A DISMAL SCENARIO

A lot has changed in the last one year in the Indian equity market in terms of sentiments. For instance, during the same period a year ago after a new and decisive government assumed power, the equity market was beaming exuberance if not ‘irrational exuberance’ that led India to be one of the best performing markets in the world. One year into power and the reality has begun to sink in gradually. It’s not that the government has failed; the macros are looking better, growth is inching up, and inflation has come down and is within the comfort zone of the RBI. More importantly, the government’s finances have improved a lot. However, the speculation of a Big Bang reform that was expected to bring about a quick turnaround in the country’s economy has not happened.

As such, reality has failed to meet the hypothetical benchmarks and the performance of the frontline equity indices best captures this scenario, having given a negative return of 2.4 this year till June 5, 2015. This makes it one of the worst performances among its peers. Among other reasons, what has led to such under-performance is weak earnings’ growth in the fourth quarter of FY15. The earnings failed to impress market participants and there were more misses than hits. Of all the 3,966 companies that have declared their results up to June 6, the aggregate topline of these companies has declined by 8 per cent on a yearly basis, showing weak demand recovery and fall in sales volume growth.

What is more disturbing is that net profit in the same period has declined by 12 per cent, without adjusting for any exceptional or extraordinary items. The factors that have led to such a fall in profit are an 18 per cent jump in tax expenses and an eight per cent increase in interest cost on a yearly basis.

Sensex Earnings

In case of the BSE Sensex companies, the aggregate topline of the companies has declined by 7 per cent. Nonetheless, if we adjust for Sun Pharma (not comparable due to integration of Ranbaxy’s operations), banking and NBFC, the decline in topline increases to 8.4 per cent. If we further analyse results as per sectors, we find that the decline in topline was primarily led by the oil and gas and metal sectors. This was due to a fall in the commodity prices that led to lower revenue for companies in these sectors. The sectors that have shown good growth are information technology (IT) (although were below expectation and were fl attish on sequential basis) and pharmaceutical.

The bottomline for Sensex companies (after adjusting for banking, Sun Pharma and financial companies as well as adjustment for exceptional items in the case of Vedanta and Tata Steel) in the same period has taken a greater hit of around 18 per cent. This decline is despite a fall in raw material prices by almost 23 per cent due to decline in commodity prices. What has eaten into the profits is an increase in employee and other expenses. The interest cost has also increased by around nine per cent in the same period despite a 50 basis points cut in key policy rate by the RBI. Sector-wise analysis shows that automotive, capital goods and metals were the worst performers while telecom remained the best. The aggregate EBITDA declined by 11 per cent as fall in raw material prices was overtaken by rise in employee and other expenses. In terms of margin, it declined from 18.09 per cent in Q4 FY14 to 17.5 per cent in Q4 FY15.

The performance of the Sensex, which largely represents large-cap companies, has been disappointing in the recently concluded quarter. The case with mid-cap companies is still worse. The BSE Mid-Cap Index companies on an aggregate basis saw their income declining by 12 per cent on a yearly basis. The operating profit, however, saw a fall of a mere 5 per cent in the same period. This was largely due to increase in other income by 23 per cent and fall in total expenses by 16 per cent. Nonetheless, the net profit declined by 24 per cent in the same period due to increase in taxes by 66 per cent and interest cost by 9 per cent.

In all these dismal numbers, financial companies make for a segment that raises hopes for things to move ahead in the right direction with something to cheer about in the Q4 FY15 results. The aggregate income of all the financial companies, including banks and NBFCs, has increased by 16 per cent on a yearly basis while its bottomline too has increased by 16 per cent.

[PAGE BREAK]

The Way Ahead

The India Inc. quarterly result for Q4 FY15 was definitely one of the worst performances in recent years. Accordingly, there were more downgrades in the earnings than the upgrades. For example, according to a report by Mumbai based brokerage firm Motilal Oswal Financial Services, they have upgraded FY16 EPS estimates for eight Sensex companies and downgraded 18 companies. Similar is the case with most of the research firms and even broader market where there are more downgrades than upgrades. Improvement in the macro economic situation (as explained in the first paragraph) is taking more time to translate into earnings’ growth as there is fall in commodity prices, weakness in the external sector, and the government has reserved most of the benefits accruing out of the fall in crude oil prices.

Going forward, domestically, how the monsoon pans out will play an important role in earnings’ growth and monetary action. Besides this, the government’s ability to pass some of the important bills in the parliament will also be crucial. Internationally, the timing and quantum of the rate hike decision by the US Fed will determine various monetary decisions here. In the last quarter it was the consumption-linked sectors that have performed better than the investment-linked sectors and we believe this will continue for at least a couple of quarters. There is still lower utilisation of capacities which needs to be addressed before any investment activity will pick up. Therefore, we believe that the consumption sector is likely to show better results in the next couple of quarters. As far as overall result is concerned, it will take couple of quarters before earnings start to show better growth.

[PAGE BREAK]

AUTOMOBILE

The automobile industry, an integral part of the Indian economy, is still posting a subdued performance, almost as if it was echoing the current economic scenario. Though the government has tried its best to infuse movement in the economy, there has been no traction in terms of ground realities. The current market disappointment was predominantly due to higher expectations of corporate earnings after one year of the majority government in power. Unfortunately, natural disasters and other elements kept both the economy and the automotive sector from putting their best foot forward.

As mentioned in the earlier quarterly result analysis, the automobile sector is still taking its sweet time to take off. Further, the rural economy is closely connected to the automobile industry. Last year, the rural economy slowed down significantly due to a deficient monsoon in 2014. Further, unseasonal rains and hailstorms earlier this year further worsened the rural economy. This has significantly impacted the sales volumes of cars, motorcycles and tractors during the year.

The combined topline of automobile companies in March 2015 quarter showed a growth of just 4.24 per cent on a yearly basis which was very poor compared to 8.66 per cent yearly growth during the December 2014 quarter. Interestingly, there was some volume growth during the March 2014 quarter, predominantly on account of rise in sales of commercial vehicles. The expectation of recovery in the economy and infrastructural spending along with hopes pinned on the implementation of the Goods & Service Tax boosted sentiments in the business community, which created some demand for commercial vehicles. However, due to slowdown in the rural economy, two-wheeler companies such as Hero Moto Corp and Bajaj Auto showed yearly negative growth during the fourth quarter. Tractor companies such as Mahindra & Mahindra too showed yearly negative growth in the March 2015 quarter.

On the expenses front, the raw material cost increased by a marginal 1.64 per cent on a yearly basis. Further, there has been considerable increase in the overall operating cost for the automobile companies. This cost increase dampened the industry’s operating profit, showing a negative growth of 9.52 per cent on a yearly basis. The interest charges of the industry showed a growth of 9.73 per cent on a yearly basis. However, there has been 14.54 per cent yearly growth in the industry’s depreciation cost during the March 2015 quarter.

Due to overall increase in the automobile industry’s expenses, the net profit of the industry too showed considerable negative growth of 28.85 per cent on a yearly basis during the last quarter. The 34.33 per cent higher tax charges dragged the industry’s net profit during the March 2015 quarter.

The top eight automobile companies by revenue showed 4.49 per cent yearly growth, similar to the industry growth rate. Also, in tune with the industry, the top five companies faced an increase in the overall operating cost, which made them post negative growth of 10.30 per cent in their operating profit. However, the top eight automobile companies posted further worsening in net profit by 30.79 per cent on a yearly basis, predominantly due to 14.78 and 35.39 per cent higher depreciation and tax charges respectively.

Though one can expect some recovery in the second half of FY16, the coming couple of quarters will be subdued by way of volume sales. The government now has only one way for growth – public spending - which is expected to improve economic activity across the county. The infrastructural activities will help the demand pick up in the automobile industry too, though not in the near term.

BANKING

The longer-than-expected recovery in economic and investment cycle is hurting the banking sector the most. The fourth quarter of the last financial year stands testimony to that. Of the 39 banks whose Q4 FY15 results were analysed (15 private sector banks and 24 public sector banks), on an aggregate basis it pointed at the fact that their profit declined by almost 5 per cent on a yearly basis. Nonetheless, painting the entire banking sector with the same brush will do injustice to the performance of the private sector banks that have performed better than state-owned banks.

The net profit of the private sector banks on an aggregate basis has increased by 13.1 per cent on a yearly basis compared to a fall of 20 per cent witnessed by the public sector banks (PSBs) in the same period. In fact, out of 24 PSBs 11 saw their profit declining on a yearly basis and out of these 11, three banks slipped into losses. Overall the profit recorded by 15 private sectors banks exceeded the combined profit of 24 public sector banks.

The reason for such diverse performance starts with the differential loan growth and consequent net interest income (NII) growth. For the quarter ending March 2015, PSBs saw their loan book growing by around 8 per cent compared to double-digit growth recorded by their private counterparts. The lower loan growth of PSBs was a conscious decision as their focus shifted towards capital conversion and risk aversion in a slow growth economy. The NII for PSBs grew by a mere 5 per cent on a yearly basis while for private sector banks it grew by a healthy 17.4 per cent. The segment that majorly contributed to loan growth was retail as corporate loan growth remained weak with incremental growth coming from disbursements in existing sanctioned facilities. Even for the next quarter the credit growth is likely to remain weak for the sector.

Another factor that has led to lower profit growth was continued weakness in the asset quality. The provisions of the banks on an aggregate basis have increased by 26 per cent on a yearly basis whereas on a quarterly basis it has increased by 38.6 per cent. Moreover, Q4 FY15 was the last quarter of the restructuring window (to get regulatory forbearance on asset classification) and hence the level of restructured assets remained at an elevated level.

This might create more slippages in the next couple of quarters and may therefore impact profitability. The asset quality, when measured in terms of gross NPA and net NPA ratio, saw an improvement on a sequential basis while it deteriorated on a yearly basis. The average combined GNPA and NNPA ratio of banks were at 4.14 per cent and 2.45 per cent respectively for Q4 FY15. There was an improvement of 21 basis points (GNPA) and 24 basis points (GNPA) on a sequential basis.

Though on an absolute basis the asset quality of state-owned banks remained at an elevated level, it saw some improvement on a sequential basis. This was largely because of a better-than-average performance by State Bank of India and its associates as well as United Bank of India. We believe that even for the next quarter the asset quality is not going to improve as higher slippages will continue with economic recovery still away by a couple of quarters. Moreover, the recent comment by the RBI’s governor clearly signifies that any rate cut is done for now and further rate cut will depend upon monsoon, response of the government and crude oil prices.

Going ahead we believe that private sector banks will continue with their better performance while the PSBs’ earning will remain muted due to higher non-performing assets and modest treasury gains due to stable bond yields.

[PAGE BREAK]

CEMENT

In the March quarter of 2015, the cement sector witnessed a slowdown – a consecutive second quarter of its kind - in volume growth as demand remained tepid during this period. Low government spending to contain fiscal deficit as well as muted private sector spending are the two main reasons. On an aggregate basis, the 23 companies in the sector we have analysed have posted topline and EBITDA growth of around 3 per cent and 15.1 per cent respectively for the March quarter 2015 on a YoY basis. The pressure on demand was evident as large companies recorded a 5 per cent decline in sales volumes on a YoY basis.

Cement prices across regions have remained weak during January-March 2015 with the exception of the southern region which saw a 34 per cent YoY increase in price whereas the central and northern regions witnessed a price decline of 16 and 14 per cent YoY respectively. Therefore, frontline stocks like ACC and UltraTech reported robust realisation growth of 5.5 and 8.4 per cent YoY respectively due to higher presence in south while India Cement, Ramco Cement and Orient Cement realisation grew at 20.3, 21.8 and 19 per cent respectively among the south-based mid-caps. However, the other regions reported flat to declining realisation due to lack of demand and increase in competition.

On the volume front, Shree Cement, JK Cement and Heidelberg reported growth of 7.6, 10.4 and 6.5 per cent YoY respectively led by capacity expansion while the rest of the players reported a volume decline due to poor rural demand. Dalmia Bharat reported 23.7 per cent volume growth due to consolidated OCL in 4Q FY15 with increase in stake from 48 to 74.6 per cent. There has been operational contribution of one month from OCL in 4Q FY15 and hence the figures are not comparable.

During the quarter, the industry EBITDA margin increased by 190 bps points from 16 per cent to 17.9 per cent, driven by lower power and fuel cost that accounted for over 30 per cent of the total cost, aiding players to more than offset the effect of rise in raw material and freight cost. With weak pricing in the north, players with higher north exposure such as Shree Cement, Ambuja Cement and JK Lakshmi Cement reported 26.8, 8.5 and 30 per cent decline in EBITDA per tonne YoY. In contrast, those with a higher south exposure - companies like India Cement, Ramco Cement and Orient Cement - witnessed a sharp increase in EBITDA per tonne led by higher cement prices on the back of continued production discipline among the south players. Rural housing makes for about 40 per cent of the total demand for cement which will depend on a better monsoon this year. Rise in the spending for infrastructure would indirectly benefit the cement companies as infrastructure companies would consume more amounts of cement to build an increasing number of roads along with urban development. South-based cement players may see some relief if new infrastructure development in Seemandhra and Telangana progresses well and cement demand gathers steam consequent to such developments.

[PAGE BREAK]

FMCG

Companies engaged in the FMCG sector posted a muted performance with single-digit revenue growth in the March quarter due to urban demand continuing to remain sluggish and rural demand impacted by crop loss due to unseasonal rains. On an aggregate basis, the 28 companies (19 staples + 9 discretionary) in the sector that we analysed have posted topline growth of 7.6 per cent and bottomline (excluding exceptional items) growth of 14.1 per cent on a YoY basis. The revenue growth of the FMCG sector was largely driven by volumes as a sharp decline in commodity cost compelled companies to partly pass on the benefit in terms of price cuts in the quarter. Volume growth remained in the range of 3-8 per cent in Q4 FY15.

If we look on the volume side, HUL registered relatively better volume growth of 6 per cent compared to 3 per cent in Q4 FY14 whereas Colgate and Dabur reported recovery in volume growth by 5 per cent and 8 per cent respectively. Marico’s domestic primary volume growth came in at a muted 3 per cent due to de-stocking of high-priced inventory at the dealer levels. Value-added hair oils and Parachute rigid packs witnessed growth of 5 per cent while Saffola edible oil registered volume de-growth of 1 per cent. GCPL’s soaps business grew at 15 per cent; the volume growth has been high single-digit and rest of the growth has been mixed-led growth. Its hair colors recorded 12 per cent growth out of around 80-85 per cent of the growth through volume on the back of rich crème-based colours.

If we look at the smaller companies, Jyoti Labs reported 11.3 per cent revenue during the quarter, mainly led by 8.7 per cent volume growth and 2.6 per cent value growth. Bajaj Corp reported double-digit volume growth in the consecutive quarter by 23 per cent YoY, driven by significant growth momentum in Bajaj Almond Hair Oil and No Marks. ITC’s cigarette volumes have seen a sharp slump from the last two quarters, falling by around 13 and 15 per cent YoY in Q4 FY15 and Q3 FY15 respectively due to a huge hike in excise duty announced during the last budget in July 2014.

In the case of consumer discretionary products, Asian Paints, which had delivered solid volume growth in H1 FY15 by more than 10 per cent YoY, posted sharp slowdown to around 5 per cent YoY volume growth in H2 FY15 mainly due to sluggish demand for decorative paints. Pidilite recorded muted sales volume growth by 3.1 per cent. Jubilant Foodworks’ revenue grew by 25 per cent YoY and this was helped by the same store growth of 6.6 per cent with 38 Dominos and eight Dunkin store additions.

In Q4 FY15 the FMCG sector has seen major impact of raw material easing and price cuts as we mentioned in our Q3 FY15 quarterly analysis issue. The prices of some key inputs like crude oil were down 19-20 per cent; palm oil has corrected 16 per cent YoY; and menthol, LLP, TiO2, LAB, HDPE, VAM, etc. have softened during the quarter on a YoY basis and this has benefited most of the consumer staples and paint companies. With a sharp fall in commodity prices, FMCG companies increased their advertisement spending by 100-200 bps. Despite the price cuts and increasing advertisement cost, the FMCG sector witnessed a 100 bps increase in operating margins. Going forward, it will help the companies to further boost the volumes to retain market share.

Going ahead, in FY16 it is expected that the FMCG sector may see some improvement in demand due to innovation of new products in various product categories, lower prices of input cost, rising per capita income, changes in consumption pattern as penetration of brands increases and also revision in macro factors. However, Q1 FY16 will close on a dismal note with monsoon forecasts adding to the uncertainty.

INFRASTRUCTURE

The government led by Prime Minister Narendra Modi has been trying hard over the past one year to boost private spending and revive the Indian economy. However, things have not fructified in terms of ground realities to the extent that was expected and now the only way out for the government is to increase public spending in the current fiscal. Primarily, the government has to start infrastructural spending.

Taking a serious note of this, proactive measures are being put into place and several stalled projects have been green-lit. At the core of all this is the Land Acquisition Bill which needs to be given the go-ahead. Further, to increase road infrastructure, the government has already outlined ways of early exits in BOT projects.

Given all this, there is a certain shade of rosiness to the picture for the coming quarters even though the March 2015 quarter was certainly a damp squib for companies in the infrastructure space. The combined revenue of the infrastructure industry showed a flattish marginal negative revenue growth of 2.32 per cent on a yearly basis during the March 2015 quarter. The government has controlled its public spending last year in order to curtail the finances and hence there was very little infrastructural activity across the country.

On the profitability front, the industry reported loss during the fourth quarter for FY15 as against profit during the same quarter last year. The drop in profitability was despite more than 600 basis points’ decline in raw material prices on a yearly basis. The almost 700 basis points increase in the industry’s finance cost and more than 20 per cent increase in depreciation cost contributed to the industry posting net loss.

Leading infrastructure companies are paying more interest cost than the industry average due to stalled projects. This interest cost during the March 2015 quarter was in spite the considerable interest rate cut by the Reserve Bank of India. However, we expect that the scenario will soon change in favour of infrastructure companies as a pick up in demand with road projects now kicking off and a positive movement in urban housing may offer some scope for improvement.

[PAGE BREAK]

INFORMATION TECHNOLOGY

With the Indian economy becoming larger and larger, the IT sector is now touching new highs, albeit with its own inherent challenges. With a lesser competitive advantage for the IT industry in India, there is need for the industry to shift its focus on more value-additions across its verticals and move to the next level of technology. However, the industry has evolved over the years in India and became a major contributor to the economy by employing more than 10 million workforces across the globe.

During our last quarter review, the Indian IT sector was expected to show a moderate growth in its revenue. However, the IT industry showed a flattish negative revenue growth of 0.33 per cent during Q4 FY15 on a sequential basis. The sequential revenue growth has disappointed our estimates. The industry’s yearly revenue growth stood at 12.02 per cent during the March 2015 quarter. The USD revenue too showed flattish negative growth on a sequential basis during the same quarter. The strengthening in US dollar against major global currencies and weakness in energy and telecom verticals dragged its US’ dollar revenue during the quarter.

On the profitability front, the IT industry showed a dismal performance during the March 2015 quarter. Its operating profit showed negative growth of 22.24 per cent on a sequential basis during the quarter. This negative growth in operating profit was primarily due to 6.87 per cent growth in its employee expenses, which is a major cost component in this sector. The industry’s net profit too posted negative growth of 21.99 per cent on a sequential basis during the March 2015 quarter. As mentioned earlier, the industry is facing new challenges of commoditization of services provided and experiencing tremendous pressure on its profit margins.

The performance of the top six IT companies matched that of the overall industry scenario in terms on its revenue. These companies have recorded flattish negative revenue growth of 0.43 per cent on a sequential basis during the quarter. Further, on the profitability front too these companies followed the industry growth rates and registered a negative growth of 21.13 per cent in combined operating profit on a sequential basis. However, the top six IT companies registered 9.43 per cent sequential growth in their employee expenses, higher than that of the industry.

For last few quarters, the IT companies have been posting continuous subdued performance and lower profitability and are in the process of exploring various new verticals and geographies to increase the scope of business. The European market seems to be lucrative for most of the leading IT companies. However, the Greece debt crisis has been creating uncertainty across these geographies over the past one year. The recent rupee depreciation against the US dollar seems to be the only margin leverage for the IT companies in the short term. We expect the sector to continue showing flattish performance over the next couple of quarters.

OIL & GAS

It seems the oil & gas sector has been marred by some kind of curse as whatever is the direction of economy and whatever be the price of crude, the blues of oil companies remain uninterrupted. This has been the case in FY15 also. Though crude touched a six-year low of USD 43/bbl, the burden of the subsidy sharing formula and inventory loss have hit both upstream and downstream companies below the belt and the impact of these was also clear during Q4 with the PSU oil & gas companies’ profitability impacted in a big way.

The full year subsidy for FY15 is budgeted at Rs 60,270 crore and as crude remained low the government has decided to spare upstream companies like ONGC and OIL from sharing the subsidy burden during the last quarter, thereby improving their crude realisation. Important to note is that during FY14 ONGC alone shouldered Rs 56,384 crore under-recovery discounts while Oil India shared Rs 8,736 crore of the burden.

Upstream companies like ONGC were hit hard due to lower realisation owing to falling crude. ONGC earned Rs 3,935 crore profit after tax (PAT) in Q4 as against Rs 4,889 crore earned during the corresponding quarter last year - a steep fall of 19.5-20 per cent. This drop in performance came on the backdrop of the fact that upstream companies have been spared from subsidy sharing, due to which their realisations have improved to USD 55.63/bbl during Q4 as against USD 32.78/bbl earned the during corresponding quarter last year. Crude oil production from the company’s ageing fields also remained stagnant at 22.26 MMT during FY15 while natural gas production was at 22.02 BCM during FY15.

On the other hand, downstream companies were hit hard due to inventory loss and bigger base of the previous year. The biggest OMC, IOC’s net profit has declined by a whopping 33 per cent during Q4 to Rs 6,285crore as against Rs 9,389 earned during Q4 FY14. The total income of IOC also dipped 30 per cent to Rs 94,791 crore from Rs 1.35 lakh crore in the corresponding quarter of FY14. Its GRM spurted to USD 8.77/bbl during Q4 as against USD 2.17/bbl earned during the same time last year. In the same way, the profitability of BPCL and HPCL got a hit due to the same reason and their PAT was down by 30 per cent and 53 per cent respectively while their GRM remained at USD 3.62/bbl and USD 4.66/bbl respectively.

Meanwhile, riding on a robust GRM, refining major RIL posted its best ever quarterly profit during Q4. The company’s GRM was at an impressive USD 10.1/bbl as against USD 9.301/bbl earned during Q4 FY14. On the topline front the company’s total income dropped by 40 per cent to Rs 58,176 crore due to a sharp decline in crude, while its net profit zoomed past Rs 6,243 crore during Q4 on a standalone basis. More importantly, this is the highest ever quarterly profit for the company. As crude is again heading northwards, the situation for the oil & gas sector may once more go haywire and upstream companies are eagerly looking for a new subsidy-sharing formula. If that happens then it would be beneficial for the sector. For OMCs the scenario would be positive if crude stabilises at the current level.

[PAGE BREAK]

PHARMACEUTICAL

Pharmaceutical companies posted a disappointing set of numbers for the fourth quarter of FY15. The only silver lining was that the domestic market offered better growth opportunity. This helped companies to post double-digit revenue growth in the March quarter mainly on the back of high growth registered by large formulation companies. On an aggregate basis, the 43 companies (39 Indian + 4 MNCs) in the sector that we have analysed have posted topline growth of 14.4 per cent while bottomline growth (excluding exceptional items) de-grew by around 4.7 per cent on a YoY basis.

During the quarter, the EBITDA level also de-grew by 11.9 per cent with EBITDA margins contracting by 495 bps point on a YoY basis due to higher material consumption and employee and other expenditure during the quarter. For large formulation companies, margins dropped by a significant 630 basis points, mainly impacted by the consolidation of the low margin Ranbaxy business by Sun Pharmaceuticals. On the other hand, mid-sized companies too registered a decline in their margins mainly on account of impact from import bans on IPCA Labs and a drop in profitability for Torrent Pharmaceuticals on account of absence of Cymbalta exclusivity seen in the previous year’s quarter.

During Q4 FY15 Indian pharmaceutical companies grew by around 25 per cent in the domestic formulation market. Among large-cap companies, Sun Pharmaceutical and Torrent Pharmaceuticals grew at 66 per cent. In the small-cap segment Ajanta Pharma grew at 19 per cent. Cipla, Lupin, Glenmark Pharma, Indoco Remedies and IPCA Lab grew by 21, 15, 15, 17 and 16 per cent respectively. On the export formulation business front, Indian companies posted growth of 21 per cent.

However, the US’ sales did not witness growth as compared to the earlier quarter due to a higher base effect increase in the competition of existing products and a slowdown in product approvals from the USFDA. Surprisingly, Aurobindo Pharma reported more than 55 per cent growth in its export formulation business due to its US’ sales growing by 20 per cent to Rs 1,340 crore and European sales increasing by 335 per cent to Rs 769 crore YoY.

Some of the major developments in the last quarter include: 1) Approval of 100 per cent FDI in medical devices, 2) Merger between Sun Pharma and Ranbaxy, 3) Apollo Health & Lifestyle, a wholly owned subsidiary of Apollo Hospitals Enterprise, acquired Nova Specialty Hospitals at an estimated cost of Rs 135-145 crore (USD 21.71-22.32 million). We believe a robust ANDA pipeline for the US’ market gives us enough confidence for better growth going forward, subject of course to USFDA approvals, many of which may be forthcoming in the second half of FY16.

[PAGE BREAK]

POWER SECTOR

Slowly but steadily some improvement has started coming into the power sector as the government has now shifted its spotlight on its revival. A lot of initiatives have been taken by the new government to make India self-reliant in terms of power requirement. However, it is too early to say anything about the impact of these initiatives on the companies operating in this space. Q4 was not an exception as the situation remained bleak for power sector companies.

During FY15 the total generation jumped to over 1,048 BU as against 967 BU generated during FY14 - a growth of 8.4 per cent with thermal power generation leading with 878 BU.

Despite this growth, capacity addition during the last fiscal has increased by 2,757 per cent to 22,566 MW as against 17,825 MW achieved during FY14. This clearly shows that companies have now started adding capacities with some momentum being witnessed on the ground in terms of economic growth. However, in spite of some improvement in capacity additions, the most annoying factor continues to be the pathetic plant load factor (PLF), which was just 62.99 per cent in March 2015 whereas it was 66.76 per cent in March 2014. It clearly indicates lower demand and fuel supply problems. At the same time, during March FY15 the availability of power remained deficient by 1,788 MU as demand grew to 83,572 MU, clearly showing a drastic mismatch.

Despite various efforts by the new government to give a boost to the power sector, the current situation doesn’t seem to be quite encouraging as interest charges of power companies are increasing on one hand and profitability is coming down in line with that increase. This has also impacted the performance of the biggest generator of the country, NTPC, as its net profit declined by 4.8 per cent during Q4 to Rs 2,944 crore as against Rs 3,093 crore earned during Q4 FY14. The total income of the company also went down to Rs 19,314 crore as against Rs 21,038 crore, a decline of 8.2 per cent.

The best performance put forward was by Tata Power as its topline increased by 19.5 per cent to Rs 2,164 crore on a standalone basis, while its net profit has risen to Rs 213 crore as against net profit of just Rs 84 crore earned during Q4 FY14 due to favourable impact of forex in VAT settlement and in coal companies, favourable impact of tariff order in MPL, and CGPL’s higher contribution due to reduced coal prices and lower depreciation.

Transmission major Power Grid also showed its mettle with a fabulous performance and its net profit jacked up to Rs 1,412 crore during Q4 as against Rs 1,175 crore earned the during same period last year - a whopping 20 per cent. Torrent Power is another company whose PAT rocketed by 113 per cent to Rs 369 crore as against Rs 173 crore earned during Q4 FY14.

On the lower side, interest cost has continued impacting the financial health of companies as it ate into their profits. The interest cost of companies like Jaiprakash Power Venture, Reliance Infrastructure, CESC, SJVN and Power Grid rose by 86 per cent, 53 per cent, 48 per cent, 379 per cent and 26 per cent respectively during Q4. Due to drastic increase in interest cost, some companies like Jaiprakash Power Venture and Jyoti Infrastructure have posted net loss of Rs 141crore and Rs 90.95 crore respectively.

Considering the present state of the power sector, it seems that this sector needs immediate attention of the government as power sector reforms are due since quite long. Also, as the rate of interest has started coming down, it clearly translates into quite a benefit for the power sector companies. Despite this, the Q4 result clearly indicates that there is still a lot that needs to be done on the part of the government and the situation will take couple of quarters to take proper shape on the ground.

STEEL

Though the government has been mooting “achche din” for the economy in general, there hasn’t been much impact in the infrastructure and construction sector and it is also too early to predict any kind of turnaround. On the one hand there is not much activity on the ground with the real estate sector continuing to experience an acute demand crunch while on the other hand dearer loans and high interest costs are working as a double whammy for the companies engaged in the infrastructure, construction and capital goods sector. The steel sector is one of such sectors that have been severely affected by this slowdown and Q4 has only extended this dismal show.

The country’s steel sector has been hit by weak domestic demand and lack of construction activities. Worse, steel producing companies are doubly impacted by the low-cost steel import from countries like China and other Asian countries from where steel import has increased tremendously during the last couple of years. India’s biggest producer of steel, SAIL too has posted a rather dim performance during Q4 with its total income at Rs 11,585 crore as against Rs 13m509 crore earned during Q4 FY14. Shockingly, the company’s PAT declined by a whopping 26 per cent to reach a mere Rs 334 crore as against Rs 452 crore earned during the same period last year. JSW Steel was impacted the most with its PAT going down by 76 per cent to Rs 188 crore on a standalone basis, while its total income dropped by 12 per cent to Rs 10,982 crore as against Rs 12,489 crore in the corresponding period last year.

Tata Steel, Uttam Galva Steel and Monnet Ispat were other companies whose profitability have taken a blow during Q4. Though Tata Steel and Uttam Galva Steel’s profitability declined by 58 per cent and 36 per cent respectively, Monnet Ispat posted a loss of Rs 492 crore as against loss of Rs 92 crore posted during Q4 FY14. On the positive side, Jindal Saw showed strength as its topline gained by a handsome 52 per cent to reach Rs 2,083 crore as against Rs 1,363 crore earned during Q4 FY14, while its PAT increased by 24 per cent to Rs 71 crore. Sujana Metal and Man Industries were other companies whose PAT increased by 20 per cent and 1,558 per cent respectively.

The biggest culprit that led to such a poor performance was the rising interest cost. The interest burden for SAIL, Tata Steel, Jindal Saw and Monnet Ispat rose by 36, 14, 42 and 164 per cent respectively, sending the finances of these companies haywire. Considering the current situation, the steel sector needs focused attention of the government as far as Chinese imports are concerned. Also it’s high time that real activity on the ground in terms of infrastructure and construction sector should take off so as to create fresh demand for steel.