QUARTER REVIEW

The mood's pretty glum on Corporate Street. It has been so for a while now. And it is likely that it will stay that way for some more time. There are a few positives in the March quarter results, but India Inc has little reason to celebrate. The rupee's slide will ensure that gains, if any, are unlikely to sustain in the June quarter. ET Intelligence Group does the number crunching to let you know what the March quarter results mean and what the outlook is for key sectors 

    In the midst of all the gloom and doom talk going on right now, India Inc's March 2012 quarter report card presents a few notable traits that Ben Bernanke would be happy to call "green shoots". In a time of slowing growth and falling profits, India Inc's operating profit margins have improved from the December 2011 quarter and so has the interest coverage ratio — a matrix that measures the ability to pay interest on borrowings. These positives are not really extraordinary. Both the measures still remain below their year-ago levels. Nevertheless, they depict a reversal of a consistent downward trend in India Inc's margins and profitability through 2011. Having said that, readers should also note that we are already two months into the June quarter and a lot has changed. Most prominently, the rupee has depreciated by over 9% reminding one of the September 2011 quarter when a similar severe weakness in the rupee had badly impacted corporate earnings. On the positive side, the Reserve Bank of India has cut interest rates by 50 basis points, paving the way for further cuts should inflation fears recede. The weakness in the rupee most probably means that the gains seen in the March quarter aggregate numbers are unlikely to sustain in the June quarter. An analysis of the March quarter results of 2,302 companies, excluding finance and petroleum firms, reveals that net revenues grew 13.5% year-on-year to 8,67,055 crore. This was the slowest pace of growth in the last two years. Net profit fell 8% from that in the March 2011 quarter, which could actually be regarded as a positive, since the September 2011 and December 2011 quarters had seen profits falling 37.9% and 20.6%, respectively. India Inc's operating profit margins for the March quarter stood at 14.3%, which were better than the preceding two quarters. However, they are down 200 basis points from the corresponding quarter of last year. The year-onyear growth in costs such as raw material, staff and power was higher than the revenue growth, which was the key reason for the margin weakness. As a result, operating profits — those profits generated by the core activities of the businesses — remained flat when compared to the March 2011 quarter. The biggest source of pain, perhaps, was the interest cost, which jumped 47.4% to 30,123 crore, a record high level in India Inc's history. It also turned out to be eighth consecutive quarter of interest cost rising in high double-digit figures. The interest coverage ratio stood at 3.8, higher than the preceding two quarters, but down 170 basis points y-o-y. Considering that the ratio had dipped to 3.4 in the December 2011 quarter, the sequential improvement was heartening. So how do we see the overall scenario? Considering the not-so-exciting outlook for India Inc's performance in the June quarter, the positive traits seen in the March quarter appear to be just a blip in the overall downward trend. It will take a lot more to see a trend reversal. Most pertinently, overall sales growth needs to buck the trend of an overall slowdown in growth. This would indicate improved economic activity. A strengthening of the rupee, further easing of commodity and energy prices and a decline in interest rates in the future, too, should be eyed as positive cues. ET Intelligence Group takes a closer look at the March 2012 quarter performance of the economy's key sectors and outlook for the future.

AUTOMOBILES 

A divergent trend is visible in the automobiles sector, as demand has moderated in the twowheeler segment while it continues to remain robust as far as four wheelers are concerned. Thus, even as performance was subdued for Bajaj Auto and Hero MotoCorp, a strong volume growth drove the top lines of companies like Tata Motors and Mahindra & Mahindra. For Tata Motors, JLR is turning out to be a trump card while for M&M, strong growth in its utility vehicle segment and four-wheel pick-ups was instrumental in driving volumes, although the sales growth moderated in tractors. 

Another concern for the industry is with respect to margins, which have been declining given the significant rise in input costs. While companies have resorted to price hikes of their products last year, their margins remained under pressure. 

M&M is likely to continue doing well in FY13 thanks to its diversified business model. Utility vehicles and tractors, which are the main pillars of its business growth, are expected to post a decent growth in the coming year.

BANKING 

Despite showing a slight improvement from the December 2011 quarter, asset quality and sustaining margins remain the biggest challenges for the banking sector amid sluggish economic growth in the country. Gross non performing assets rose 46% year-on-year for the sector with over 60% of the banks reporting a deterioration in assets. Most of these were pubic sector banks. But even with higher slippages and higher restructuring of loans, the sector reported a 42% increase in net profit, the highest in more than two years on the back of increased recoveries and a decline in provision coverage ratio. Advances grew 18% during the quarter. 

Amongst the strongest performers in terms of improvement in asset quality as well as net interest margins were ING Vysya Bank, ICICI Bank, South Indian Bank, Bank of Maharashtra and Development Credit Bank.

CAPITAL GOODS The last quarter of FY12 saw a certain level of comfort in the capital goods sector. Notwithstanding the hardships, most of the leading companies managed to meet their revenue guidance for the year. It is mainly the lack of new orders that is weighing heavy on this sector. 

Although the order book size of most companies exceeded their one-year revenues, the acute slowdown in industrial investment is a cause of concern for engineering and capital goods companies. Leading players like BHEL, L&T and Engineers India have all suffered from this trend. 

The industry witnessed a margin recovery in the March 2012 quarter as compared to the December 2011 quarter, which was mainly due to the seasonality factor. A trend of declining global commodity prices also helped. 

Thanks to its debt-free balance sheet, Greaves Cotton, the manufacturer of engines and gensets, looks well-poised to benefit from the expansion of its construction equipment project and the technology upgradation of its existing products in FY13.

FMCG 

FMCG companies logged a robust revenue growth of 18% — largely value driven on account of price increases. The companies did not face much of a hit on volume growth despite these price hikes. The stoppage of supply orders from the canteen stores department of the Indian military though dented the revenue growth of certain companies like Marico, GlaxoSmithKline Consumer Healthcare etc. Lower input cost pressure and rationalisation of overheads related to advertising and other expenditure helped most companies to maintain a strong operating margin. At 17%, the operating margin is ruling strong against the preceding quarters. 

Riding on the consumption growth story, the outlook for the industry continues to remain promising in spite of sectoral valuations looking stretched. Based on the strength of their business models, the outlook for ITC, Godrej Consumer Products and Jyothy Laboratories appears to be more promising than that of their peers for the current fiscal. HUL may find it difficult to continue its current growth trajectory given the high base year effect.

INFRA & CONSTRUCTION 

Barring the roads segment, where NHAI awarded 1,300 km of projects, few new projects were awarded in other infrastructure segments in the March quarter. The bidding for these projects was seen to be somewhat less aggressive compared to last year. The March quarter was a mixed one for infrastructure firms. Companies with a healthy balance sheet and a reasonably good number of operational projects continued to grow at an encouraging rate. However, those with high debt have reported losses. In the coming months, a fall in interest rates would be the key trigger for profitability. For a meaningful turnaround, interest rates will have to come down by at least another 50 basis points. It is also crucial that state and central governments speed up awarding of projects in the irrigation and urban infrastructure segments. 

IRB Infrastructure Developers would be the best company to invest in FY13 due to its healthy mix of operating and under-construction road projects while maintaining a comfortable balance sheet.

INFOTECH 

The March 2012 quarter IT numbers reflect a mixed performance by industry bellwethers. While the bad set of numbers and weak guidance from Infosys and Wipro added to concerns of a demand slowdown, TCS and HCL Technologies' better-than-expected results presented a healthy picture of the IT sector. 

TCS reported the highest volume growth of 3.2% followed by HCL Tech and Wipro at 1.9% and 0.83%, respectively. Infosys, on the other hand, reported a fall of 1.5% — its second consecutive quarter of a decline in volume growth. Infy and Wipro's weak guidance has raised issues related to demand slowdown, delayed decision making and margin pressure. However, TCS suggested a positive demand outlook. Also, HCL Tech indicated healthy revenue visibility with deals worth $2.5 billion. The two companies also indicated that they expect a similar deal pipeline to continue going ahead. 

Healthy revenue visibility reflects that though demand outlook is uncertain, it is more a company specific issue depending on deal pipeline, client mining and delivery models. The rupee depreciation is good, but a reversal would be damaging to those with lower growth. 

Given the demand traction in emerging technology and infrastructure management space and recent large deal wins, HCL Tech continues to be the preferred pick

OIL & GAS 

The petroleum industry's quarter performance was dominated by the government's high subsidy payouts and the heavy discounts extended by upstream majors to ensure that oil marketing companies ended the year in black. Private sector players had a bad quarter for various reasons. A fall in global crude oil prices is bound to impact the revenues of Indian upstream players, while the mid-stream refiners see their refining margins move up slightly. The failure to revise diesel, LPG and kerosene prices means that marketing companies will continue to depend on the government for support. Natural gas transporters are facing stagnation with domestic availability of gas on the decline. 

BPCL could prove to be an outperformer in FY13, mainly due to its exploration portfolio which has seen some exciting success in the last 6-8 months.

PHARMA 

The March quarter was one of the strongest quarters for the pharma sector in terms of performance. Logging 25% growth in revenues and a 16% operating margin, most companies in this export-oriented sector seem to have benefitted from the rupee's depreciation. The launch of products with exclusivity period or limited competition helped several companies like Ranbaxy, Dr Reddy's Labs and Lupin. In the domestic market, the sluggish growth in the acute segment continued to affect the performance of GSK Pharma and Ranbaxy that have acute therapies dominating their portfolio. Forex losses impacted the profitability of some companies like Ranbaxy. For FY13, Sun Pharma, Cipla and Lupin continue to look promising.

POWER 

The March 2012 quarter was the worst in the last eight quarters with high fuel costs impacting the performance of power utilities. Tata Power, Lanco Infratech and Adani Power reported losses. Besides fuel cost, interest cost and employee expenses as a proportion of net sales were also at the highest in the last eight quarters. 

These issues will continue to impact the industry in the first half of FY13, but an improvement could be expected in the second half, particularly with the expected improvement in supplies from Coal India. 

Power transmission major Power Grid appears top be the safest bet for FY13 as it runs no fuel risks. It has already exceeded its 11th five-year plan targets for transmission projects and is likely to continue in a similar way in the near future.

REAL ESTATE 

Though the performance of realty players was slightly better than that in the preceding December quarter, it is hardly something to cheer about. With a marginal revenue growth of 3% and an operating margin of 20%, the real estate sector continues to suffer from numerous challenges like liquidity crunch, high cost of borrowing, problems in debt servicing, rising construction cost, sluggish demand and a slowdown in execution. The bottom line of most real estate companies was impacted by high interest costs. The aggregate interest cost for 39 companies has risen by 79.5%. Debt-free company Oberoi Realty and the Godrej group-owned Godrej Properties with its asset light model are the two safest bets in the sector.

STEEL 

The steel industry registered a 10% growth in sales, the slowest in six quarters, on account of sluggish demand during the quarter. But the fall in the price of raw materials — mainly coking coal — helped restrict the rise in operating expenses for the sector. Raw material costs, as a percentage of sales were at 43% during the quarter compared with 50% during the December 2011 quarter. Operating profit margins which dropped to their lowest in December have also shown improvement as have interest coverage ratios. 

Coal prices have reduced further since the March 2012 quarter, but at the same time the rupee has also depreciated. This will negate the benefit of lower coal prices as most steel makers have to import coal. Steel prices have also improved and with demand pegged at about 6% through 2012, prices could improve further. But with the current macro economic headwinds, the next two quarters are likely to remain challenging for these companies.

TELECOM 

The March quarter's performance of the country's leading telecom operators was pretty much in line with street expectations. While Bharti Airtel reported a sequential drop of 0.5% in its net income, RCom and Idea Cellular reported a gain of 78.5% and 18.9%, respectively. The industry saw stagnating revenue per minute (RPM) impacting its performance. 

Going forward, regulatory uncertainties and balance sheet health remain the key indicators of the telcos' performance. In February, the Supreme Court cancelled 122 telecom licences issued after January 10, 2008. Also, last month, sector regulator Trai proposed re-auctioning of these licences at a steeper base rate. 

Amidst these issues, and given the trend of rising data usage among domestic subscribers Idea looks well-positioned. However, with seven of its licences cancelled and fresh auctions proposed at a higher base price, the company is expected to clock heavy expenditure going ahead. 

High debt burden remains an issue for RCom, while tariff pressure on the domestic business and higher finance charges due to investments are a cause of worry for Bharti. 

But continued momentum in its African business is expected to help Bharti offset the impact of these challenges. Also, the company's 3G and recently-launched 4G initiatives are expected to fuel growth. 

Team ETIG