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While growth signs are visible in the economy, robust earnings growth across sectors is a couple of quarters away - Industry to grow at 7% plus in Aug, near 9% in Oct: IEG - Mahesh Vyas: India drives along the recovery autobahn">Mahesh Vyas: India drives along the recovery autobahn - April-Aug excise kitty down 25% - Green shoots evident, but worries remain - Markets at a glance - Reassuring numbers The results in the September 2009 quarter are likely to confirm the trend of gradual recovery from last year’s December quarter lows. Despite concerns over the scant rainfall, inflation and weak fiscal situation of the government, successive quarters of robust GDP growth (6.1 per cent in June quarter) and strong IIP numbers (6.8 per cent in July) have a created a base which could lead to an increased demand for goods and services. While some of this growth is already reflected in the spurt in cement dispatch numbers, steady rise in auto sales volumes and order book size of power equipment makers, it will take a couple of more quarters for this to be reflected in the earnings growth of laggards for the September quarter such as realty. While the improvement in overall earnings growth in the September quarter is unlikely to be as sharp y-o-y as that experienced in the June quarter, the sequential increase is estimated in the range of 0-5 per cent. The continuing trend of sequential growth is the result of a pickup in demand over the last six months. Says Hitesh Agrawal, head research, Angel Broking, “Stable economic conditions is a reflection of the improvement in consumer sentiment, availability of credit and most importantly stimulus measures that cushioned the fall in demand and helped boost sales volumes. Operational efficiencies and lower interest costs helped improve earnings growth.” While sequential earnings growth is flat to positive, profitability hinges on the oil and gas sector as far as y-o-y growth in concerned. While the September quarter preview of Motilal Oswal Securities indicates that if expected earnings of oil refining and marketing companies are removed, profit growth would have slid into the negative at -12.4 per cent for their universe of 117 companies, thanks to a poor performance by metals sector. With regards Sensex, while the combined profit growth of the 30-companies is expected to be largely flat, the combined EPS are expected to decline by 5-10 per cent. This is because some companies had raised funds through the equity route, leading to a dilution in their respective equity capital. The biggest gainers in the quarter on a y-o-y basis both in terms of sales and net profit growth on the back of high volumes, improved order book and efficiency gains are the auto, infrastructure, FMCG and cement sectors. The losers of the pack are metals, realty and engineering. On a q-o-q basis, however, metals and engineering firms are expected to post strong growth numbers on the back of demand recovery and order books. While the markets have already given thumbs up to the recovery with the Sensex moving over 76 per cent since the start of 2009, will earnings play catch up? The other question is, while the recovery has hardly been dramatic, are valuations expensive? After recent upgrades, some as high as 25 per cent if we are to look at an 2010-11 EPS of between Rs 1,050-1,100, the Sensex is trading at 15-15.7 times, which however is fairly priced. Compared with other emerging economies, Indian markets are, however, trading at premium valuations. Read on to know more on how the individual sectors and within them the top companies are expected to fare. AUTO: Higher sales in September across categories have confirmed the trend of rising demand on the back of improving business climate. While passenger cars and two wheeler sales continue to impress (up 10.2 per cent and 7 per cent, respectively) CV sales too are looking good, though the growth at 0.5 per cent in September is marginal. The improved business outlook has helped the BSE Auto index outperform the Sensex spurting over 89 per cent to the latter’s 75 per cent in the last one year. Going ahead easier credit norms, and a low base will ensure strong y-o-y growth for most companies. While revenues for the quarter should see a boost due to higher volumes, cost efficiency and lower commodity prices should help improve profitability. Despite concerns on the monsoon front, strong rural demand continues to boost the fortunes of companies such as Maruti Suzuki and especially Hero Honda. BANKING: A slower credit pick-up has ensured that loan growth decelerated during the quarter; credit growth stands at 13.4 per cent as on September 11, 2009. Nevertheless, banks have observed a pick-up in housing and vehicle loans. Coming off a high base, net interest income growth should be muted for banks like SBI and ICICI Bank. With other investment avenues becoming attractive, deposits have moderated to around 20 per cent from 22 per cent in Q1 2009-10. With lending rates stable during Q2 2009-10, and a decline of about 50 basis points in deposit rates during the quarter, NIMs should see a stabilisation with an upward bias. In Q1 2009-10, restructured assets were 2.5-5 per cent of the total loans of large state-owned banks and analysts expect that PSU banks have completed a large part of loan restructuring and significant negative surprises are not expected in Q2. However, private banks like ICICI Bank could report additions to the restructured loans pool in this quarter. As G-sec yields rose 5-50 bps across maturities, treasury gains are not expected to be as hefty as there were in Q1 FY10. Consequently, PSU banks like PNB would see lower profit growth of around 15 per cent in Q2 compared to over 60 per cent in Q1. AUTO, CEMENT SHINE Quarter ending September 2009 Sales Net profit % change y-o-y q-o-q y-o-y q-o-q Auto -(5) 25.8 13.0 73.4 20.9 Banks-(18) 4.6 6.2 8.3 -0.2 Cement-(7) 14.9 -6.0 46.2 -9.9 Engineering-(8) -0.6 17.6 -16.7 41.0 FMCG-(12) 12.9 3.9 18.0 1.3 IT-(7) 6.7 2.9 12.7 -0.8 Infrastructure-(5) 25.3 2.1 12.2 7.7 Media-(6) 1.7 3.4 15.0 -11.5 Metals-(8) -29.1 14.2 -61.1 206.9 Oil Gas & Petchem-(10) -14.9 18.4 LP -5.2 Pharma-(13) 4.9 5.1 10.5 11.2 MOSL(120)* -8.5 12.2 26.0 3.9 Excl. Banks-(102) -9.1 12.6 31.0 4.9 Excl. Metals -(112) -4.8 12.0 62.0 -2.5 Excl.RMs-(117) -3.5 10.0 -12.4 5.3 Excl. Metals and RMs-(109) 3.9 9.2 1.6 -1.8 Excl Oil & Metals -(102) 9.4 5.7 4.3 -1.4 Sensex-(30) -3.1 10.0 -16.5 5.9 Sensex Excl. Metals -(27) 7.8 9.1 0.5 -0.6 * Tata Steel Consolidated, LP= Loss to profit, Figures in bracket indicate no of companies Source: MOSL CEMENT: New capacities going on stream and late onset of monsoons helped push volumes across the board. For example, both Grasim and UltraTech operated at higher capacities. Grasim is thus, expected to report the highest growth in despatches at 27 per cent. A pick up in housing in rural and semi-urban areas as well as thrust on infrastructure has helped the cement industry report higher despatch volumes by around 12-13 per cent y-o-y in Q2. The revenue growth for the top companies should hover 14-17 per cent, with the help of better pricing, which is up 5.5 per cent y-o-y on an average. The new supplies however, have dampened prices in the South and West recently. Central and Western regaions had seen a sharp price rise of 15 per cent and 10 per cent, respectively. Going ahead, North and Central India focussed companies would score over others, owing to higher volume growth and stable realisations CAPITAL GOODS & ENGG : The power sector is currently acting as a cushion to the Indian engineering companies as industrial capex is yet to show revival for new orders. Announcement of new power projects led to higher demand for power equipments from utility companies, including from the T&D space by Power Grid and others. Thus, helping the equipment makers, which have large exposure to power sector, such as BHEL, Crompton Greaves, Kalpataru Power and others to show better growth in order inflow. Besides volumes, analysts also expect the operating margins to improve given the lower metal prices and positive effect of easing high cost inventory. The benefit of lower commodity prices will be higher for companies like BHEL, Crompton Greaves and ABB. Also, the availability of funds and lower interest rates will benefit these companies as they require longer working capital. Among companies, BHEL has the highest visibility in the terms of order book and it is expected to report 170-200 basis improvement in margins given the easing high cost of raw material inventory. Others like L&T also benefitted on account of higher spend in the power sector and orders from the hydrocarbon sector. The company is expected to report strong growth in revenue and net profits. CONSTRUCTION & INFRA: Infrat-ructure companies continue to grow as result of a strong order book. The benefits of lower commodity prices and higher availability of funds will reflect in this quarter. Also, lower interest rates and marginal reduction in working capital should augur well for earnings of the companies. Companies like Punj Lloyd, HCC, Nagarjuna Construction were among the few who raised funds through the QIP route. Post the elections and the stimulus package announced by the government, the infrastructure companies have been able to improve their order book intake, which had slipped in 2008-09. Projects from road, urban infrastructure, power (hydro) and irrigation witnessed high activity. The largest number of orders were awarded from the road sector as a result of which the companies like IRB Infra, HCC, GMR and others benefited. The companies are expected to show decent growth in revenue followed by higher margins resulting in strong growth in net profits. GMR could report strong revenuePages: [1] 2 3