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Home > Business > Special


Q1 results may be a mixed bag

The Smart Investor Team | July 10, 2006

The first quarter of FY07 has come to an end, just as the south west monsoon has made its presence felt (rather harshly at some places).

Over the next few weeks, June quarter (Q1) results for FY07 will pour in. Performance in this quarter assumes greater significance given the volatility we have seen over the past months.

If good, the results give a chance to the companies to prove that their stocks were worth it, after all.

The Smart Investor team went ahead and gathered opinions of several market pundits to curb the anxiety of our readers to an extent.

Read on to see whether your expectations match those of the experts and if your favourites are on their list too. It seems one can expect a pleasant drizzle and not a torrential downpour that takes everything down the drain.

Analysts are expecting Sensex earnings to grow around 30 per cent y-o-y. While they are concerned about issues like declining liquidity and rising interest rates, they reiterate that the long-term fundamentals are sound.

And with the recent correction the risk-reward equation has only turned favourable. While most of the sectors are expected to report good numbers, pharma and banking are expected to post a dismal performance.

Auto

The Indian auto majors are expected to start FY07 at a breakneck speed with strong topline growth followed by soaring volumes of vehicles in Q1 FY07. All the major segments, viz. passenger cars, commercial vehicles (especially LCVs) and two wheelers, reported double digit growth rates in volumes.

However operating margins are expected to remain subdued due to input cost pressures. According to an analyst from Brics PCG, " Bajaj Auto and Tata Motors are the best picks to cash in on the boom in the auto sector."

Bajaj Auto is not only expected to gain from robust revenue growth due to higher volumes, but its margins are also expected to be protected due to better product mix and dominance in the higher end premium segments.

Further it also enjoys huge value in its fast growing subsidiary businesses like auto finance and insurance. So although the risk is low, returns are still going to be intact.

According to Motilal Oswal estimates, total volumes and sales are likely to grow by 29 per cent and 34 per cent in Q1 FY07, led by the improved product mix. Net profit is expected to grow by 47 per cent at Rs 310 crore (Rs 3.1 billion).

Tata Motors is going to benefit from its robustly growing CV business. The analyst from Brics expects the company to report over 45 per cent growth rate in revenues.

Further its subsidiary businesses like construction equipment, telecom and auto components are doing well. Margins are also expected to be sustained as the company is able to pass on the costs to its customers.

Rising income levels and cut in the excise duty of small cars bode well for Maruti Udyog due to its dominance in the small and compact car segment. Rising fuel prices and interest rates remain a key concern for any impact in demand.

In Q1 FY07, both volumes and sales are expected to grow at around 20 per cent y-o-y. Net profit is also expected to grow at 35 per cent to Rs 300 crore (Rs 3 billion).

Mahindra and Mahindra is expected to benefit from increased farm credit offtake, focus on agri-driven growth and normal monsoons leading to higher demand for tractors.

Thus, it is expected to report volume growth of 13 to 15 per cent and net sales are expected to grow by a similar amount to Rs 2,030 crore (Rs 20.3 billion). Net profit at Rs 160 crore (Rs 1.6 billion) is expected to grow by half as much due to margin pressures.

Banking

Both, deposits and advances continued to grow at double-digit rates this quarter and many banks hiked their lending rates (100-200 bps in last 6 months) followed by deposit rates in Q4 FY06.

Yet the banking sector is expected to disappoint investors due to major hits on the bond portfolio leading to higher provisioning and low margins. The 10-year government bond yield has spiked to eight per cent. This may not augur well for banks like SBI, PNB and Canara Bank since they still hold a major part of their investment portfolio in available for sale category.

For instance, SBI is expected to report a decline of over 20 per cent in net profit in Net Interest Income and higher provisioning requirements. However, most of the large private banks like ICICI Bank, HDFC Bank and UTI Bank are insulated from rising bond yields.

According to Motilal Oswal and SSKI Securities, ICICI Bank is the most preferred pick. The bank has raised its lending rates four times in last six months by a total of 225 bps.

Analysts expect the bank to report NII growth of around 30 per cent on the back of strong demand for retail credit. However, margins are likely to be lower as compared to Q4 FY06. Fee income is likely to witness strong growth of over 35 per cent. Net profits are also expected to increase by about 11 per cent.

"Bank of India and Indian Overseas Bank also look attractive as they are well protected in the rising interest rate scenario with over 75 per cent of their investments in held to maturity category," says Rajesh Malhani from Prabhudas Liladhar.

Core industries

Cement

The June quarter is expected to be one of the best quarters in recent times for the cement sector. The performance of cement companies has been good in the quarter and would get reflected in the quarterly results.

Cement despatches in April-May were up 6.3 per cent y-o-y, so was cement production. Earnings are expected to grow at 50-100 per cent y-o-y. Realisation growth has occurred from March 2006 for most companies. Moreover, ACC would get the additional benefit of extra income due to the sale of land.

Brics PCG business head, Amitabh Chakraborty says, "We expect very strong quarterly numbers for the sector, largely on the back of increased construction and housing across India. Cement prices have been better (20 per cent growth) due to the demand-supply mismatch."

Analysts expect over 20 per cent topline growth for the sector and about 60 per cent bottomline growth (before extra-ordinary income).

ACC is expected to post about 20 per cent topline growth and 90 per cent bottomline growth, Gujarat Ambuja: about 35 per cent and 80 per cent, Grasim: about 14 per cent and 20 per cent and UltraTech: about 35 per cent and 100 per cent.

Engineering and capital goods

Increasing investments, thrust on accelerated infrastructure development and continuation of power reforms are the key domestic demand drivers. Robust order backlogs and strong order booking during the quarter for Bhel, L&T, Thermax and power equipment companies, indicate good revenues and substantial growth during the quarter.

Operating margins are likely to improve on y-o-y basis, as operating leverage plays out. Equipment companies will report 26 per cent and 31 per cent y-o-y growth in revenues and earnings respectively, according to a SSKI Securities report.

Top picks of Motilal Oswal Securities are Bhel, L&T and Crompton Greaves. Analysts expect Bhel to post 35 per cent topline growth and 41 per cent profit growth, L&T: 22 per cent and 55 per cent and ABB: 38 per cent and 40 per cent.

Infrastructure

Infrastructure companies are expected to register strong momentum in order intake.

Most analysts expect leading companies in the sector to report 35 per cent topline growth in the June quarter and average operating margins to stabilise at around 9-10 per cent.

However companies may experience only moderate margin expansion due to significant price increases in steel, bitumen and copper in the past months.

SSKI Securities however is more conservative in its estimates: it expects quarter's revenues and earnings to grow at 21 per cent and 31 per cent respectively. IVRCL Infra and Nagarjuna Constructions are likely to come out with robust growth numbers this quarter.

SSKI's top picks are Jaiprakash Associates and Gammon India. The consensus amongst analysts is that Jaiprakash Associates would post 21 per cent topline growth. Hindustan Construction is expected to show a topline growth of 45 per cent and profit growth of 75 per cent, and Gammon India: 45 per cent and 60 per cent.

Metals

High demand, raw material shortage and low inventory levels led to a strong bull run in all the major metals, especially non-ferrous metals like aluminium, zinc and copper.

All of them touched record high levels in May, though they have corrected significantly since then. However they are still higher by over 50 per cent on y-o-y basis. Even steel prices recovered on account of strong growth in consumption.

Sterlite Industries is the best pick among the non-ferrous metals space, thanks to the value embedded in its subsidiaries.

According to Ajit Dange, analyst from UTI Securities, "Since the company has major stakes in its subsidiaries like Hindustan Zinc (65 per cent) and Balco (over 50 per cent), it's a good buy. It is cheaper to buy one share of the company since half a share of Hindustan Zinc comes free with it."

According to SSKI estimates, the company's net sales are expected to grow 192 per cent to Rs 5465 crore (Rs 54.65 billion) and profits are expected to grow 388 per cent to Rs 800 crore (Rs 8 billion).

Being the only Indian zinc player, Hindustan Zinc is expected to witness improved profitability led by robust volume growth. According to SSKI estimates, the company's net sales are expected to triple to Rs 2206 crore (Rs 22.06 billion) and profits are expected to grow six fold to Rs 1101 crore (Rs 11.01 billion).

In a situation of high input costs (iron ore prices), integrated players having huge capacities and diverse product portfolio like Tata Steel and Sail are expected to be the safest bets.

Analysts expect Tata Steel to witness a revenue growth of 15.7 per cent, although profit is expected to decline marginally by four per cent. Similarly the figures for Sail would be 32 per cent and 6 per cent respectively.

Oil and gas

Oil marketing companies, viz. BPCL, HPCL and IOC, have remained significant underperformers in the sector (48-60 per cent underperformance over last 12 months), thanks to the sticky fuel pricing regime and strong international crude prices.

However, it seems all the bad news is already in the price and news flow from here on is likely to be positive. Most of the analysts say that the results of the oil marketing companies (IOC, HPCL and BPCL) depend on the Rs 7000 crore (Rs 70 billion) oil bonds.

Oil marketing companies are likely to do better as compared to the last quarter due to three reasons. First is the hike of Rs 4 in the price of petrol and Rs 2 in the price of diesel, last month.

Second is reduction in custom duty on motor spirit and HSD (high speed diesel) from 10 per cent to 7.5 per cent in the last month. Third, the government is likely to further issue oil bonds due to which the subsidy burden will reduce.

Jaspreet Singh, oil & gas analyst at Prabhudas Lilladhar, says, "Due to high crude prices ONGC is expected to show a 20 per cent growth." However some analyst say that due to high subsidy burden ONGC and Gail will not show significant growth. They expect good results for IPCL, due to increase in polymer prices.

According to Motilal Oswal, Reliance Industries is expected to post a net profit of Rs 2320 crore, flat y-o-y, despite strong Singapore refining margins, on account of fuel retailing losses, refinery product price discount and some weakness in key petrochemical products.

FMCG

Buoyant economy, rural as well as urban demand and return of the pricing power augur well for the sector. FMCG sector is set to report about 20 per cent revenue growth.

"The growth would be on the back of uptrading in the domestic FMCG space, momentum in the rural offtake and acquisitions by companies," says Nikhil Vora from SSKI Securities.

"Although the volume growth for the sector is expected to be just around eight per cent, growth will come from individual categories which will grow at a faster rate than the industry. For instance, home care is expected to grow at about 18-20 per cent," says Janish Shah, head-research at Networth Stock Broking.

Even though raw material prices have gone up, especially of crude-based materials and agri-commodities, margins have not been impacted due to the selective price hikes companies have gone for.

Analysts expect operating margins to improve by 100-150 bps.

Vora's top picks are ITC, Godrej Consumer Products, Tata Tea and Nestle. While ITC is likely to witness a 32 per y-o-y growth in sales, its profits will be up by 21.4 per cent.

But Shah is expecting a 300 bps slump in the margins of ITC as he feels that the company may not be able to reap the same benefits from agri business as it did last year.

GCPL is expected to post a robust topline growth of 45 per cent, which will result in a bottomline growth of 41.5 per cent. Strong volume growth in personal products and price hikes will help HLL to post a 15 per cent revenue growth.

Pharma

The pharma sector is also expected to churn out a decent set of numbers, overall. In case of Dr Reddy's, it is the acquisitions that will boost the results, while Cipla is also expected to post good numbers.

However, according to Sarabjit Kaur of Angel Broking, "Ranbaxy may not post good results as it will not get the benefit of new product launches in this quarter. However, this would be perhaps the last bad quarter for the company."

Multi-national pharma companies may see a lacklustre quarter Chakraborty expects the overall results for the sector to be muted as compared to the extra-ordinary domestic sales numbers seen during last June quarter due to the spill-over effect after implementation of VAT in last March quarter.

On the export front, generic volumes would be the drivers, while prices are not conducive. Analysts are positive on Dr Reddy's with about 70 per cent y-o-y topline growth and 150 per cent bottomline growth. This would be on the back of Betapharma and its acquisition of a Mexican company.

Cipla is expected to post 60 per cent topline growth and 100 per cent bottomline growth, on the back of good performance by Scrtraline, an Active Pharma Ingredient.

Tech

Robust recruitment plans and favourable FY07 revenue guidance are indicators of a strong demand situation in the IT sector. Overall the results are expected to be good for the sector.

The rupee, which appreciated by 0.4 per cent against the US dollar in the March quarter, has reversed direction, falling by 2.7 per cent. The depreciation of rupee against dollar is a positive sign for the sector.

Margins were expected to come under pressure as most companies offered salary hikes of 3-5 per cent for onsite and 14-15 per cent for offshore.

In case of frontline IT companies like Infosys, TCS and Satyam, P Phani Sekhar from Angel Broking says, "The main concern was the softness in operating margins due to wage hike and visa cost. But thankfully due to the three per cent rupee depreciation, the margin pressures have been offset."

Analysts expect Infosys to post good numbers backed by the depreciation in rupee and strong business momentum. It is expected to deliver a 40 per cent y-o-y topline growth though the botomlie growth could be a shade lower.

Satyam is expected to post good results due to strong growth in their enterprise solution business. It is expected to deliver a 30 per cent y-o-y topline growth and 55 per cent bottomline growth.


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Sub: Q1 results may be a mixed bag

The market has crashed after the Q4 of 2005-06. the market has come down to 10400 from 13000. Let us hope for the best after ...


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