Sectoral Outlook: Auto, IT, Banks, Cement, Metals

Investors may have to say good bye to the prolonged phase of robust corporate profit growth. Or at least that’s what broking houses would want them to believe as they fear the beginning of a growth slowdown.

Auto companies may slip

The automobile sector will continue to face challenging times, feel most brokerages, as the pressures of last financial year (FY08) have only intensified.

According to analysts tracking automobile stocks, higher oil prices and interest rates remain key threats to volume growth while the sharp rise in input prices would pose a challenge for margins.

While auto majors have been able to keep up the demand by offering huge dealer-level discounts, another round of price hike is just a matter of time as input costs continue to rise.

“With soaring inflationary pressures, there will be a limit to which the market will be able to absorb the hike,” says Prabhudas Lilladher, in its earnings preview report, adding that “consequently, the bottomline of automobile companies would increasingly be under pressure.”

Estimates for the quarter ended June'08. (Net sales and PAT figures in Rs Crore) (Y-o-Y and Q-o-Q figures in %)

Auto majors like Bajaj Auto, Hero Honda, Maruti, Tata Motors and Mahindra & Mahindra (M&M) have been considered in this edition of quarterly preview. The table clearly shows that brokerages are expecting a fall in the quarterly sales and profits of Tata Motors. The bottomline of Hero Honda is also not expected to be impressive, either.

“Passenger car sales (of Tata Motors) would continue their declining trend with a 12% Y-o-Y fall in volumes,” says Motilal Oswal Securities. The brokerage estimates an EBITDA margin decline of 10 basis points quarter on quarter (Q-o-Q), but flat Y-o-Y to 9%. This would result in the adjusted PAT declining 9.3% YoY, the report adds.

Interestingly, in the case of Hero Honda, CLSA says margins will see a sequential decline due to higher promotional spend as the company was a sponsor in the Indian Premier League cricket tournament during the first quarter. However, on an Y-o-Y basis, the company is likely to outperform with 38% PAT growth, driven by 11% Y-o-Y volume growth.

Meanwhile, India Infoline feels that Maruti could surprise negatively as it has been the least capable of passing on price hikes, largely on account of competition from Hyundai and GM.

IT may spring a surprise

The June quarter might not be as bad for the IT sector as many have feared amidst the slowdown in the US economy. Indeed, many analysts expect a slightly better growth rate than that of the previous quarter ended March, 2008. This is expected to be reflected in the bottomline of these companies.

The aggregate net sales of the top five IT companies, as estimated by broking firms, are expected to witness around 30% growth compared with the same quarter last year. This is relatively high compared with the 24% Yo-Y growth in net sales seen for the quarter ended March, 2008.

Going by estimates, IT bellwether Infosys is expected to surpass its net sales guidance figures for the Q1 of the current financial year. Infosys has given a revenue guidance of Rs 4570 cr-4582 crore for the quarter ended June, 2008.

TCS, however, has been more cautious and has indicated weak growth, according to one analyst, who said if the company met estimates or performed better than current estimates, then it could act as a positive trigger for the stock.

Estimates for the quarter ended June'08. (Net sales and PAT figures in Rs Crore) (Y-o-Y and Q-o-Q figures in %)

“People have built up so much negative perception that if it meets estimates or outperforms, there could be a rally. Apart from TCS, which is expected to grow 1.5% in revenues, others are expected grow 3%-5 % sequentially,” he said. Both the TCS and HCL Tech stocks have been beaten down compared to their peers.

HCL Tech has a bigger hedge and is expected to be hit by forex losses. Similarly, Satyam Computer Services also has $1.1 billion in hedges, of which 40% are in forward contracts. This is expected to hurt its bottomline, although it will benefit from lower cost of wages because salary hikes for employees are not given out in the first quarter, unlike most other IT firms.

The depreciation of the rupee is a major factor in bringing cheer for the IT companies. The rupee has depreciated against all the three major currencies, US dollar, euro and British pound, the domestic currencies of those countries from where the Indian IT companies get more than 80% of their revenues.

Santanu Mishra & N Shivapriya

Brokers see lower returns from banks

Analysts are expecting a tepid growth in earnings of Indian banks for the first quarter of this financial year, as credit growth has slowed down considerably, and banks have taken a substantial hit in their treasury operations, both in equities and bonds.

Most brokerages have reduced their earnings estimates and are advising their clients to be prepared for lower returns from banking stocks near term. They are also warning that state-owned banks would continue to see their margins and asset quality slipping over the next few quarters.

Over the last three months, the macro-economic environment has deteriorated, fiscal deficit has been increasing on the back of rising oil prices, rising fertiliser subsidy and the farmers’ loan-waiver package introduced in the Union Budget FY09.

The rising inflation coupled with a weakening rupee has raised serious concerns over interest rates and the imminent slowdown in the economy. This obviously has taken a toll on stock prices of banking stocks that have corrected sharply from their peaks in January.

There’s a consensus that continued inflationary pressure and tightening measures by RBI will lead to rising cost of funds for the sector. Most banks have already raised the prime lending rate (PLR) by 50 bps; however, increase in lending rates was along with the rise in the deposit cost.

Hence, margins are likely to remain under pressure for banks, feel analysts. On the bad loans front, the situation does not appear very promising either. Citigroup warns that loan loss provisioning to remain high for private banks due to seasoning of retail credit portfolios like auto loans, two-wheeler loans and personal loans.

Motilal Oswal estimates that the valuations for PSU banks are at 0.7-1 times FY09 (estimated) book value, with return on equity (RoEs) in the range of 16-23%. Private banks, being growth plays, continue to trade at premium at 1-3 times FY09 estimated) book value. “We prefer selective buying with preference for banks with high-earnings visibility.

There’s a consensus that continued inflationary pressure and tightening measures by RBI will lead to rising cost of funds for the sector. Most banks have already raised the prime lending rate (PLR) by 50 bps; however, increase in lending rates was along with the rise in the deposit cost.

Hence, margins are likely to remain under pressure for banks, feel analysts. On the bad loans front, the situation does not appear very promising either. Citigroup warns that loan loss provisioning to remain high for private banks due to seasoning of retail credit portfolios like auto loans, two-wheeler loans and personal loans.

Expect some Incredible Hulks in metals pack

The metal sector is all set to begin the current financial year with a moderate set of numbers for the first quarter. The year-on-year growth rate is expected to be better compared to that in the year-ago quarter.
However, on a quarter-on-quarter basis, analysts expect lower sales and the net profit, given the government’s decision in the second week of May to curb steel prices in order to check inflation. Further, analysts expect sales growth to be tepid in the June quarter as against the March quarter, which traditionally records higher volumes.

Both the ferrous and non-ferrous companies have benefited from higher prices compared to the same quarter last year. In addition to that, non-ferrous companies, which export a bulk of their products, are expected to benefit from the rupee depreciation.

The ET survey of analyst estimates indicate that the average net sales of top five metal companies are expected to grow by 19.2% (YoY growth) whereas the net profit is likely to increase by 11.2% for the quarter. As usual, the non-ferrous companies lag behind their ferrous peers as far as the growth is concerned.

**Standalone Figures. Estimates for the quarter ended June'08. (Net sales and PAT figures in Rs Crore) (Y-o-Y and Q-o-Q figures in %)

The average net sales growth for top three ferrous companies is estimated to be slightly more than 30% whereas the same is close to 10% for the top three non-ferrous companies. The corresponding figures for the ferrous and non-ferrous companies during the June quarter of the last year were in the range of 17% and 7%, respectively.

However, the growth in net profit is non-uniform across companies. Within the ferrous segment, players like SAIL and Tata Steel, which are almost fully integrated (having own captive mines), would report a more than 20% growth in net profit.

Metal players who do not have captive mines would feel the pressure on their margins and are expected to report poor growth in bottom-line. This is on account of surging prices of raw materials, including iron ore and coking coal.

While iron ore prices have increased by over 70% over the year-ago levels, coking coal prices have increased to three-folds in the same period.

The Economic times 11 7 2008