COVER STORY

Meaningful recovery in the earnings of India Inc. seems to be still a couple of quarters away, and so the wait continues. The one single factor that dominated the performance of India Inc. in the first quarter of FY16 is commodity prices. The slump in commodity prices in general has impacted the performance of most of India Inc. directly or indirectly. The CRB Index, which measures the overall direction of commodity prices, is down by 27 per cent on an average in the first quarter of FY16 on a yearly basis. While this drop has benefitted many companies that use commodity as raw material, it has adversely affected companies that are into the commodity business.

The topline of 3,945 companies, including companies engaged in finance activities, declined by 4 per cent on a yearly basis while the bottomline increased by 1 per cent. Nevertheless, if we exclude finance companies, including banks, the topline has declined by 7 per cent and the bottomline has increased by 2 per cent. The decline in sales has primarily been led by drop in revenue of companies engaged in the commodity business such as metal and mining, cement, oil and gas, etc. However, sectors such as IT, pharmaceuticals, etc. have shown growth in topline.

The bottomline, however, has shown an improvement and for the entire universe of 3,945 companies it has increased by 1 per cent on a yearly basis. This might seem to be anaemic growth, but if we look at the trend it is encouraging as it has improved from a decline of 12 per cent in the fourth quarter of FY15. The performance gets even better if we exclude finance companies from the above universe. The profit increased by 2 per cent in the same period. Such a rise in the profit is on the back of 9 per cent rise in interest burden and 15 per cent rise in tax expense.

What has helped companies post increase in profit is better operating performance due to fall in commodity prices. Although the operating profit has remained flat on a yearly basis, the margins have increased by 15 basis points on a yearly basis to 25.4 per cent for the recently concluded quarter. On an aggregate basis, the net profit margins too have increased from 7.1 to 6.4 per cent.
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Nifty Earnings

The case with companies forming a part of CNX Nifty Index, considered heavyweight entities, is not very much different from the overall trend of the performance of companies. After excluding the results of finance and oil marketing companies, the revenue of Nifty-based companies has dropped by 4 per cent on a yearly basis while on a sequential basis it has declined by 3 per cent. As explained earlier, the real culprits are the commodity companies that have pulled down the performance. For example, companies like NMDC, Cairn India, Tata Steel and Reliance Industries saw their revenue declining by 48 per cent, 41 per cent, 17 per cent and 26 per cent respectively on a yearly basis.

Telecom, IT and pharmaceutical companies continued with their improved performance. The two leading telecom companies, Idea Cellular and Bharti Airtel, reported a YoY revenue growth of 16 per cent and 3 per cent on a consolidated basis over the period. The five software and IT stocks on the list reported a rise of 10 per cent in consolidated total income. Tech Mahindra led the list with a 23 per cent growth while TCS and Infosys followed with revenue growth of 16 per cent and 12 per cent respectively in the June 2015 quarter over last year’s same quarter.

The operating profits, however, for these companies improved by 11 per cent on a yearly basis due to a fall in the consumption of raw materials. These companies have reported a fall of 16 per cent in their raw material consumption for the quarter ended June 2015 compared to the same quarter previous year. This has helped to increase the operating profit margin by almost 3 per cent. Regardless, the net profit of these companies have declined by 3 per cent on a yearly basis due to rise in interest cost by 23 per cent on a yearly basis.

Going Forward

The external factors that have led to de-growth in the revenue of India Inc. are likely to persist for at least the next couple of quarters. The internal factors, however, are improving and this has been reflected in the start of new projects which, according to CMIE, is indicated through an increase in the quantum of new and revived projects. The latest IIP recovery is also led by the capital goods’ industry and even the core sectors of steel and cement have turned positive. Even the imports of engineering goods and project goods is recovering; this contrasts with the general trend of decline in overall imports.

Therefore, we believe that recovery is in sight and we may see the impact various factors in the next couple of quarters. The concern about a weak monsoon is also not going to impact much as area with normal or excess rainfall is up to 65 per cent at the end of August 7. Sowing has already covered 85 per cent of the normal area; it was 82 per cent last year. All this eases the worry about inflation as is demonstrated in the latest WPI (-4.1 per cent) and CPI (3.8 per cent) numbers for the month of July. As such, we may see a rate cut sooner than expected. This will definitely help to improve the overall sentiment in the economy. Looking at all the factors, we believe that from the December quarter we may see an uptick in corporate performance.
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AUTOMOTIVE: Yet to Pick up Speed

The picking up of infrastructure activity in the last six months has started attributing for the commercial vehicle (CV) segment’s growth. However, an erratic monsoon is now playing a big spoilsport and has adversely affected the fortunes of the light commercial vehicle (LCV), utility vehicle (UV), and two and three-wheeler markets, all of which rely heavily on the rural markets. Nevertheless, the Society of Indian Automobile Manufactures (SIAM) has stated that a slow recovery process is underway with more confidence seeping into the marketplace.

A total 19 automotive companies were analysed which has indicated that the net sales of the industry increased by 0.47 per cent in Q1 FY16 on a year on year basis led by 1.24 per cent increase in the number of units sold. The industry’s net sales declined by 4.78 per cent on a sequential basis. However, the industry major Tata Motors posted revenue of Rs 61,020 crore (about 56 per cent of the automotive sector’s revenue) with decline of 5.66 per cent in Q1 FY16 on a yearly basis.

The raw material cost for the sector increased by 2.91 per cent on a YoY basis and declined by 0.71 per cent on a QoQ basis. Sequentially, the raw material prices declined due to fall in prices of commodities, primarily steel, iron, copper and aluminium. The PAT of the industry declined by 16.19 per cent in Q1 FY16 as compared to Q1 FY15 while on a sequential basis it registered a rise of 36.94 per cent. The SIAM, in its first quarterly review (April-June 2015), has revealed that the Q1 FY16 numbers at 48,88,226 units mark a 1.24 per cent increase over Q1 FY15’s 48,28,163 units.

The passenger vehicle (PV) segment grew by 6.17 per cent (6,53,302), with cars growing at 8.57 per cent (4,82,332) and vans at 1.47 per cent (42,906). But the utility vehicle (UV) segment, which is facing the brunt of an unstable monsoon that in turn has affected incomes in rural India, has seen a fall of 0.57 per cent (1,28,064). The commercial vehicle (CV) segment has grown by 3.55 per cent (1,46,159), The medium and heavy commercial vehicle (MHCV) segment has posted 23.23 per cent growth (62,076) while the LCV segment is down by 7.37 per cent (84,083).

Two-wheeler sales have shown flat growth of 0.64 per cent (39,75,724), which is largely because of the decline in motorcycle sales by 1.97 per cent (27,12,769). The scooter market continued to grow by 7.25 per cent (10,79,535) while the moped numbers grew by 3.92 per cent (1,83,420). Three-wheeler sales declined by 6.77 per cent (1,13,041) with passenger carriers and goods carriers down by 7.97 per cent (90,926) and 1.51 per cent (22,115) respectively.

Overall, automobile exports for Q1 FY16 grew 9.22 per cent with PVs, CVs, three-wheelers and two-wheelers witnessing 0.75 per cent, 26.01 per cent, 40.05 per cent and 6.15 per cent growth respectively. As per the SIAM reports, companies were used to get a 2 per cent subsidy till now while exporting to Bangladesh and Sri Lanka under an incentive scheme but that has been now withdrawn by the government. That is affecting the bottomline of some companies.
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BANKING: PSBs Continue To Lag Behind

The banking sector has continued to report a bad set of numbers even for the first quarter of FY16. On an aggregate basis, for Q1 FY16, the 38 banks that we analysed (14 private banks and 24 public sector banks) reported a fall of 7 per cent in their reported profit on a yearly basis. This is after reporting a drop of 5 per cent in the fourth quarter of FY15 on a yearly basis. What is also more hurting is that the chasm between the performance of the private sector banks and state-owned banks continues to get wider.

While the 14 private sector banks (we have excluded Kotak Mahindra Bank as their numbers were not comparable on a yearly basis due to its acquisition of ING Vysya Bank) on an aggregate basis reported a healthy profit growth of 11 per cent on a yearly basis, the net profit of PSBs dropped by a huge 21 per cent during the same period. The combined profit of 14 private sector banks was almost 5 per cent above the combined profit of 24 PSBs.

The overall weakness in economy is impacting the performance of the entire banking sector. The loan growth for the quarter stood below 10 per cent on a yearly basis. This is clearly hurting the net interest income (NII) growth of banks which reported growth of a mere 9.3 per cent on a yearly basis. Lower credit growth also impaired the other income growth due to fewer opportunities for lenders to earn commission from activities like loan syndication. For Q1 FY16, what also adversely impacted the other income of banks was the lower treasury income.

The banks booked profit on their government bond portfolio during the April-June period of last year. Bond yields, however, have hardened since July last year following a tight monetary policy which resulted in lower profit from sale of investments. Other income, which forms almost 28 per cent of the total income of banks, grew by 15 per cent on a yearly basis and fell by 27 per cent on a sequential basis.

Besides lower other income and NII growth, what is also impacting the profitability of banks is the continued rise in bad assets and provisioning. On an aggregate basis, provisions for bad assets for banks have increased by a huge 38 per cent on a yearly basis. What is interesting to note is that private sector banks have seen a sharp increase in their provisions compared to their public counterpart. There was 77 per cent increase in provisions for private sector banks compared to 32 per cent by PSBs.

In absolute terms, however, provisions by PSBs are 4.5 times’ that of private sector banks. The average gross NPA as percentage of advances has increased by 42 basis points on a sequential basis, whereas net NPAs witnessed rise of 22 basis points. Going forward, the recent devaluation of yuan by China will definitely hurt some of the sectors, primarily steel, and hence banks having exposure to this sector might see their stress level rising. However, we believe that early signs of stabilisation in asset quality are visible in the PSBs and their performance will improve from here on.
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CEMENT: Getting a Better Grip

In June quarter 2015, India’s cement demand inched up in May and June, driven by gradually increasing government spending. On an aggregate basis, the 23 companies in the sector we have analysed have posted topline and EBITDA growth of around 5.4 per cent and 0.9 per cent respectively for the June quarter 2015 on a YoY basis. The larger companies recorded growth of around 4.3 per cent in sales volumes on a YoY basis despite a high base of more than 10 per cent growth in the corresponding quarter of the previous year. The eastern region was the best performing one with growth of around 8‐10 per cent YoY.

The government’s latest core sector data shows that cement output grew by a sluggish 2.6 per cent in both May and June. During April to June, the cement sector grew just 0.9 per cent which is a tenth of 9.6 per cent growth seen in the first quarter of FY15. The sector expanded 5.6 per cent during FY15. Despite an improvement in overall demand, prices remained weak in the rest of the regions due to intense competition. The all-India average cement prices decreased around 3 per cent sequentially in Q1 of FY16, led by western region’s price slipping down by around 8 per cent followed by the northern side price down by 3 per cent and the central region’s price down by around 2 per cent.

However, the prices remained flattish in the eastern region on a sequential basis but they increased by around 2 per cent in the southern region. Therefore frontline stocks like Ambuja Cement reported de-growth in realisation at around 9.3 per cent with the northern and western region contributing around 70 per cent to the total revenue of the company whereas ACC’s realisation per ton marginally declined by 1.2 per cent and UltraTech’s realisation per ton increased by 3 per cent due to both the companies being well-diversified geographically on a pan-India level. Ramco Cement’s realisation per ton increased 18.5 per cent due to higher exposure in the south.

On the volume front, Shree Cement and JK Lakshmi Cement reported growth of 16.9 and 15 YoY respectively, led by capacity expansion. Heidelberg reported growth of 14.3 per cent due to an improvement in its capacity utilisation. During the quarter, the industry’s EBITDA margin declined by 70 bps points from 16.7 per cent to 16 per cent due to lower realisations. With weak pricing in the north, players with higher northern exposure such as Shree Cement, Ambuja Cement and JK Lakshmi Cement reported 37.2, 42.7 and 61.2 per cent decline in EBITDA per tonne YoY. In contrast, those with a higher southern exposure such as companies like India Cement and Ramco Cement witnessed a sharp increase in EBITDA per ton led by higher cement prices on the back of continued production discipline among the southern players.

The cement demand and pricing trend environment is at the cusp of a cyclical upsurge from the second half of FY16 against the backdrop of expected pick-up in infrastructure and real estate activities across the country, which will also be supported by pick-up in rural demand. Further, slowing capacity addition will aid in improving the fortune of the industry.
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FMCG: A Mixed Bag of Fortunes

Companies engaged in the FMCG sector posted a muted performance with single-digit revenue growth in the June quarter due to ban on Maggi noodles which impacted Nestle’s revenues by 20 per cent, while lower cigarette sales impacted revenues of ITC by 7 per cent. On an aggregate basis, the 31 companies (20 staples + 11 discretionary) in the sector that we analysed have posted topline growth of 2.9 per cent and bottomline (excluding exceptional items) growth of 12.3 per cent on a YoY basis. The volume growth of FMCG companies improved during the June quarter as they passed on the benefits of lower input costs to consumers to boost sales. The trend is likely to continue over the next couple of quarters.

If we look on the volume side, Britannia reported volume growth of 10 per cent whereas Godrej Consumer’s domestic business posted volume growth of 13 per cent YoY. Dabur reported 8.1 per cent volume growth led by strong growth in oral care, OTC, foods and hair care. HUL registered volume growth of 6 per cent, same as in Q4 FY15, whereas Colgate posted toothpaste volume growth slightly below 2 per cent, which was at its multi-quarter low. Marico’s net sales grew 10 per cent, mainly led by 6 per cent volume growth in its India business. Nestle India posted a 20.1 per cent decline in sales mainly due to a recall of Maggi noodles in India and it posted a loss of Rs 64.4 crore due to Rs 451.6 crore of exceptional loss after the ban on its noodles.

If we look at the smaller companies, Jyothy Laboratories reported 5.6 per cent volume growth. Bajaj Corp grew its volumes by 12 per cent (YoY) whereas Emami reported a fifth consecutive quarter of double-digit domestic volume growth at 15 per cent. The company acquired ‘Kesh King’ in June 2015 for Rs 1,684 crore, which helped it foray into the ayurvedic hair and scalp care segment. The company expects revenues from Kesh King to be at Rs 900 crore in FY16. ITC’s cigarette volumes continually fell by around 15-16 per cent YoY respectively due to a huge hike in excise duty in the last 12 months whereas its agri business was down 29.4 per cent YoY on a high base. FMCG and hotels registered healthy double-digit sales growth of 12.2 and 15.7 per cent YoY respectively.

In the case of consumer discretionary products, Asian Paints reported low double-digit growth at around 10-11 per cent as against 11 per cent growth in Q1 FY15 on the back of a strong volume growth in lower end paint categories. Kansai Nerolac reported 8.3 per cent YoY topline growth largely driven by around 14 per cent YoY growth in volume with a change in the sales mix. Pidilite recorded sales volume growth by 5 per cent (3 per cent in Q4 FY15) with consumer and bazaar growth at 7.4 per cent, while industrial was flatly impacted by weak industrial activity. Jubilant Foodworks’ revenue grew by 19.7 per cent YoY on account of weak same store growth of 4.6 per cent, even off a low base (Q1 FY15 by -2.4 per cent), which the management attributed to muted discretionary spends.

With a sharp fall in commodity prices, the top FMCG companies, including brands such as HUL, Dabur, Colgate, Marico, Britannia and Emami, during Q1 FY16 saw a 16.1 per cent growth in advertisement spend of Rs 2,350 crore. Despite the price cuts and increasing advertisement cost, the FMCG sector witnessed a 53 bps increase in EBITDA margin to 19.9 per cent in Q1 FY16. Going ahead, in FY16, the FMCG companies would witness volume-led growth in the next two quarters and see further pick-up in demand in the second half of the year.
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INFRASTRUCTURE: Slow Recovery in Sight

Indian infrastructure companies posted weak results in the June 2015 quarter, reflecting a drag in the economy. According to the Reserve Bank of India data, credit growth for the overall infrastructure sector was 11 per cent in June 2014 while it was 9.2 per cent in June 2015. This suggests weak investment sentiments across the infrastructure industry. The sector has witnessed a sharp decline in credit demand for development of road, power and other infrastructure projects over the last two years.

However, the recent infrastructural announcements by the government have started materializing in these companies’ order books. The consolidated order book of the infrastructure sector major L&T stood at Rs 2.38 lakh crore as on June 30, 2015, higher by 22 per cent on a yearly basis. A total of 70 infrastructure companies were analysed, leading to the fact that the net sales of the industry declined by 13.63 per cent in Q1 FY16 on a quarterly basis. The sector’s net sales remained flat and declined by 0.01 per cent during Q1 FY16 on a yearly basis. The sector is expecting topline growth in the forthcoming quarters with a steady resolution of execution issues and improving revenue visibility. The infrastructure sector seems to have recovered modestly during the quarter.

The raw material cost for the sector declined by 1.84 per cent on a yearly basis in Q1 FY16. Meanwhile, steelmakers from India are expected to cut prices over the forthcoming quarter to tackle the low priced Chinese steel in order to preserve their market share. The steel companies are already bleeding over the sharp decline in commodity metal prices. However, this may be helpful for the infrastructure sector to keep the raw material cost at lower levels.
The operating profit excluding other income for the industry declined by 1.77 per cent on a yearly basis in Q1 FY16. The industry major L&T’s operating profit too decreased by 8.79 per cent in Q1 FY16 on a yearly basis.

Furthermore, the interest expense for the sector increased by 9.47 per cent on a yearly basis in Q1 FY16. The depreciation expenses reduced by 9.02 per cent on a yearly basis in the June 2015 quarter. The overall bottomline of the infrastructure industry was negative in Q1 FY16 as against net profit in Q1 FY15.

The government is aiming infrastructure development as a national priority and it needs funds up to USD 200 billion a year for the next five to 10 years to attain the desired infrastructure level. The Union Cabinet has cleared the National Investment and Infrastructure Fund (NIIF) during the first week of August 2015. The fund of Rs 20,000 crore will function as a trust from December 2015.
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INFORMATION TECHNOLOGY: Gearing Up to Meet Embrace New Technologies

India is the world’s largest sourcing destination for the information technology (IT) industry. The industry employs about 1 crore Indians and continues to contribute significantly to social and economic transformation in the country. India’s cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be its unique selling proposition (USP) in the global sourcing market.

The June 2015 quarter was a bit disappointing; the few top Indian software companies like Persistent, KPIT and Tech Mahindra have indicated pressure on the revenues of this quarter. However, TCS posted good growth. The operating margins were impacted adversely on account of seasonal factors like wage revisions, visa expenses albeit offset and around 2.1 per cent average currency depreciation during the period.

TCS, India’s foremost IT company, posted Rs 25,668 crore revenue, up by 6 per cent QoQ and 16 per cent on a yearly basis. The top five Tier I Indian software companies viz. TCS, Infosys, Wipro, HCL and Tech Mahindra have posted 5 per cent sequential revenue growth and 13.6 per cent yearly revenue growth. The operating profit rose by 22.45 per cent on a sequential basis and 6.62 per cent on a yearly basis in Q1 FY15. Interestingly, the net profit of these companies rose by 20.65 per cent on a sequential basis and 4.66 per cent on a yearly basis.

From the Tier II sector IT companies like Hexaware posted 8.3 per cent sequential revenue increment and MindTree posted 6.92 per cent revenue growth on a sequential basis. An analysis of the top 225 companies reveals that the total revenue from operations rose by 4.23 per cent on a QoQ basis. The employee cost decreased by 2.43 per cent during the same period. Interestingly, the operating profit increased by 26.69 per cent on a sequential basis during Q1 FY16. The net profit increased by 32.64 per cent in Q1 FY16 as against Q4 FY15.

The software industry is going through churnings of technological advancement. The prospects of the IT industry are gearing up to tackle various issues as well as the idea of using software to control hardware. As per rough estimates, up to 5 crore things will be connected on the internet by the year 2020, bringing together sensors and smartwatches, smart meters and smartphones, washing machines, fridges, wearable devices, and much more. Hence, now it is high time that software companies should come up with world-class products and services to cater to the changing environment acros-s India and the world.
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OIL AND GAS: Double benefits help mint profits

At last “achche din” are here for sure for oil and gas companies, especially for oil marketing companies (OMCs), which have actually minted money owing to the double benefits of sustained decline in crude oil prices and complete deregulation of petrol and diesel. The impact of this is quite obvious: OMCs have minted money during the first quarter with their profitability rising manifold due to the increasing gross refining margins (GRM). Interestingly, Indian Oil became the most profitable company of the country with its PAT touching the USD 1 billion mark.

The grit displayed on the part of the government to anyhow curtail the petroleum subsidy is now showing its impact on the health of petroleum companies although the biggest explorer, ONGC, hasn’t performed on expected lines due to declining production from ageing fields. During the first quarter, ONGC has given a subsidy discount of Rs 1,103 crore as against Rs 13,200 of subsidy discount shared during the same period last year. Due to complete deregulation of petrol and diesel, ONGC hadn’t shared anything during the quarter ending March 2015.

On the heels of improved realisation, ONGC’s net profit jumped by around 14 per cent to Rs 5,459 crore in Q1 as against Rs 4,782 crore during the same period last year. Despite achieving USD 58.92/bbl realisation, the company missed the estimates as experts were expecting a realisation of more than USD 60/bbl during the quarter. The company’s topline also increased marginally by around 4 per cent to reach Rs 23,631 crore as against Rs 22,746 crore earned during Q1 FY15.

On the other hand, the biggest retailer of the country, Indian Oil’s topline declined by 19 per cent due to drop in crude prices, reaching Rs 1.01 lakh crore. However, the real positive news came in terms of GRM, which soared to a whopping USD 10.77/bbl as against just USD 2.25/bbl during the same period last year. This is the highest margin for the company since June 2008 when it earned USD 16.81/bbl. Riding high on fabulous GRMs, the company’s PAT jacked up by 155 per cent to reach Rs 6,435 crore during Q1 as against Rs 2,523 crore earned during the same period last year.

The company’s petrochemical margins also got doubled to Rs 1,875 crore as against Rs 719 crore while owing to declining crude price it earned an inventory gain of Rs 2,395 crore as against inventory loss of Rs 426 crore posted in Q1 FY14. Other oil marketing companies such as BPCL and HPCL also have put a decent show as their profitability shot up by a big margin. In fact, HPCL posted a net profit of Rs 1,588 crore as against a mere Rs 46 crore earned during the same period last year, showing a growth of 3,349 per cent. Its GRM has also climbed to USD 8.56/bbl. Meanwhile, BPCL’s GRM too reached USD 8.55/bbl as against USD 3.38/bbl achieved during last year, due to which it earned PAT of Rs 2,376 crore during Q1, a growth of 95 per cent.

Due to improved margins, the biggest private sector company, Reliance Industries, has also put forward a fabulous show with its GRM improving to USD 10.4/bbl as against USD 8.70/bbl earned during last year, which is at its six-year high. On the topline front the company’s total income declined by 31 per cent to Rs 67,635 crore on a standalone basis while its net profit rose by 11.8 per cent to Rs 6,318 crore during Q1 as against Rs 5,649 crore earned during last year.

Apart from GRM, the company’s petrochemicals business recorded a strong quarterly performance supported by high operating rates and margin strength in the ethylene chain, which helped the company to post better numbers. Going by the state of the oil and gas sector, it seems that softness in crude oil prices may remain for long, which will certainly help OMCs in the medium term also. Considering this, oil companies can be a decent investment.
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Pharma Sector: One-Offs Improve Overall Show

Pharma companies posted double-digit revenue growth at lower end in the June quarter mainly due to due to a high-base effect, adverse cross-currency movement and fewer product approvals for the regulated markets. On an aggregate basis, the 50 companies (45 Indian + 5 MNCs) in the sector that we have analysed have posted topline growth of 12.7 per cent while bottomline growth (excluding exceptional items) grew by around 15.2 per cent on a YoY basis. The EBITDA, during the quarter grew by 16.4 per cent with EBITDA margins expanding by 176 bps point to 23.1 per cent on a YoY basis (excluding Sun Pharma’s exceptional charges of Rs 685 crore). This was on account of better product mix in US market witnessed by Torrent Pharmaceuticals and Cipla, which reported a significantly strong revenue as well as operating margin growth which was driven by of higher contribution from Nexium (high margin due to profit sharing basis).

During Q1FY16 Indian pharmaceutical companies grew by around 13.52 per cent in the domestic formulation market. On the export formulation business front, these companies posted growth of 11.24 per cent. However US’ sales has not witnessed growth similar to the earlier quarter due to a higher base effect, increase in competition of existing products, and slowdown in product approvals from the USFDA.

Few developments in this sector in last quarter: 1) Drug major Lupin acquired Brazil's Medquimica Industria Farmaceutica SA, marking its foray into the Latin American nation, 2) Strides Arcolab acquired South Africa's Aspen Pharmacare's portfolio of branded and generics products in Australia for about Rs 1,910 crore, 3) Marksans Pharma has acquired Time-Cap Laboratories Inc, New York for USD 28 million (about Rs 170 crore), and a move that will give the Mumbai-based company a front-end presence in the US.

We expect a large chunk of the pending ANDAs to unfold in the next few quarters and that will help revive the growth rates. Also, the growth is likely to be driven by the domestic market, which is witnessing a robust volume growth, and the introduction of new drugs. Recently dollar depreciation will also help export formulation front.
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POWER: Decline in Demand Hampers Performance

Though the Indian government is trying hard to put economy back on track and the green shoots of revival are also quite visible, the core sectors haven’t yet come out of the blues. The power sector is one such that is actually waiting for a significant turnaround. However, if we look at the performance of the power sector companies, some kind of movement is clearly visible and companies have started forth putting better numbers both in terms of topline and bottomline, but it is too early to say anything about them as far as sustained progress is concerned. On an overall basis, power remained deficient in the country and the PLF (plant load factor) was at a low.

During April-June 2015, total electricity generation has increased by 1.9 per cent to touch 271 BU while it was at 266 BU during the same time last year. Here, the contribution has come from thermal power, which shot up by 0.97 per cent to 225 BU while hydro remained stagnant due to a weak monsoon season. Despite various efforts, capacity addition remained the biggest concern as just 3,280 MW of generating capacity has been added from April to June 2015 while 4,229 MW was added during the same period last year – indicating a decline of 22 per cent.

Both thermal and hydro power plant capacities have been added during this period and the total installed capacity of the country has reached 2,74,817 MW in which 1,91,263 MW came from thermal power plants. The demand for power continues to be one of the biggest concerns for the sector as there is a sustained decline in the PLF. This dropped from 66.31 per cent to 59.43 per cent in June 2015 as against June 2014. This is an irritant for the sector as this parameter has to improve if the power sector wants to get out of the woods.

Due to various concerns and lukewarm demand for power, individual companies’ performance remained a worrisome factor. The biggest generator of the country, NTPC’s total income depreciated by 8 per cent to Rs 17,323 crore during Q1 as against Rs 18,885 crore earned during Q1 FY15. Its net profit also declined by 3 per cent during Q1 to Rs 2,135 crore as against Rs 2,201 crore earned during Q1 FY15 owing to increase in fuel cost during the quarter. One of the best performances has been by Tata Power as its consolidated profit rose to Rs 322 crore as against loss of Rs 66 crore during Q1 FY15. Actually, the company suffered foreign exchange loss of Rs 136 crore during Q1 FY15 while this year it has earned other income of Rs 105 crore.

The company’s topline also grew by more than 5 per cent. Power Grid also posted a fabulous show as its topline grew by 17 per cent to Rs 4,787 crore as against Rs 4,075 crore earned during the same period last year, while its PAT also jacked up by 20 per cent to Rs 1,366 crore. Torrent Power also proved its mettle as its PAT touched Rs 174 crore as against Rs 87 crore posted during Q1 FY14, showing a growth of more than 100 per cent. The most interesting set of numbers has been put forward by Reliance Power, which stunned the street by posting a PAT of Rs 344 crore during Q1 as against Rs 244 crore earned during last year, indicating a growth of 41 per cent.

On the other hand JSW Energy’s PAT declined by 8 per cent to reach Rs 308 crore as against Rs 335 crore and its topline also came down by 17 per cent to reach Rs 2,106 crore owing to decrease in demand. The worst performance was by Adani Power, which posted a loss of Rs 417 crore owing to huge increase in interest charges. This happened despite the fact that the company’s topline rose by 13 per cent during Q1 to Rs 5,914 crore. Reliance Infrastrutrure’s profitability also declined by 32 per cent to touch Rs 240 crore as the interest burden rose by 34 per cent to reach Rs 644 crore during Q1 as against Rs 480 crore during last year.

Considering these numbers, it is quite clear that despite some kind of positivity that emerged in the power sector, the situation is still quite grim as economic activity has not yet picked up at the expected pace, thereby hampering the demand for power. It is now inevitable for the government but to focus on economic growth and infrastructure development so that the PLF in the power sector shows some improvement.
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STEEL: Global Cues Hit the Sector Hard

The steel industry has been hammered out of shape in the last one year due to a rout in the commodity prices in general and steel prices in particular. What is also rubbing salt on the wounds is the slowdown in China’s economy and if all this was not enough, the recent devaluation of China’s currency yuan will make the condition worse for steel companies since China is the largest consumer as well as producer of steel in the world. On the one hand all these conditions clearly indicate a softening of steel prices in the medium term as well, whereas on the other hand, less than expected growth in the economic and infrastructure activities in the domestic circuit is putting further pressure on the steel companies.

At the same time the high rate of interest is also a concern for these companies. That being the reason, Q1 remained quite sober for the steel sector both due to domestic and global reasons. The steel sector is hugely impacted by weak domestic demand and lack of economic activities. Also, steel producers are doubly impacted by the low cost steel imports 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’s performance in Q1 was also impacted by the slowdown with the total income of the company reaching Rs 9,677 crore as against Rs 11,536 crore earned during Q1 FY15. What was worse, the company posted a net loss of Rs 321 crore versus PAT of Rs 529 crore earned during the same period last year. JSPL was also a sufferer of bleak demand and various litigation issues as it posted a net loss of a whopping Rs 355 crore on a consolidated basis as against Rs 401 crore profit earned during the same period last year. The company’s topline also declined by 11 per cent to reach Rs 4,426 crore whereas its interest burden rose from Rs 535 crore to Rs 851 crore during Q1.

JSW Steel was also impacted with the company posting a net loss of Rs 125 crore on a consolidated basis as against Rs 643 crore profit earned during the last fiscal, while its total income dropped by 12.6 per cent to Rs 11,576 crore as against Rs 13,254 crore. The star performer of the sector remained Tata Steel as its PAT increased by 114 per cent to reach Rs 734 crore as against Rs 343 crore earned during Q1 FY15 on a consolidated basis. This is despite the fact that the company’s total income declined by 17 per cent to reach Rs 30,300 crore on a consolidated basis.

In addition to some exceptional items, a decline in interest burden has helped the company to post higher PAT. NMDC and Usha Martin were other companies whose profitability was been impacted heavily during Q1. NMDC’s profitability declined by 47 per cent to Rs 1,010 crore while its topline slipped by 16 per cent during Q1 to reach Rs 2,295 crore. On the other hand, Usha Martin posted a net loss of Rs 72 crore as against Rs 20 crore loss posted during the same period last year, whereas its topline also declined by 7.5 per cent.

On the positive side APL Apollo Tubes showed some strength as its topline gained by a handsome 29 per cent to reach Rs 965 crore as against Rs 745 crore earned during Q1 FY15, while its PAT increased by 10 per cent to Rs 21 crore. Clearly the biggest concern for steel companies is the interest burden, which for SAIL, JSPL and Usha Martin rose by 45, 59 and 5 per cent respectively. Additionally, as the Chinese economy is now showing a persistent slowdown, it will a long cycle for commodities like steel to show any kind of spurt in the near future.

Since the global cues are quite bleak, only domestic consumption in infrastructure and housing can save the day for steel companies but those activities will also take some time to take shape on ground. Considering this, the steel sector’s performance would continue to be a drag.
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TEXTILE: Spinning a Success Story

Textile companies in India make for one of the largest employment generating industry and account for 13 per cent of the total exports from India. These companies have exhibited a good performance in their quarterly results. On an aggregate basis, the profit after tax of 254 textile companies analysed for this report increased by a whopping 122 per cent on a yearly basis while on a quarterly basis the growth is even more phenomenal; it has increased by 363 per cent. This is despite a drop in topline by 4.4 per cent and 6.96 per cent in the same period respectively. The fall in topline was primarily due to lower realisation in spite of a rise in volumes. What helped companies post robust bottomline was strong operational performance.

For example, a company like Vardhman Textiles saw its topline declining by 9 per cent on a yearly basis due to lower realisations of yarn while its bottomline increased by 39 per cent on a yearly basis due to higher operating margins backed by lower raw material prices. The raw material consumed by these companies has declined by 3 per cent on a yearly basis while sequentially it has witnessed a drop of 1.1 per cent. The primary reason for such a fall is the drop in cotton prices, which has come down by almost 40 per cent in the last one year.

According to a report by India Ratings & Research, “China’s decision to liquidate cotton stocks has been an inflection point for world cotton trade, and has led to a glut in the cotton market with exporters facing waning demand. Lower imports by China of cotton as well as cotton yarn has led to sluggish demand for cotton yarn for Indian exporters focused on China, and has pushed prices down for yarn.”

What has also helped companies post better profit figures is the very marginal rise in interest expense and a fall in depreciation expenses. The average increase in the interest cost of these companies was 2.9 per cent on a yearly basis, while the depreciation cost of these companies declined by 10 per cent on a yearly basis. Depreciation costs had increased steeply in FY15 as the companies provided for it under the new Companies Act, which lowered the effective life of certain assets. The depreciation reduced in Q1 FY16 owing to rationalisation of depreciation.

The recent devaluation of its currency by China will have a significant impact on Indian textile companies. This is because China remains the major player in the textile and clothing export market worth USD 784 billion with a market share of 36 per cent. Since there is a high overlap of both exports market and textile products between India and China, such devaluation might decrease the competitiveness of Indian textile companies in the world market. The deprecation of Indian rupee will mitigate some of such risks. Going forward, while cotton prices are likely to remain range-bound and the demand for apparel will increase, these factors will benefit cotton textile companies and companies that export apparel.