| Poor show |
| SI Team / Mumbai April 13, 2009, 0:26 IST |
India Inc is likely to report its worst ever quarterly performance on the back of an economic slowdown, lower realisations and margin pressures.
The performance of India Inc for the three months ended March 2009 will be among the worst seen in many quarters. And, this is despite the steps undertaken by the government (stimulus packages) and RBI (monetary measures) over the last nine months. Going by estimates, the combined net profit of the 30-companies comprising the BSE Sensex is likely to decline between 9 and 15 per cent year-on-year (y-o-y), the worst in 15 quarters, which comes on the back of a 6 per cent y-o-y dip in profits reported for quarter ended December 2008 (Q3). Notably, combined sales are also estimated to decline, which if it happens, would be the first quarterly decline in the last 10 years.
On a broader level, barring 3-4 sectors, most others are expected to report a decline in operating profit margins, which along with a faster rise in interest expenses (and decline in other income) will mean a decline or at best, single-digit growth in profits. Nonetheless, the expectations are not surprising given that the country is emerging out of a crisis-like situation experienced in Q3. Thus, it is not surprising that many companies are expected to be better in Q4 compared to Q3.
The key highlights for Q4 are sectors like real estate, metals, oil and gas, and banking. The fall in realisations, particularly in metals, oil and gas, and real-estate, are key reasons for the expected dip in combined sales for India Inc. Likewise, receipts of oil bonds by oil marketing companies (OMCs) will mean a phenomenal growth in profits for the sector, even as Reliance Industries is expected to report a marginal decline in profits. This would help offset the significant decline in profitability of the metal sector. The banking and FMCG sectors are also expected to report a double-digit growth in profits helped by decent pricing power (and volume growth for the former). Notably, within individual sectors, expect performance to be divergent. For more, read on.
Auto
After witnessing a declining trend, auto volumes spurted in the March quarter. On a quarter-on-quarter (q-o-q) basis, two wheelers were up 15 per cent, passenger vehicles grew 41 per cent while commercial vehicles (CV) sales, too, showed positive signs with a growth of 26 per cent. With the exception of Bajaj Auto, whose volumes declined about 11 per cent, auto majors recorded increases by 16 per cent or more. The increase in sales were aided by duty cuts, drop in prices of fuel, spending by government employees, strong growth in farm income and new product launches.
While the volume growth in two wheelers is attributed to higher rural incomes and cash purchases, passenger vehicle sales were up on pent-up demand, lower interest rates and availability of finance. Though CV sales were up, lower freight rates and lack of finance options continue to be a major overhang for this segment. Operating margins of companies are expected to improve (by about 200 bps) on the back of lower commodity prices (steel and aluminium) in Q4. For the quarter, while Hero Honda is expected to post the highest y-o-y increase in profits, for Tata Motors and M&M earnings are likely to be dented by forex losses on foreign loans.
Banking
In spite of better liquidity conditions, the after-effects of a slowing economy and cautious lending practices of banks have led to lower credit growth of 17.3 per cent as of end-March from 24 per cent in Q3. A higher deposit growth and drop in lending rates will mean that most banks will report negative q-o-q growth in net interest income (NII).
However, on a y-o-y basis, margins should remain stable or improve leading to strong NII growth. Nevertheless, expect ICICI Bank's NII y-o-y de-growth to be higher than q-o-q (at 1.5 per cent), due to the bank consciously curtailing its loan disbursals.
Trading profits should also be strong (but, lower than Q3 due to higher bond yields resulting in mark-to-market losses) due to active portfolio churning. Lower exposure to available-for-sale bond portfolios will ensure that private sector banks like HDFC Bank are less vulnerable than public sector banks (marginal decline in net profit q-o-q).
Led by robust profits (NII plus trading profits), banks however may chose to continue making higher provision for NPAs even as RBI has allowed banks to delay NPA recognition till December 2009. However, the recent norm regarding the treatment of floating provisions could also put an upward pressure on net NPAs in Q4. Expect banks like UBI, PNB to report higher net NPAs. Presence of higher liquidity and higher cuts in PLRs (around 200 bps) as compared to deposit rates (150-200 bps) across maturities in H2 FY09 will put pressure on the margins, going ahead. However, decline in bulk deposit rates, earlier cuts of SLR and CRR bring relief to margins.(Click for table)
Capital goods & Engineering
The slowdown in industrial activity (including project delays) is clearly reflecting in the declining IIP numbers, which are down for some time. Thus, companies with higher exposure to industrials, especially sectors like metal, oil and gas and textiles, might report shrinking order books. However, companies having exposure to government-sponsored projects and power sector could show stable or marginal growth in orders.
On a y-o-y basis, the impact of higher employee and interest costs, forex losses, inventory losses and issues of working capital management will lead to lower margins. However, on a q-o-q basis, some margin stability is expected, given soft commodity prices and lower interest rates.
Among large players, L&T generates about 42 per cent of its revenues from the industrial segment, primarily hydrocarbons. Thus, its order book is expected to grow at a slower pace. Also, despite healthy revenue growth, net profit growth could come down due to higher interest and depreciation cost.
ABB has high exposure to industrials, and hence, is expected to report a marginal revenue growth of 7.5 per cent. This is also on account of the 37 per cent decline in its order book in Q3. Net profit in Q4 is expected to dip due to lower realisations and working capital pressure.
BHEL is expected to report good growth in revenues but, lower growth in net profit due to higher wage provisions (about Rs 470 crore) and high inventory cost or losses. However, on q-o-q basis, revenue and net profits are expected to be significantly higher, on the back of strong order book (Rs 1,13,500 crore as of December 2008), lower commodity prices and measures taken to control costs.
Construction
Led by a strong order book, companies are likely to show reasonable growth in Q4. However, the challenge for most of them will be to grow net profits, thanks to higher interest cost as a result of high leveraging (debts) and extended working capital needs. But, of late as these issues (working capital, raw material and interest rates) have eased, companies should report better margins and profit growth on q-o-q basis.
IVRCL Infra will report reasonable y-o-y growth in revenue but higher input costs coupled with doubling of interest expenses (to Rs 419 crore) will lead to lower net profits. However, on q-o-q numbers should be better due to lower working capital, commodity prices and interest rates.
Higher interest cost will also impact companies like Nagarjuna Construction and HCC. For Nagarjuna, sales should grow by 11 per cent, whereas net profit growth is seen lower due to nearly tripling of interest outgo. In HCC's case, interest costs are likely to jump 55 per cent y-o-y to Rs 694 crore in Q4, and restrict net profit growth. Jaiprakash Associate's higher revenue growth of 22 per cent is largely due to increased contribution of its construction business (Yamuna Expressway), but profit growth is likely to be muted on account of concerns over cement and real estate businesses.
FMCG
Among the few bright spots, many FMCG companies are seen reporting double-digit growth in sales, better profit margins and faster net profit growth. The excise duty cut (4 per cent in Q3 and 2 per cent in February 2009) should benefit somewhat (1-2 per cent) as many companies operate from excise-free zones, while some products already attract specific rates or are out of the excise net. A boost from soft commodity prices is also seen, although some gains will be offset in case of crude oil-linked inputs due to the rupee's depreciation. Also, sugar, wheat and tea prices too, are up. Earlier, companies had resorted to price hikes to offset the cost pressures, which may result in slower volume growth in Q4—only recently, they have responded through price cuts, increasing gram-age, offering freebies, etc.
ITC's cigarette volumes are seen declining by just 2-3 per cent, due to discontinuation of non-filter cigarette sales. But, judicious price hikes and higher conversions (to filter cigarettes) should help improve margins. While losses in personal care and foods should continue, sales growth is expected to be strong. And, lower energy costs and backward integration in paper business should improve margins. But, hotels business is like to offset some gains.
Aggressive price hikes in 2008 (in soaps and detergents) is expected to result in subdued volume growth for HUL, and restrict topline growth to 11-13 per cent (15-23 per cent in previous five quarters). Personal care business should sustain healthy performance. Lower input prices should prop up overall margins, which along with fall in net interest expenses should propel profit growth.
Nestle is seen gaining from brisk sales of culinary, noodles and milk products. But, high sugar and wheat prices may put some pressure on margins. For Dabur, robust hair care business is seen driving volume growth, while decline in packaging costs and input prices should support margins. For Colgate, strong rural sales and lower packaging costs are seen driving overall growth in Q4.
Information Technology
Recessionary trends in the US and Europe are weighing on IT spends, which in turn have impacted demand; IT service budgets are expected to decline by 8-15 per cent in CY09. Volumes have already been marred by project cancellations and delays. Additionally, a negation of pricing power will ensure pressure on revenue growth in Q4. From the highs in Q2, revenue growth (in rupee terms) for the three IT bellwethers has declined to 4.4 per cent q-o-q in Q3 and is expected to slide further in Q4.
Infosys and Wipro are likely to report negative growth q-o-q. However, due to the Axon acquisition, HCL Tech should deliver around 15 per cent revenue growth. Partially, a rupee depreciation of 2 per cent q-o-q is a positive, but the impact will not be as pronounced as it was in Q3. Nonetheless, cross-currency head winds with dollar appreciating against euro and British pound could negate those positives.
The pricing pressure and lower utilisations on the back of employee additions by TCS and Infosys would put pressure on the EBITDA front. However, reductions in sales and operational costs are positives for margins. On the forex losses front, Infosys with lower hedging exposure will be less affected compared to TCS and HCL Tech. Nevertheless, Infosys as well as others are expected to experience a decline net profit on q-o-q basis.
Metals
A recovery in demand for long and flat products (construction, auto and consumer goods sectors) and de-stocking by players in Q3, should lead to a volume growth of 35-45 percent q-o-q, with significant gains for integrated players. Also, iron ore and coking coal prices as also, freight rates are down, which suggests gains for SAIL and JSW Steel, as they outsource a large quantity of such inputs. However, for the sector, realisations are lower on q-o-q and y-o-y basis.
For SAIL, analysts expect a q-o-q volume growth of 30-40 per cent, leading to higher revenues and net profit. But, lower steel prices and higher input costs should lead a decline in margins on y-o-y basis.
Despite higher volumes, JSW Steel and Tata Steel (both on a consolidated basis) are expected to post losses. Tata Steel's EBIDTA could fall due to its international business (Corus), which accounts for 75-80 per cent of revenues-- primarily due to lower volumes and realisations, and inventory losses.
JSW Steel could report a net loss on y-o-y basis due to a 20 per cent drop in realisations. JSW is renegotiating coking coal contracts at lower prices, but high cost inventory is a concern. Also, gains in the domestic market may be negated by poor performance of its US pipe and mill operation.
In the non-ferrous space, the 50 per cent correction in aluminium prices is expected to impact margins of Hindalco and Sterlite Industries. Sterlite, which also has other business like copper and zinc, will be impacted due to lower LME prices of these commodities.
Oil & Gas
On a q-o-q basis, most companies should report better profitability. In Q3, gross refining margins (GRMs), crude oil prices and petchem margins had slumped to their respective lows. The Singapore-GRMs averaged $3.6 per barrel in Q3, while it was $5.4 in Q4; crude oil prices dipped to about $35 and are now around $50. Although the two were also lower on a y-o-y basis, a 22 per cent fall in the value of rupee is seen helping companies.
For oil marketing companies (OMCs) like IOC, BPCL and HPCL, absence of inventory losses, lower crude oil prices and higher realisations (profit) in petrol and diesel should offset the losses in kerosene and LPG in Q4 vis-à-vis Q3. Analysts also expect the government to issue oil bonds worth Rs 14,000-18,000 crore in Q4, which are crucial for OMCs to report a profit in FY09. On a y-o-y basis, better realisations (fuel) are seen helping OMCs post a significant improvement in performance.
| SECTOR OUTLOOK | |||
| Sector / (No of cos) | % y-o-y change in ** | ||
| Sales | EBIDTA | PAT | |
| Auto (5) | -4.5 | -24.8 | -38.7 |
| Banks (17) | 20.2 | 12.3 | 15.9 |
| Cement (7) | 6.4 | -3.7 | -4.1 |
| Engineering (9) | 15.2 | 19.6 | 5.6 |
| FMCG (12) | 14.9 | 12.7 | 11.7 |
| IT (7) | 23.8 | 23.8 | 8.2 |
| Infrastructure (5) | 19.7 | 13.7 | -8.8 |
| Media (6) | 1.1 | -20.4 | -6.9 |
| Metals (8) | -20.1 | -74.9 | -90.6 |
