This could probably be the first quarter, where corporate performance will be under pressure from all sides. Sales growth is expected to be sluggish on account of the subdued volumes and lack of pricing power, whereas operating profits will be hit due to higher costs.
The rise in interest cost indicates that combined net profit of India Inc would be substantially hit. After many years in the history, combined revenues of the 30 Sensex companies for the quarter ended December 2008 (Q3) is expected to grow by just 4-5 per cent while net profits may fall by 3-6 per cent on a yea-on-year basis (y-o-y). In short, the pressure would largely be felt on account of weakening demand, high input costs and firm interest rates.
The biggest damage could be seen in the industrial or manufacturing sector including metals, cement, automobile and real estate. Besides domestic woes, the growth and profitability of many companies are dependent on the export markets, which have been under pressure on account of the global financial crisis.
Indian exports were down between 9-12 per cent in October and November 2008. Analysts, thus, expect sectors like textiles, IT, hotels and export-oriented companies to feel the heat on these counts. Positively, financial and banking, healthcare, telecom and to the some extent oil and gas, engineering and power utilities are likely to report decent numbers.
Going forward, the year 2009 is likely to see consolidation as factors, which caused the damage, are showing signs of receding. For instance, interest rates are on a downtrend and liquidity is improving, which are necessary to boost demand.
The falling commodity prices will also ease out worries on operating margins for user industries. However, these may take a few quarters to reflect in corporate performance. Read on to know how the top sectors, and within them the top companies, are expected to perform in Q3.
Auto
The auto sector is one of the worst affected in the current economic downturn with companies cutting back on production or closing plants. For Q3, while car sales barely moved up (1.8 per cent), two wheeler sales were down 10 per cent. While Hero Honda saw its sales drop 4 per cent, Maruti recorded a 14 per cent drop, Bajaj Auto (30 per cent), TVS Motors (10 per cent), M&M (25 per cent) and Tata Motors (32 per cent).
These numbers would have been much worse, but for the numbers on the export front–two wheeler and car sales were up 44 per cent and 96 per cent in Q3. The gloomy outlook in the domestic markets had its impact on margins (fell between 100-800 bps) as auto makers doled out higher discounts even as the cost of raw materials and higher inventory took their toll.
The biggest impact of the downturn has been the medium and heavy commercial vehicle (CV) segment with volumes for Q3 down 58 per cent y-o-y. Drop in freight rates is forcing truckers to delay purchases and cut costs to survive.
The situation is unlikely to improve in the short term for the two leading players, Tata Motors and Ashok Leyland, more so for the latter as it is operating only in the CV sector. While there are positives in the form of lower commodity prices and cut in excise duty, it is unlikely to bridge the gap created by falling demand and lack of credit. Not a sector you would put your money on for the near term.
Banking
Despite the slowing economic growth in Q3, business growth (deposits and advances) was 22.3 per cent. Even as credit growth slipped from its highs of 30 per cent in November, it was robust at 24.5 per cent. During Q3, RBI announced several measures including cuts in cash reserve ratio (CRR), repo and reverse repo rates (350 basis points (bps), 250 bps and 100 bps, respectively), paving the way for improved liquidity and lower interest rates.
In fact, the 10-year government bond yields came-off by over 320 bps, which will help banks deliver strong trading profits in Q3. The public sector banks (PSB) including SBI, BOB and UBI would benefit from this and a possible reversal in mark-to-market provisions on bonds (as bond prices have risen), leading to a jump in profits.
The cut in CRR would provide cushion to margins, as these funds would have been deployed at better rates for lending to corporates. Thus, NIMs are likely to remain stable, even as banks have cut their prime lending rates (PLR) ahead of cutting their deposit rates.
Profits growth would be robust on the back of strong loan growth and higher treasury gains. Although, banks have been cautious in their lending practices, expect provisions for loans to rise due to weak economic conditions. ICICI Bank’s profits are seen declining due to higher provisioning for loans and decline in fee income. Apart from PSBs, private banks like HDFC Bank and Axis Bank should report good numbers.
Cement
This sector is grappling with a situation of oversupply coupled with weak demand. While output grew by 7.6 per cent during Q3 to 44.1 million tonne (mt), consumption grew by 4.2 per cent to 41.4 mt due to the slowdown in housing and construction sectors. Shree Cement and UltraTech are expected to post better sales growth due to addition of new capacity.
However, flat cement prices versus 9-10 per cent rise in operating costs on a y-o-y basis, would drag profit margins. And, while imported coal prices have fallen by over 40 per cent during Q3, the benefits will reflect only from Q4. A sharp increase in interest and depreciation charges due to capacity expansion will also impact the bottom line of cement companies. Thus, net profit for the sector is expected to decline by an average 15 per cent y-o-y.
Going forward, the several steps taken by the government during Q3 (excise duty cut, higher infrastructure spending) have created a positive sentiment, but, the gains will be limited as, for instance, excise cut has been passed on to customers. Likewise, focus on low-cost housing and the easing of liquidity are long drawn processes.
Construction & Infrastructure
Despite strong estimated revenue growth of about 30-35 per cent in Q3, net profit growth in the construction sector will only be about 8-10 per cent. This is primarily on the back of higher cost of funds of about 13-14.5 per cent compared to 11-12 per cent earlier. Like in the case of Jaiprakash Associates, while revenue growth is expected to be 45 per cent in Q3, net profit growth is seen at just 9 per cent, thanks to an estimated 70 per cent increase in interest costs.
| SHRINKING PROFITABILITY | ||||||
| In Rs crore | Net Sales | Operating profit | Net profit | |||
| Q3FY09 | % Change | Q3FY09 | % Change | Q3FY09 | % Change | |
| BANKING | ||||||
| SBI | 8,555.00 | 23.00 | 4,501.00 | 23.00 | 2,599.00 | 43.70 |
| ICICI Bank | 4,312.00 | -1.70 | 2,365.00 | 4.70 | 1,069.00 | -13.10 |
| HDFC Bank | 2,719.00 | 28.50 | 1,358.00 | 27.30 | 590.00 | 37.30 |
| PNB | 2,327.00 | 22.00 | 1,238.00 | 24.90 | 673.00 | 24.20 |
| Bank of India | 2,028.00 | 24.10 | 1,266.00 | 30.30 | 709.00 | 38.40 |
| Axis Bank | 1,621.00 | 31.30 | 771.00 | 14.70 | 406.00 | 32.20 |
| IT | ||||||
| TCS | 7,492.00 | 7.70 | 1,949.00 | 7.10 | 1,438.00 | 14.00 |
| Wipro | 6,815.00 | 6.30 | 1,325.00 | 7.40 | 970.00 | 2.50 |
| Infoys | 5,743.00 | 6.00 | 1,864.00 | 3.90 | 1,497.00 | 4.50 |
| HCL Tech* | 2,531.00 | 6.80 | 570.00 | 7.20 | 377.00 | 12.20 |
| AUTO | ||||||
| Tata Motors | 5,329.00 | -26.50 | 441.00 | -46.20 | 210.00 | -57.90 |
| Maruti Suzuki # | 4,285.00 | -8.30 | 319.00 | -48.00 | 222.00 | -52.40 |
| Bajaj Auto # | 2,017.00 | -19.40 | 216.00 | -41.10 | 137.00 | -45.00 |
| Hero Honda # | 2,956.00 | 7.80 | 394.00 | 2.90 | 304.00 | 10.50 |
| M&M | 2,401.00 | -18.34 | 181.00 | -45.42 | 117.00 | -71.11 |
| CAPITAL GOODS & ENGINEERING | ||||||
| L&T | 8,052.00 | 26.20 | 923.00 | 26.00 | 565.00 | 16.20 |
| BHEL | 6,387.00 | 28.80 | 1,224.00 | 21.60 | 923.00 | 18.00 |
| Suzlon # | 4,283.00 | 35.10 | 558.00 | 35.90 | 246.00 | 25.30 |
| ABB | 2,113.00 | 14.90 | 276.00 | 3.30 | 186.00 | 2.80 |
| CEMENT | ||||||
| Grasim | 2,495.00 | -6.10 | 580.00 | -2.50 | 342.00 | -18.40 |
| ACC** | 1,905.00 | 6.20 | 382.00 | -7.20 | 241.00 | -4.70 |
| Ambuja** | 1,573.00 | 3.50 | 425.00 | -8.60 | 276.00 | 5.30 |
| Ultratech | 1,514.00 | 9.60 | 424.00 | -9.40 | 242.00 | -13.40 |
| Shree Cement | 611.00 | 9.40 | 202.00 | -4.20 | 110.00 | -4.30 |
| CONSTRUCTION | ||||||
| Jaiprakash Assoc | 1,306.00 | 45.10 | 334.00 | 49.80 | 135.00 | 9.20 |
| IVRCL Infra | 1,300.00 | 33.30 | 131.00 | 13.10 | 63.00 | 2.30 |
| HCC | 943.00 | 25.70 | 117.00 | 21.20 | 26.00 | 22.70 |
| Nagarjuna Cons. | 1,055.02 | 35.36 | 108.99 | 26.39 | 42.20 | 6.48 |
| # Consolidated figures, For IT,% Change is Q-o-Q, * year end is June, results are for Q2, * year end is December, thus Q4 results; For Banking, Net Sales= Total income & Operating profit=Gross Profit Source: Analyst reports | ||||||
Additionally, the construction sector's operating margins could come down by about 50-60 basis points on account of higher commodity prices. Going forward, investors need to watch order flow as Q3 was relatively subdued as companies were reluctant or selective while bidding for projects. Also, the impact of economic slowdown and election was seen on various segments.
| SHRINKING PROFITABILITY | ||||||
| In Rs crore | Net Sales | Operating profit | Net profit | |||
| Q3FY09 | % Change | Q3FY09 | % Change | Q3FY09 | % Change | |
| FMCG | ||||||
| Hindustan Unilever | 4,467.00 | 21.10 | 672.00 | 19.10 | 639.00 | 15.30 |
| ITC | 4,135.00 | 19.60 | 1,387.00 | 15.60 | 920.00 | 10.70 |
| Nestle | 1,099.00 | 22.70 | 186.00 | 18.20 | 113.00 | 20.80 |
| United Spirits | 1,074.00 | 20.80 | 210.00 | 22.60 | 107.00 | 21.40 |
| Colgate | 422.00 | 14.92 | 71.00 | 15.88 | 70.00 | 16.20 |
| Tata Tea | 1,284.00 | 8.36 | 211.00 | -13.83 | 97.00 | 4.44 |
| Dabur India | 756.00 | 16.32 | 116.00 | 12.90 | 104.00 | 10.12 |
| METALS | ||||||
| Tata Steel # | 31,638.00 | -3.30 | 1,812.00 | -54.00 | -243.00 | NA |
| SAIL | 9,563.00 | 0.30 | 1,245.00 | -58.40 | 820.00 | -57.70 |
| JSW Steel # | 2,967.00 | 9.20 | 564.00 | -25.50 | 152.00 | -56.90 |
| Sterlite Industries # | 4,220.00 | -19.40 | 1,139.00 | -27.50 | 823.00 | -3.80 |
| Hindalco | 3,825.00 | -15.60 | 560.00 | -30.00 | 354.00 | -34.80 |
| Nalco | 1,235.58 | 11.39 | 416.83 | -5.28 | 299.35 | -9.11 |
| OIL & GAS | ||||||
| IOC | 66,528.00 | 3.90 | (1,s419) | -147.80 | -1,978.00 | -194.60 |
| Reliance Industries | 31,3,99 | -9.20 | 4,667.00 | -20.00 | 3,394.00 | -12.60 |
| BPCL | 28,373.00 | -1.90 | 1,379.00 | 215.60 | 586.00 | 101.20 |
| ONGC | 14,959.00 | -1.10 | 7,158.00 | -10.90 | 3,561.00 | -12.30 |
| GAIL | 5,159.00 | 20.00 | 771.00 | -11.60 | 585.00 | -5.80 |
| PHARMA | ||||||
| Ranbaxy ** # | 1,956.00 | 9.60 | 186.00 | 16.20 | 67.00 | -64.10 |
| Dr Reddy's # | 1,561.00 | 23.30 | 186.00 | 34.80 | 81.00 | 29.60 |
| Sun Pharma # | 1,113.00 | 40.90 | 493.00 | 39.00 | 479.00 | 50.40 |
| POWER GENERATION | ||||||
| NTPC | 10,677.00 | 8.60 | 3,172.00 | 2.60 | 2,043.00 | 2.70 |
| Reliance Infra | 2,054.00 | 36.40 | 219.00 | 195.60 | 212.00 | 37.10 |
