Oil Firms set to Lead in Q4

Oil Firms set to Lead in Q4
The Financial Express, India Inc, April 23, 2009, Page I

Viveat Susan Pinto

This results season is likely to be a trial by fire for corporate India. The question is: can companies keep their heads above water when recession is threatening to eat into quarterly numbers? Signs suggest that it is likely to be a tough battle for most this season.

Traditionally, fourth quarter results have been the better of the lot in a financial year. That’s primarily because the Jan-Feb-March quarter is the early part of the calendar year and companies land up with fresh orders from customers on the back of an aggressive push in products and services by them. Consumer sentiment also tends to be high around this time, so the propensity to spend is more, which means that demand is also high. Companies obviously stand to gain from this.

But the fourth quarter of the financial year 2008-09 may see none of this because it was the first full quarter that bore the brunt of the economic slowdown triggered by the financial meltdown in September 2008. It is believed that many companies are unlikely to announce their audited results for the financial year anytime soon because of the painful quarter.

Fast moving consumer goods, oil marketing companies, telecom and cement etc are likely to post decent numbers, on the other hand. “Overall,” says Manish Sonthalia, fund manager at Mumbai-based Motilal Oswal Securities Ltd, “there is likely to be an earnings’ degrowth on a year-on-year as well as quarter-on-quarter basis for the benchmark BSE-Sensex companies. These companies are drawn from a number of industries. The decline in net profit in my view could be as steep as 15% year-on-year for these players. But I do see a divergence in results across companies and sectors.”

Sectors such as metals, real estate, auto components, retail, gems & jewellery etc are likely to feel the pressure considerably in the fourth quarter.

* Oil & Gas

Oil marketing companies are expected to show a stellar performance in the fourth quarter because of falling crude price globally, which has declined significantly from $140 per barrel in June to around $35 per barrel in December last year and remained at around $40 a barrel in January-February 2009. Under recoveries of oil companies have come down significantly and cost of petrol and diesel was lowered by Rs 2 and Rs 5 respectively in the domestic market. In fact, gross refining margin had softened during the September-December 2008 quarter and it has witnessed marginal improvements. For public sector oil companies, inventory loss was a major reason for weakening numbers in quarter ended December 2008, but that has been minimised in the quarter ended March 2009.

* Cement

Cement companies are likely to gain this quarter on the back of increased demand coming from the infrastructure sector.

Projects are normally pushed aggressively in this period, resulting in a higher offtake of cement at this time, says Rajan Kumar, a cement analyst at Centrum Broking in Mumbai. Dispatches, for instance, are likely to grow by about 10% this quarter. Production, on the other hand, could grow by 10.7%, he says. Most of the cement companies, for the record, have also managed to increase their price by 1.5-1.7% this quarter, implying better realisations for these players.

* Steel

Steel companies, like cement players, are likely to do well on the back of robust demand in the Jan-Feb-March quarter from sectors such as infrastructure and automobiles. At times, during the quarter, say analysts, companies such as Tata Steel and Ispat Industries have even attempted to realign production to the prevailing demand, thereby attempting to bring down mismatches in supply and demand. Volume growth, say analysts, is likely to be over 40% for these companies. Earnings growth is also likely to be high.

* Telecom

This sector, say analysts, is likely to post good numbers on account of new subscriber additions to the tune of about 15 million in the fourth quarter. When most players were scaling back on expansion, telecom operators were actively launching services, in contrast. Reliance, for instance, launched its GSM services in 14 circles this quarter. Clearly, telecom is an active sector. But the increased competition is likely to keep average revenues per user (ARPU) under pressure for companies. By some accounts, ARPUs are likely to decline by 6-10% quarter-on-quarter for most companies.

* FMCG

A defensive sector, FMCG is likely to register good growth on the back of sustained consumer demand. Prices, for instance, were dropped by about 10-15% in the fourth quarter. This is likely to impact margins, say analysts. But decent volume growth in the range of about 7.5-8% during the quarter, savings on account of lower input prices and the duty cuts announced by the government during its various stimulus packages is likely to mitigate the pressure on margins to a certain extent. “FMCG is one sector that remains relatively unaffected during a downturn. That works for it,” says Amitabh Chakraborty, president, equity, Religare Hitchens Harrison.

* Capital goods & engineering

This sector is likely to see moderate growth despite the fact that industrial production has actually shrunk in the last few months. A key reason for this is the buoyancy in the production of capital goods. Output of capital goods, for instance, increased by 10.4% in the month of February, when industrial production actually came down by 1.2%. In January, industrial production was marginally up by 0.5%.

Year-on-year, say analysts, topline growth for companies in the sector is likely to be about 10-15%. Bottomline, on the other hand, is likely to grow by about 5-6% only.

Companies such as Bharat Heavy Electricals Ltd and Larsen & Toubro may show an above-average performance on the back of good order books. But since the times are rather tough, analysts are wondering whether these players will be able to sustain the momentum going forward.

Companies such as Suzlon, Siemens and Crompton Greaves, for instance, have seen their order books stagnate over the last few months. The fourth quarter is not likely to be any different for these companies. In fact, analysts fear that increased competition between players for orders could put pressure on margins. There is also a danger that existing project pricing could be renegotiated by customers putting further pressure on margins.

* Information technology

IT bellwether Infosys set the ball rolling for this sector with the announcement of its Q4 results on April 15. The company registered a decent 24% and 29% growth in topline and bottomline year-on-year. Net profit, interestingly, was higher than analysts’ estimates, who had pegged it to be in the region of about 25-26%. Topline estimates were also similar. Infosys therefore seemed to have performed marginally below analysts’ expectations on the parameter of net revenue at least. Sequentially, the IT major had nothing much to show predictably. This, in fact, is likely to be the trend for most companies this quarter. As the economic slowdown weighs down on companies, most will not have much to show sequentially.

For instance, archrival TCS could post a decline of about 2-3% in net profit sequentially. Wipro, on the other hand, may see a decline of about 1-2% in net profit quarter-on-quarter, while HCL Technologies may post a decline of about 12-13% respectively.

On the metric of operating profit margin, companies are likely to show a decline of 1-3%, say analysts. This could have been worse, if companies had not initiated cost-cutting measures in earnest. Most were quick to react to the financial crisis at the start of the third quarter by trimming wage bills and improving operational efficiency. Lateral inductions have come down though companies such Infosys have stuck to their commitments on campus recruitment.

* Pharmaceuticals

Sales growth in the pharmaceutical sector during the quarter ended March was driven by strong performance in mid-cap generic companies, though some companies would face MTM losses on outstanding foreign currency loans and hedges. Analysts are expecting sales growth at Q4 around 20% YoY because of strong demand and revenue growth from companies in mid-generic and contract research and manufacturing services. The 3% depreciation of the rupee against the dollar in the quarter is likely to push up topline growth of pharma companies. Analysts expect that in the long-run, the sector is likely to face some headwinds as the pipeline for development of blockbuster drugs is drying up and the generics market is facing extreme competition. In the domestic pharma market, analysts say there are chances of consolidation as there were reports that Glaxosmithkline Pharma and Sanofi Aventis were interested in acquiring a stake in Piramal Healthcare in spite of strong management denial.

* Auto

In auto, two-wheeler and passenger-vehicle manufacturers are likely to gain from a pick-up in demand in the fourth quarter, thanks to a drop in product prices as well as a drop in interest rates by banks. All of this came about following the stimulus packages of the government between December ’08 to February '09 when monetary and fiscal measures such as a 4% cut in excise duty, cut in bank rates etc were announced. This, say analysts, was successful in brining consumers to the marketplace, who were deferring purchases otherwise.

Commercial-vehicle makers, in contrast, especially, medium and heavy-commercial vehicle manufacturers, are not likely to gain much in the quarter ending March on account of the economic slowdown that has brought down transportation of goods. Besides, non-banking finance companies are also facing a fund crunch at the same time. By some accounts, almost 90-95% of the purchase of a commercial vehicle is externally financed, primarily by NBFCs. With a credit crunch, sales of commercial vehicles have obviously suffered, say analysts.

* Banking

This sector, say analysts, is likely to underperform quarter-on-quarter mainly on account of a marginal growth in credit in the Jan-Feb-March months. Year-to-date credit growth up to March 13, 2009, for instance, was merely 14.8% as against a stated target of 24% by the Reserve Bank of India. This is likely to pull down both topline and bottomline of banks, say analysts. Topline, they say, is likely to be flat this quarter, while net profit could decline by about 10-12%. Says Chakraborty of Religare, “Banks are likely to make a higher provision for non-performing assets (NPAs) as well as mark-to-market losses on investments this quarter. This is likely to eat into their profits.”

* Metals (non-ferrous)

Demand hasn’t been very firm for allied metals in the fourth quarter. This is likely to put pressure on both topline and bottomline of firms. The price of base metals has also fallen at the same time by over 10-20%, say analysts. This is likely to exert even more pressure. Metal companies, they say, are likely to see an earnings degrowth of over 60% this quarter. This hardly makes the picture rosy for these companies.

* Textiles

This sector like most export-oriented industries has suffered enormously in the wake of the financial meltdown. The October to March period is generally considered to be a hectic one for textile companies. But the financial meltdown has resulted in a worldwide contraction of demand. As a result, the third quarter as well as fourth quarter has been a bad one for these firms. It doesn’t help that the minimum support price of cotton has increased by over 30-40% in the period making Indian cotton steeper by over 15-20% to international cotton. This has put added pressure on company margins. Year-on-year and quarter-on-quarter margins, for the record, could decline by over 40-50%, say analysts.