BANKING
The performance of public and private sector banks is expected to be robust in the third quarter on the back of a 22 per cent growth in deposits and 26 per cent growth in loans. The net interest income is seen to grow 20-25 per cent and profit by 20-25 per cent. While all major banks are expected to post a double-digit growth in sales and profit, ICICI Bank may fare badly with a single-digit growth sales and a decline in profit.
Most banks have reduced their prime lending rates (PLR) by 125-150 basis points (75 basis points from January 1) due to the cut in benchmark rates by the Reserve Bank of India. But, banks have also reduced deposit rates by 125-150 basis points across maturities and inflicted loan re-pricing with immediate effect.
Since deposit re-pricing will only happen later, there will be some impact of the PLR cut. But, this impact will be mostly offset by the fact that the sharp cash reserve ratio cut of 350 basis points has increased earnings for banks.
Interestingly, the reversal in mark-to-market (MTM) provisions will ensure higher net profit growth for all banks expect for ICICI Bank. During the first quarter of the current financial year, banks had taken a heavy MTM hit on their investment portfolios due to the 75-125 basis points increase in yields on government securities across all maturities. However, in the third quarter, yields on the 10-year and one-year securities have fallen by 320-375 basis points. Thus, there will be MTM provision reversal and higher trading profits for all banks.
According to banking analysts at various broking houses, HDFC Bank is expected to report 25-40 per cent growth in interest income while the net profit is seen to rise by 30-40 per cent. ICICI Bank is set to have subdued growth in loans and its deposits are expected to decline by around 6 per cent due to the net repayment of bulk deposits in the quarter. The bank will report a 5-10 per cent growth in interest income while the net profit growth would be flat to negative.
| Sales* | OP* | NP* | |
| Motilal Oswal (15) | 25.90 | 22.30 | 21.90 |
| Merrill Lynch (15) | 24.20 | 27.70 | 29.40 |
| Sharekhan (12) | 23.00 | 10.50 | 29.20 |
| Edelweiss | 29.00 | - | 19.00 |
| Prabhudas (8) | 27.20 | 25.40 | 47.00 |
The country's second-largest lender Punjab National Bank (PNB) is likely to show strong loan and deposit growths while margins are to decline as compared to the sequential quarter due to sharp PLR cuts. Banking analysts expects PNB to report a 25-30 per cent rise in interest income and net profit. State Bank, the country's largest lender, is set to grow 25-30 per cent in revenue and net profit may grow 40-50 per cent.
TELECOM
Telecom companies are expected to show a robust 30 per cent-plus growth in revenue and a modest 10-15 per cent rise in net profit. While Bharti Airtel is likely to post a robust over 30 per cent rise in net profit, Reliance Communications (RCom) is expected to register a 10-15 per cent increase. However, Idea Cellular may play the spoilsport with a 30 per cent decline in net profit.
The sector’s top line growth is expected to remain strong in the region of 35 per cent on continued buoyancy in subscriber additions. However, the average revenue per user (ARPU) is likely to decline. The sales from other business segments namely enterprise, broadband and long distance are expected to remain strong. The impact of the rapid network rollout is likely to affect operating margins, which may decline by 250-300 basis points (bps).
While Idea’s net profit decline will be on account of operating losses in its newer circles, RCom will post a moderate growth due to lower margins on wireless segment and higher cost of borrowing. Bharti Airtel’s robust profit growth will be driven by a rise in operating margins and the absence of any significant MTM forex loss.
Bharti Airtel’s revenue is expected to grow by 35-40 per cent on a healthy mobile subscriber growth of 11 per cent. The operating margin is likely to remain stable over the sequential quarter, but the same will decline by over 150 bps year-on-year (y-o-y). The ARPU is expected to be around Rs 322 -- a decline of 3 per cent quarter-on-quarter (q-o-q).
Idea Cellular is to show revenue growth of over 50 per cent due to a 12 per cent rise in its subscriber base. For the company, ARPU is expected to decline by only 2 per cent q-o-q due to festive season benefits. The margin is likely to decline by 730 bps on account of expenses incurred on new launches. The net profit growth is expected to decline by 12-24 per cent due to higher interest and depreciation as well as Spice consolidation.
| Sales* | OP* | NP* | |
| Motilal Oswal (3) | 35.50 | 25.80 | 11.60 |
| Merrill Lynch | 29.30 | 24.90 | 18.90 |
| Edelweiss | 28.00 | - | 14.00 |
| Prabhudas (4) | 34.20 | - | -1.70 |
| Angel Broking | 34.50 | - | 15.10 |
RCom is expected to grow 20-24 per cent on strong wireless additions, though ARPU is expected to decline by around 3 per cent. The company’s operating margin is likely to decline by around 290 bps on account of aggressive network expansion. RCom may see a rise in cost of funds on its overseas borrowing. However, the company could continue to spring surprises by showing net interest income through treasury income.
FMCG
The FMCG universe — from personal care to cigarette to food products – is expected to show sales growth of around 20 per cent and profit growth of around 8-15 per cent. Companies driving the acceleration in sales are Hindustan Unilever (HUL) , Marico, Britannia, Nestle and ITC. The growth in profits would come from Colgate, Godrej Consumer, Hindustan Unilever and Nestle.
Accrual of benefits of softening of commodity prices would be partial in the third quarter as major consumers such as HUL and Godrej Industries had built their respective inventories at higher prices. FMCG analysts indicate that the benefit from crude oil-linked commodities such as palm oil and HDPE will flow in from the fourth quarter.
Margin pressure for FMCG firms using agro products is expected to continue as the price trend is unlikely to reverse in the near term. Prices of most of the commodities such as sugar, wheat, milk and copra have remained firm. Lower production of these commodities has contributed to rising prices. Wheat has ruled firm as it is linked to the minimum support price in the domestic market and not to global commodity prices.
Among FMCG companies, Asian Paints is expected to report net sales growth of 20 per cent and net profit growth of only 10 per cent on account of an 80-100 bps decline in operating margins. Britannia is likely to post net sales growth of 22 per cent and net profit growth of 10 per cent due to a decline in operating margins and higher rate of taxation. For the company, major inputs such as wheat and sugar, which together account for 43 per cent of sales, have remained firm.
Colgate is expected to report sales and profit growth of 15-16 per cent each. The company is set to report a 50 bps rise in margins due to lower packaging cost. Godrej Consumer is expected to register a net sales growth of around 20 per cent, while its profit growth is likely to be around 10-16 per cent.
| Sales* | OP* | NP* | |
| Motilal Oswal (12) | 19.60 | 15.00 | 12.90 |
| Merrill Lynch (5) | 19.70 | 18.50 | 12.80 |
| Sharekhan (8) | 15.40 | 5.00 | 8.00 |
| Edelweiss | 18.00 | - | 15.00 |
| Angel Broking (9) | 17.60 | - | 9.60 |
HUL may shine in the third quarter with a sales growth of 16-23 per cent, while the company’s net profit growth may be in the region of 10-15 per cent. ITC is expected to post a 20.20 per cent growth in revenue and a 150-200 bps decline in margins due to new launches. The company may post a moderate growth in cigarette sales. Also the decline in losses arising out of FMCG products is likely to aid the company’s profit growth.
PHARMA
Pharmaceutical companies are expected to show a revenue growth of around 20 per cent, driven by the performance of mid-cap generic and contract research manufacturing companies.
However, the expected growth is likely to be lower than what it was in the previous quarters. Multinational pharma companies are expected to report a single digit growth due to a decline in exports and lower sales in the domestic market for Aventis.
The rupee deprecation is likely to affect companies with foreign currency loans and FCCBs on their books. Ranbaxy, Wockhardt and Orchid Chemicals may be hit by translational losses due to FCCBs. Among the Indian companies, notable performance may come from Cadila Healthcare, Dr Reddy’s Laboratories and Sun Pharmaceuticals.
With most companies having hedged a large part of their outstanding receivables at around the Rs 41-42 level, the benefit of the weaker rupee would be only partial. Sun Pharma is likely to be the biggest beneficiary of the weaker rupee since it has not hedged at higher levels and relied more on the natural hedge mechanism.
Operating margins are expected to decline by around 200-400 basis points (bps) as Indian pharmaceutical companies, led by Glenmark and Ranbaxy, are likely to post a sharp fall. Multinational companies are expected to show some improvement in margins as Aventis and GSK Pharma are expected to register 50-150 bps rise in operating margins.
Among frontline pharma companies, Cipla is likely to grow by 17-23 per cent due to a strong 29 per cent rise in export sales. The mark-to-market (MTM) forex loss for forward contracts worth $400 million is expected to drive down the company’s net profit, which may either show a modest rise of around 9 per cent or a sharp decline of 29 per cent, according to pharma analysts.
Despite a favorable currency, Ranbaxy’s sales are expected to grow by around 10 per cent due to the ongoing US FDA ban on some products and forward covers taken in the past. The company’s margins are expected to decline sharply due to forex losses on hedged positions.
| Sales* | OP* | NP* | |
| Motilal Oswal (15) | 21.00 | 11.30 | 0.80 |
| Merrill Lynch (12) | 13.30 | 19.90 | 1.40 |
| Sharekhan (12) | 14.40 | - | -23.70 |
| Centrum Broking | 26.00 | - | -11.00 |
| Prabhudas (8) | 16.10 | - | 15.80 |
Sales of Sun Pharmaceuticals are likely to grow by 39 per cent, led mainly by its generic Protonix. However, the company’s margins are expected to decline mainly due to the high base of last year. But its net profit is likely to grow by 40-45 per cent on account of other income.
CEMENT
Cement consumption during the quarter ended December 2008 grew by a dismal 4.2 per cent due to the slowdown in housing and construction sectors. The consumption would have been much better but for the subdued growth in the northern (down 3.4 per cent) and western (down 3.6 per cent) regions. Southern and eastern regions continued to grow at 10 per cent, while the central region witnessed a recovery in demand with 11 per cent growth.
Cement companies added a capacity of 31 million tonnes in the last one year. So, the capacity utilisation in the third quarter declined to 85 per cent from 95 per cent in the corresponding period of the previous year.
Cement analysts expect the sector to show sales growth of around 3-6 per cent, driven by ACC, Ambuja Cement, Birla Corporation, Madras Cement and UltraTech. The net profit (of the industry) is expected to decline by around 20 per cent on account of poor shows by ACC, Grasim, Madras Cement and UltraTech.
Profit margins are expected to decline by 300-700 basis points (bps) despite an improvement in realisations by around Rs 206 a tonne, largely on account of a sharp increase in the cost of production. The rise in costs of energy and freight affected profitability in the last few quarters, but with prices of imported coal/pet coke declining by 60 per cent in the third quarter, the sector will reflect the benefits in the fourth quarter.
ACC is expected to post a single-digit growth due to the divestment of its ready-mix concrete (RMC) business. The firm’s operating margin is expected to decline by 190-270 bps on stable fixed costs. The higher tax provisioning could hit its net profit, which is expected to decline by 15-30 per cent. Ambuja Cement is to do better in terms of net profit despite a single-digit growth in net sales.
Grasim’s cement volumes are expected to grow by a meagre 2.4 per cent as the new capacity is not yet fully operational. The company’s cement realisations are likely to remain flat quarter-on-quarter (q-o-q), but may show a 7.2 per cent growth year-on-year (y-o-y). The cement division’s operating margins are expected to decline by 450-750 bps as the benefits of lower inputs costs would be realised in the fourth quarter.
| Sales* | OP* | NP* | |
| Motilal Oswal (7) | 6.60 | -19.50 | -19.50 |
| Merrill Lynch (5) | -0.80 | -17.60 | -11.00 |
| Sharekhan (6) | 6.90 | - | -23.50 |
| Edelweiss | 6.00 | - | -21.00 |
| Prabhudas (6) | 1.60 | - | 17.60 |
UltraTech Cement is expected to grow by 16 per cent on a 10 per cent rise in price realisations. The higher cost of production would adversely impact operating margins, which may decline by 600-1,000 bps. The higher depreciation and interest cost on account of new capacity may result in a 32 per cent decline in net profit.
AUTOMOBILE
Analysts at various broking houses expect automobile companies to post a 15-20 per cent decline in sales, while the fall in net profit could be 55-90 per cent in the quarter ended December 2008.
According to the auto analyst at Fortune Financial, the huge inventory pile-up has resulted in companies declaring plant shut-downs and, thus, a decline in production. The average inventory for commercial vehicles at dealers’ end rose to 90 days from 15-20 days earlier. For two-wheelers, inventory days went up to 75 days from 10-15 days earlier.
The analyst of Motilal Oswal Securities says that the benefit of low commodity prices will be noticed only from the fourth quarter onwards, while the excise duty cut may result in losses on inventories. As a result, margins are expected to decline by 344 basis points (bps) to 9.43 per cent. The net profit of Hero Honda is likely to fall by 4 per cent, while the same for the rest is expected to decline in the range of 55-90 per cent.
Bajaj Auto’s net sales are expected to decline by 21-26 per cent, while its operating margin may plunge by 200-900 bps due to higher cost of funds and raw materials. The company is expected to report a 20-40 per cent decline in net profit. Hero Honda likely to report 2-7 per cent increase in sales and a decline of 45-110 bps in operating margins. The net profit of the company may either rise by 9 per cent or see a 2 per cent decline.
Utility vehicle major Mahindra & Mahindra is likely to post a 17-20 per cent decline in net sales, while the higher raw material cost may result in a 280-500 bps fall in operating margins. The net profit of the company is expected to decline in the range of 40-55 per cent.
| Sales* | OP* | NP* | |
| Motilal Oswal (5) | -17.50 | -39.60 | -52.20 |
| Merrill Lynch (7) | -20.95 | -52.80 | -62.60 |
| Edelweiss (7) | -19.00 | - | -65.00 |
| Prabhudas (5) | 15.02 | - | -15.35 |
| Centrum Broking | -22.00 | - | -49.00 |
Car maker Maruti Suzuki’s sales are likely to decline by 8-11 per cent and its net profit may fall by around 55 per cent due to higher raw material prices and depreciation of the rupee against the yen.
Tata Motors will show a 30 per cent decline in sales due to lower sales of commercial vehicles and a fall in price realisation. The higher raw material costs and lower operating leverage may result in a 430-700 basis points decline in operating margins. The company’s net profit is expected to slide by 90 per cent.
