Nifty 50 companies are expected to report better numbers for the December 2011 quarter

Crazy Little Thing Called Growth Nifty 50 companies are expected to report better numbers for the December 2011 quarter, helped by new capacities, better employee utilisation and one-time gains for some. But at a time when macroeconomic parameters are pointing to a deceleration in the economy, the big question is whether the good show will continue i  nvestors appalled by India Inc's lukewarm performance over the last two quarters may be in for a surprise once the financial numbers for the December quarter start flowing in. Helped largely by factors such as one-time windfalls, lower base of the previous year, business consolidations, and a weaker rupee in the case of exporters, India Inc is expected to report a better quarter this time around.  The ET Intelligence Group expects the net profit of the Nifty 50 companies to grow by 11.4% year-onyear for the December 2011 quarter on a robust 25% growth in revenue. While the estimates look positive against the backdrop of a 6.5% fall in net profit and 23.5% increase in sales last quarter, it is still too early to conclude that there has been a reversal in the trend.  This is because domestic as well as global macroeconomic parameters do not look any better than what they were during the previous quarter. As our coverage on India Inc's September 2011 quarter performance on November 21, 2011, pointed out, there continues to be sluggishness in demand indicators including slowing industrial production, and stagnation in industrial capital expenditure. Read on to know what can be expected from India's top frequently traded companies and which factors will impact 12 key sectors.  UP AND NOT AWAY  After dipping to 23.5% in the September 2011 quarter from above 27% in the preceding two quarters, sales growth of the Nifty 50 sample is expected to inch up to 25.5% for the December quarter.  The performance, however, will be less secular this time around with only a handful of companies reporting robust sales growth. According to our forecast, 15 companies will be able to post a bigger jump in their revenues compared to the sample's average sales growth. During the September quarter, 24 companies had topped the sample growth rate  Companies including BPCL, Reliance Power, Tata Motors, and Cairn India are expected to clock a higher sales growth during the third quarter of FY12. These companies will be benefited by factors like new capacities coming on stream, the weak rupee or one-time benefits. For instance, BPCL's performance will depend a great deal, as usual, on how much the government decides to compensate it for selling products below cost. In the first half, the government chose to pay very little leaving the company high and dry. We have estimated that BPCL will get 2,500 crore of upstream support and 5,000 crore in compensation from the government for the December quarter in projecting a net profit of 1,008 crore. This will be five times more than the profit of 187.4 crore a year ago.  IT players including TCS, Infosys, and Wipro would show a better year-on-year growth on account of a steeper depreciation in the rupee. Reliance Power and Tata Power are likely to reap the benefits of new capacities. Kotak Mahindra Bank has started reporting dividends from subsidiaries on a quarterly basis since the September 2011 quarter. This had resulted in 44% jump in its revenue then. We expect the private sector lender to report a 34% increase in the December quarter boosted by dividends.  THE ROAD AHEAD  Macroeconomic factors such as fiscal deficit, currency movements, exports and growth in gross domestic product look unfavourable at the moment. Given the government's plan to raise borrowings by 40,000 crore in the second half of FY12, net borrowings are expected to touch 4.4 lakh crore according to economists at Barclays Capital. This may result in the fiscal deficit exceeding the target of 4.6% of GDP, they think. Though food inflation has fallen by 3.36%in the fourth week of December, experts consider it to be more as a result of a higher base in the corresponding period last year than actual relief in food prices. In addition, the wholesale price index reported a year-on-year increase of 9.1% in November — though marginally lower than the previous month — reflecting that prices have not cooled off significantly.  The situation on the export front is not encouraging either. Though India's merchant exports rose by 33.2% in the first eight months of FY12, the pace has reduced significantly in recent months. In October, exports grew by 10.8%, and in November, at an even slower rate of 4%. This may continue in the near term due to uncertainties in western economies. Some industry trackers believe that a possible easing of interest rates by the Reserve Bank in the coming months may help in resuming dwindling credit offtake in the economy thereby supporting growth. The banks' credit disbursal relative to deposits has been consistently falling in the last few months. In the second week of December, the ratio fell to 0.72, the lowest in 21 months and 38 basis points lower from the corresponding number a year ago.  India Inc is likely to report slower growth in the remainder of FY12 and a trend reversal can only be expected in the second half of FY13 if policy-related issues that have created bottlenecks are addressed by then. We have provided a detailed analysis of 12 key sectors to help you gauge which sectors are likely to be affected more during the December quarter and which companies may sail through the tough times.  The performance of the auto sector is expected to remain under pressure at a time when the rupee has weakened and pushed up input costs. In the four-wheeler segment, Maruti Suzuki, the leading player in the sector, reported a 27.6% fall in total vehicle sales during the quarter under review, given the problems arising from its earlier labour problems and auto finance at elevated levels. As a result, its net profit is expected to fall nearly 58% y-o-y in the December quarter.  M&M is also expected to post a 16.3% y-o-y fall in its standalone net profit despite strong demand for its tractors and SUV portfolio. And that's largely due to a rise in purchase of traded goods during the quarter under review. However, Tata Motors is expected to report a 46.6% growth in its consolidated net profit for the third quarter of FY12, helped by strong demand for its recently-launched SUV Evoque. Twowheeler player Bajaj Auto is expected to report a 20.4% y-o-y growth in its net profit in the quarter under review, helped by strong overseas demand for its models like the Pulsar.  The slowdown in economic and industrial growth in the country is likely to increase pressure on the asset quality of banks with exposure to affected sectors like SME, real estate, textiles, power and infrastructure. Credit growth is expected to be modest as capital expenditure by companies is close to stalling. As a result, NPAs (non performing assets) are likely to increase. Gross slippages, especially for public sector banks, are likely to rise from 3.7% last quarter to 4% in the October-December quarter. Despite the sharp decline in banking stocks, the perception of default risk will remain high until the macroeconomic situation improves.  The capital goods sector may witness yet another quarter of dreary growth as not much has changed for it in the past three months from the macroeconomic perspective. While companies in the sector may witness an increase in the pace of order execution in order to meet their target revenue guidance for the year, pricing pressures and high input costs are likely to impact margins in this quarter as well. The only respite for the industry, especially for companies catering to the power sector, is the increase in the ordering activity from Power Grid Corporation India Limited (PGCIL) this quarter. The order activity is expected to be healthy, at least until March 2012, as PGCIL needs to meet its targets for the XIth Five Year Plan that ends this fiscal.  Realisations for an all-India player like ACC are likely to improve nearly 10% y-o-y in the quarter under review, helped by better realisations in the southern and western regions. In the northern region while cement prices have shown some signs of easing over the past few weeks they are still higher on a y-o-y basis.  Higher realisations should help companies to deal with a rising cost structure. Although imported coal prices have eased by 8% sequentially during the December quarter to about $110, this has been more than offset by the rupee depreciation. A higher tax burden is expected to weigh on the Holcim-controlled companies (ACC and Ambuja) in the December quarter given a rather low base a year ago. Ambuja Cements is also anticipated to post a growth of barely 8.5% growth in net profit in December quarter, while net sales should grow 22.1%.  FMCG companies are likely to continue their good performance in the quarter ended December. Most players including HUL have increased prices of their products. This may affect volume growth, but easing of raw material prices will help them to improve margins. The companies are also likely to control costs by rationalising ad spend and changing the product mix. While there are fears of a slowdown in demand in the urban and rural markets, HUL, ITC and Nestle are likely to be the best performers in the sector.  IT exporters are likely to report lower volume growth, measured in terms of billed man-hours, during the December quarter due to New Year festivities.  Top players are expected to log 3-5% sequential volume growth with a similar growth in dollar-denominated revenue. But, when converted to rupees, revenue is expected to grow in double digits from the previous quarters for each of the top four players, which are publicly listed in India.  This is because of a near 12% sequential drop in average rupee rate for a dollar during the December 2011 quarter. The mark-to-market losses on forex hedging, however, may increase. The commentary by managements on future demand traction will be crucial in anticipating the trend in US technology spending in 2012.  Steel makers will not benefit much from the 15% decline in international coal prices as the rupee declined by 10% during the same time making imports costlier. They will not be able to pass on the cost increase to their customers amidst a demand slowdown.  The mining ban in Karnataka will continue to negatively impact volumes of steel makers dependant on that region for iron ore. Sesa Goa is also expected to see slow volume growth as a result. In the base metal space, higher cost of power will severely impact margins of aluminium producers like Hindalco and Sterlite. With LME prices on the decline, realisations will be under pressure. Companies which have borrowings in foreign currencies are likely to take a further hit on their loans.  The sector is expected to show mixed results. Upstream oil producers such as ONGC and Cairn India will report high realisations thanks to strong oil prices and a weak rupee. ONGC's one-time gains on recovery of royalty on Rajasthan oilfield will be a further booster. The midstream refiners are facing margin pressure, with the benchmark gross refining margins coming down in the quarter.  The downstream marketers — Indian Oil, BPCL and HPCL — are suffering the worst with the industry's under-recoveries shooting up to 388 crore per day. The domestic natural gas industry and its leader Gail India are facing stagnation, as the domestic availability of natural gas isn't growing.  On the whole, the pharma sector's performance is likely to continue on a healthy trajectory although individual companies may perform differently. While a 10% depreciation in the rupee is beneficial for most pharma companies in terms of export realisations, the rupee effect would be neutralised for companies with high imports.  Ranbaxy and Cipla are likely to report better growth on the back of Lipitor sales for the former and higher sales from Indore SEZ for Cipla. Dr Reddy's performance may be disappointing as the company has not performed well in India and Russia. Sun Pharma's performance may also be impacted, as Taro may not be able to sustain the exceptional performance logged in the preceding quarter.  Most powerutilities will feel the pinch of rupee depreciation as they import coal. This would increase the overall cost of power generation, forcing these companies to operate at lower plant load factor or capacity utilisation. Companies mainly dependent on imported coal include Adani power, JSW Energy and KSK Energy.  The plant load factor of these companies would also be lower due to the extended monsoons. This will have an impact on the power companies' revenues and higher input cost would reduce profitability too. Coal India's production would be lower year-on-year due to waster-logging in its mines.  NTPC and Power Grid Corp would perform better than industry peers as these companies are not much dependent on external fuel supply like others and have a relatively safer business model.  With economic conditions not much different from the preceding quarter, it will be a poor show for the real estate sector in the December quarter. Slowdown in demand will continue to lead to low revenue recognition for most companies. Most of them have not launched any new projects during the quarter — a sign of difficult times — as they struggle to raise funds.  Many companies have little choice but to trim their debt as interest costs are denting their bottom line. For instance, DLF, the largest real estate company, has an interest cost of 20% of its revenues. However, companies with projects in tier II and III cities have been able to perform better due to the ongoing demand.  Higher interest outgo to service loans taken to establish 3G services will continue to weigh heavily on telecom operators during the December quarter due tothe pan-India launch of the platform by most operators. This will hamper net profitability since these services are yet to gain momentum and hence would not contribute to the bottom line significantly. Bharti Airtel is expected to report a strong sequential growth of 9% in its African operations during the quarter, helped by higher subscriber penetration and the currency movement. This will more than offset the sluggishness in its Indian operations. But the company is likely to report a fall in net profit due to higher interest expenses.  After reporting a fall in sales for the past few quarters, Reliance Communications is expected to show a 10% sequential growth for the third quarter backed by stable per minute revenue and sustained subscriber addition.  (Contributed by Amriteshwar Mathur, Bakul Chugan Tongia, Crystal Barretto, Jwalit Vyas, Kiran Kabtta Somvanshi, Ramkrishna Kashelkar, Ranjit Shinde, and Suraj Sowkar)