bonds.
The decline in crude oil prices from $120/bbl in the first half of 2008-09 to $45/bbl in the fourth quarter has significantly improved the working capital requirement of oil companies. That apart, oil bonds of Rs 16,100 crore, issued at the end of the third and fourth quarters, has also helped oil marketing firms tide over working capital requirements.
