DSIJ Mindshare

Q1FY13: Results Analysis

Over the past few years, we have seen India Inc. swimming against the tide quarter after quarter and emerging victorious by posting a good set of numbers on many occasions. But sometimes, the tide gets just too rough to handle, and every attempt at swimming against it only tires you out without much success. The results for the March 2012 quarter depicted a similar story, and now, the numbers for the quarter that ended June 2012 seem to be echoing a similar story.

While rampant inflation, rising interest costs and weakening IIP numbers have already been playing spoilsport for quite a few quarters now, the situation has only aggravated further with a new irritant entering the scene – a depreciating rupee that has resulted in mounting forex losses posted by some of the major companies. These have only made matters worse for India Inc., whose bottomline seems to be weakening at its knees.[PAGE BREAK]

Change In Scenario From The Quarter Ended Mar 2011 Till Mar 2012 
Mar-12Mar-11
GDP growth for Q1FY13 estimated at 5.50 per centGDP growth for Q1FY12 estimated at 8 per cent
FY13 GDP growth expected at 6.50 per centGDP growth for FY12 at 6.50 per cent (revised from 7.50 per cent)
Some improvement in WPI at 7.50 per cent in April, 7.55 per cent in May and 7.25 per cent in JuneWPI was higher at 9.74 per cent in April, 9.56 per cent in May and 9.36 per cent in June
IIP growth declined consistently, at -0.90 per cent in April, 2.50 per cent in May and -1.80 per cent in JuneStrong IIP growth figures showing consistent growth at 5.30 per cent in April, 6.20 per cent in May and 9.50 per cent in June
Some slow but steady recovery witnessed in the US and some European marketsGlobal markets were struggling, with the European concerns looming large and the US losing its AAA rating
Sentiments improved a bit, as the there appeared to be some ray of hope
Sentiments were not good, as the global as well as domestic economies were losing steam
Rupee depreciated at a higher pace from the 50 mark in April 2012 to breach an all-time low against the US dollar in June 2012Rupee traded in the range of 44-45 against the US dollar

[PAGE BREAK]

If we take even a cursory look at the financial results posted by companies for the June 2012 quarter, they clearly indicate that India Inc. has gone through a rough time. The June quarter results season has ended, with the results of 2428 companies having come in so far. Though the number is actually higher, we, at DSIJ, have only considered companies that are frequently traded on the bourses.

After making the regular adjustments of excluding PSU Oil Marketing Companies (OMCs), India Inc. continued to show some resilience on the sales front in this quarter too, with a consolidated topline growth of over 12.28 per cent on a YoY basis. This presents quite a relieving picture considering the overall macroeconomic scenario that we are presently in. Inflation consistently remained at the higher levels (April 7.50 per cent, May 7.55 per cent and June 7.25 per cent) and the Index of Industrial Production (IIP) also remained a concern as growth declined consistently (April -0.90 per cent, May 2.50 per cent and June -1.80 per cent).

However, the enthusiasm over a decent topline growth is suddenly dampened when you look at the bottomline figures. The net profits of Indian companies have witnessed a marginal growth of just 2.24 per cent in this quarter.

The situation is also quite poor on a QoQ basis, where the topline actually declined by 5.09 per cent and the bottomline declined by 9.23 per cent. Amish Munshi, Senior Fund Manager, Tata Mutual Fund, says, “The June quarter results were broadly in line with market estimates, with around 12-14 per cent topline growth and a flat bottomline. Cost pressures continue to impact the bottomline growth for the broader market”.[PAGE BREAK]

Though the figures are not favourable, we can see a small ray of hope here. Despite the gloomy scenario, some leading Sensex-based companies have put up a great show. Despite all odds, the topline growth of these Sensex-based companies stood at 16.75 per cent and the bottomline growth stood at 12.60 per cent. This is despite the big names like Tata Steel, Bharti Airtel and Tata Power actually witnessing a significant decline in their toplines and bottomlines. Else, the growth would have been higher. Of the 30 Sensex-based companies, 11 have surpassed the street’s expectations and 14 have posted results in line with the expectations.

Fast Facts 
  • Out of a total of 2428 companies that we have considered, the net profit of 1175 companies increased, while that of 1182 companies declined and 71 companies remained stagnant.
  • The sales of 1472 companies increased, while those of 838 companies declined and 118 remained stagnant.
  • The interest cost of India Inc. (excluding that of banks and financial services companies) has increased by 52 per cent on a YoY basis. On a sequential basis, the interest cost is up by 9 per cent.
  • Operating profit margins for the June 2012 quarter declined to 17.40 per cent from 18.10 per cent in June 2011.
  • The biggest surprise was in terms of the depreciation cost, which has witnessed a growth of 12.56 per cent. In the preceding two quarters, it had witnessed a significant decline. This shows that some capex is being incurred.
  • Banking, FMCG, Cement and Pharma have been the star performers, with some Large-Cap companies leading the way.[PAGE BREAK]

Increased Depreciation Cost – Renewed Optimism
A major positive that has emerged in the June 2012 quarter is the depreciation cost, which has actually increased by 12.56 per cent after witnessing a decline in the preceding two quarters. We take this as a good sign, as an increase in the depreciation cost would mean a positive capex program.

The best part is that this increase is led by the Large-Cap ‘A’ Group companies. Around 65 per cent of the total depreciation amount is contributed by the ‘A’ Group companies, clearly indicating that the capex is being led by these Large-Cap companies.

Input Costs – Marginal Improvement
Like in the past few quarters, there has been no respite on the input cost front this time too, with inflation remaining at the higher levels. The raw material costs have witnessed an increase of 14.29 per cent on a YoY basis. The impact of this is directly seen on the margin front, as the operating margins for the June 2012 quarter declined to 17.40 per cent from the levels of 18.10 per cent. However, the scenario was better than the March 2012 quarter, which witnessed a negative impact of around 200 basis points and where the margins stood at just 17.09 per cent. So, some improvement has certainly happened on the margin front. We feel that the fall in commodity prices in the international markets is the reason behind this.

Lalit Nambiar, Fund Manager & Head – Research, UTI AMC, has this to say, “The results have been a tad disappointing. Revenue growth showed a bit of deceleration, but the EBITDA margins showed slower compression than that seen in recent quarters, largely benefitting from raw material savings”. Munshi concurs, saying “Within the cost matrix, we find that while the raw material costs have gone up at a much slower pace as compared to the last few quarters, the interest costs have accelerated”.

Interest Cost – Still A Concern
We have continuously focussed on the interest cost burden in the past, as the key interest rates were maintained at the higher levels. The RBI has not reduced the repo rate further after cutting it by 50 basis points in April 2012. Hence, not much of an impact is visible in the June quarter results.

The interest cost, excluding that for banking and finance companies, has increased by 52 per cent. This is a significant rise. To put the figure in perspective, the interest cost for the June quarter as a part of sales stood at 3.66 per cent, a significant increase from 2.64 per cent in the June 2011 quarter. However, we feel that some action is expected from the government on the rate cut front, now that P. Chidambaram has taken over as the new Finance Minister.[PAGE BREAK]

Key Performers
If we further dig into the results, they clearly indicate that the banking, cement, pharma and FMCG companies have managed to put in better figures. Banking and finance companies have posted a topline growth of 24 per cent and bottomline growth of 22 per cent on a YoY basis. Excluding banking companies, the YoY topline growth would have been just 9.50 per cent and the bottomline would have witnessed a decline of 6.70 per cent.

Further, the growth in the banking, pharma and cement sectors has been led by the Large-Cap companies. In banking, SBI, ICICI Bank and HDFC Bank have been at the forefront, while in pharma, Sun Pharma, Lupin and Wockhardt posted decent gains. In FMCG, Dabur and Marico posted robust numbers and in the cement sector, higher realisations have helped the biggies like ACC, Ambuja Cements and UltraTech. According to Kaushik Dani, Head – Equity, Peerless Mutual Fund, “The results for the first quarter of the new fiscal have been in line with the expectations. Overall, for the major companies, we have witnessed a decent double digit growth in topline”.

The results for the quarter ended June 2012 indicate that though the overall results are below average, select Large-Cap companies have put in a good performance. So, what should you expect from the September 2012 quarter? With inflation for July 2012 declining a bit (WPI at 6.87 per cent and CPI 9.86 per cent), some improvement can be expected in the September 2012 quarter. The rupee has stabilised a bit and the government is taking some positive steps on the reforms front. If the government continues with these moves, some betterment on economic front is expected.

Further, in terms of financial performance, we are at a trough and can only expect to go up from here. Commodity prices are expected to witness a decline and provide some relief, though some other factors like the lower-than-expected monsoon and rupee depreciation may create some ripples. “On a full year basis for FY2013, we believe that the softer commodity cycle expected globally should provide some relief to corporates, subject to not much further depreciation in the rupee”, says Munshi. Some research and broking houses have stated that the earnings downgrades are over and we may see some betterment in H2FY13. Considering all these factors, we feel that India Inc. is heading towards better September 2012 quarter results.[PAGE BREAK]

Automobiles

The auto industry, which was already going through some rough times, saw its position further worsen during the first quarter of FY13. The overall sales volume growth for domestic vehicles dropped to 9.94 per cent on a YoY basis, which is almost a third of the volume growth recorded in Q1 FY10. Among the top six listed automobile manufacturers, only Mahindra & Mahindra (M&M) has seen double digit volume growth.

The demand slump in Q1 FY13 was mainly due to the rise in petrol prices and higher interest rates. The rise in petrol prices resulted in a rapid shift in demand from the petrol variants to the diesel ones, even forcing manufacturers to adjust their production schedules. Higher interest rates too have drastically affected the demand, with the cost of EMIs estimated to have gone up by 12 to 14 per cent. An estimated 75 per cent of the vehicles sold are backed by financing for consumers.

The cumulative effect of lower steel, aluminium and rubber prices globally and a depreciating rupee has benefited manufacturers in terms of input costs. However, this has been reversed due to higher marketing costs resulting from increasing competition, which affects the margins. Taking a weighted average of the six major listed automobile manufacturers in India, the topline of the sector as a whole grew by 14.03 per cent while the bottomline grew by just about 0.44 per cent, clearly displaying how pressured the margins have been.

Maruti witnessed major headwinds due to the violent outburst at its Manesar unit, which resulted in a closure of the plant for about a month that cost the company approximately 1500- 1600 units per day or Rs 70-90 crore per day. The effect of this will show up in the Q2 FY13 results. For Q1FY13, its sales volumes grew at a slower pace of 5.10 per cent as against the 9.71 per cent overall growth recorded by the passenger vehicles segment. Its revenues in rupee terms grew by 26.37 per cent to Rs 10778.15 crore. MSIL’s net profits declined 22.84 per cent to Rs 423.77 crore because of the depreciating rupee against the yen. Unlike other auto makers, M&M has been growing tremendously, mainly capturing the opportunity offered by the proliferation in the demand of Utility Vehicles (UV).

Growth in the two-wheeler market remained quite moderate on a YoY basis. The sales volumes grew at 10.51 per cent, with 64.51 per cent contributed by Honda alone. Over the quarter, Honda’s sales volumes grew by 50.07 per cent on a YoY basis. It now stands in the second place in terms of two-wheeler sales, pushing Bajaj behind.

Bajaj and TVS underperformed in terms of volumes as well as financials, with their YoY topline growth standing at 1.85 per cent and 4.22 per cent respectively. Both these companies saw immense pressure on their margins as well, and this is reflected in the net profit growth for Bajaj which stood at just about 1.03 per cent, while that of TVS actually declined by 13.1 per cent. Hero has performed relatively better, with a sales volume growth of 7.37 per cent. The company’s revenues grew by a stable 9.92 per cent and the net profit was up 10.32 per cent.

Overall, we expect the sector to remain under pressure until stronger macroeconomic cues emerge. Interest rate reversal remains a key factor for the future of the sector, coupled with the easing of petrol prices. The festive season would definitely bring in more sales, but there is relatively higher pressure on the margins this year than there was earlier.[PAGE BREAK]

Banking

The much-awaited U-turn in interest rates finally happened on 17th April, 2012, with the RBI slashing the repo rate by 50 basis points to eight per cent. Further, it also raised the borrowing limit of banks under the Marginal Standing Facility (MSF) from one per cent to two per cent of their Net Demand and Time Liabilities (NDTL). In the latest meet, the regulator also slashed the Statutory Liquidity Ratio (SLR) by 100 basis points to 23 per cent.

Despite this, it seems that the banking space is facing headwinds. This is evident from the fact that during the June quarter, the BSE Bankex remained unchanged almost in line with the broader indices, which went nowhere. The results for this sector were pretty disappointing, as the asset quality of most of the banks worsened and the margins contracted.

As of 13th July, 2012 (week ended), the deposits grew by approximately14.4 per cent (against the RBI’s projection of 15 per cent for FY2013) while the advances grew by 17.4 per cent (against a projection of 17 per cent) on a YoY basis. The lower deposit growth is on the back of a meagre growth of around 5.8 per cent in the demand deposits (Current and Savings accounts) and a decent growth of 15.4 per cent in time deposits (Fixed Deposits). Further, there was significant easing of liquidity deficit in the June quarter, primarily on account of large scale open market purchases and also due to measures such as enhancing of the Export Credit Refinance (ECR) limit.

Of the 40 banks that we analysed, private sector banks (16) continued to perform well as compared to the public sector banks (24). For the June quarter, the aggregate net profit of private banks grew by 30 per cent while that of public sector banks (excluding SBI) grew by 17 per cent. SBI posted a profit of Rs 3751 crore for the June quarter against a profit of Rs 1583 crore reported in the same period last year.

The seriously worrying issue is the worsening asset quality and shrinking margins. Of the 14 major banks that are a part of the BSE Bankex, 11 showed an increase in their Net NPAs, while they remained unchanged for two banks. Only ICICI Bank showed an improvement in its Net NPAs on a sequential basis. Further, the Net Interest Margin (NIM) declined for nine banks, remained unchanged for two, while the rest three showed an improvement on a sequential basis. ICICI Bank’s performance was exceptional on this front too, as it reported stable margins and good business growth.

Overall, it seems that there is pessimism hovering over the banking sector again. Asset quality continues to be a major worry. Further, in its latest monetary meet, the RBI revised its outlook for GDP growth down by 80 basis points to 6.5 per cent and its inflation projection higher by 50 basis points to seven per cent for March 2013. All this would impact the sector. We believe that the coming quarters would be challenging for the banking space as the slowing growth could have impact the banks’ business, while the margins and asset quality continue to be key focus areas.[PAGE BREAK]

Cement

The performance of cement companies in the June 2012 quarter was more or less similar to what it was during the preceding two quarters. However, this time it was mainly driven by higher price realisations and to some extent by extended demand due to a delayed monsoon and lower utilisation (77 per cent) levels. Cement is one of the rare sectors that benefits from scanty rainfall, at least in the short run, and this is what has happened in the case of most of the cement companies during the June quarter.

The 32 cement companies that we have analysed have reported an aggregate sales growth of 18 per cent and an operating profit growth of 21 per cent on a YoY basis. The net profit grew by 26 per cent YoY. The jump in the net profit was on account of a strong performance by the small and mid-sized cement firms and moderation in depreciation provisioning by larger companies like ACC, Ambuja Cements and UltraTech as compared to the March 2012 quarter.

The operating profit improved by 150 basis points to 21 per cent as compared to the same period last year. The rise in operating profit can mainly be attributed to factors such as price improvement, which was driven by seasonality, and a softening of the imported coal prices. The cement prices were raised back to the Rs 300-320 levels per 50 kg bag on the back ofextended infrastructure and construction activities in the months of May and June. This price hike was also done to offset the high freight and other input costs, which were hurting the margins. The demand also picked up in May and June on the back of a delayed monsoon, which had remained tepid during March and April.

Companies with a pan-India presence reported a decent growth in their dispatches and realisations. This resulted in a strong bottomline growth for these companies. The table provided here suggests that the volumes for ACC were up by just two per cent on a YoY basis. However, this below- average volume growth was compensated by an increase in realisations, resulting from price hikes. The realisations per tonne in case of Ambuja Cements were up 9.8 per cent, driven primarily by a rise in prices in the eastern markets where dispatches grew by a strong 7.3 per cent. This strong growth in realisations resulted in an improvement in margins by 114 basis points to 28.64 per cent and the EBITDA per tonne to Rs 1283 against Rs 1106 in the same period last year. As for the largest cement manufacturer UltraTech, growth was on the back of both volumes and realisations, which grew by 9.3 per cent and 6.7 per cent on a YoY basis respectively.

All this is reflecting in the stock price movement of these companies as well. On a YTD basis, ACC is up by 18 per cent, UltraTech by 48 per cent, Ambuja by 28 per cent and JK Lakshmi by 163.51 per cent. However, the cement stocks also corrected slightly when the Competition Commission of India (CCI) came up with its report alleging the involvement of 13 companies in cartelisation and price rigging. Most of these companies have appealed against the order before the Competition Appellate Tribunal. Therefore, the impact of this issue on the cement companies seems to be very limited, at least in the short term.

We believe that with the revival of the monsoon, there will naturally be a slackening of demand in the near future. Even otherwise, the economic situation isn’t exactly encouraging, and therefore, the coming quarter could see a slowdown in demand and a subsequent fall in the cement prices. This, coupled with high freight and input costs, may erode the margins in the coming quarter. The upcoming quarter will remain a subdued one for the cement companies.[PAGE BREAK]

FMCG

Fast Moving Consumer Goods (FMCG) companies are investors’ favourites and are considered defensive bets. This is evident from the fact that during the June 2012 quarter, the BSE FMCG index zoomed almost 11 per cent while the broader index went nowhere. The companies in the sector posted good topline growth but faced some headwinds on the bottomline front during the June 2012 quarter.

For the 12 FMCG companies that we have analysed, the aggregate topline grew by 19 per cent while the bottomlinesaw a growth of 41 per cent. If you exclude Hindustan Unilever (HUL) and Godrej Consumer Products (GCPL), which account for around 45 per cent of the total size of the sector in terms of revenues, then the equation remains almost constant in terms of the topline but the bottomline shows a growth of only 10 per cent.

Well, this is primarily because both HUL as well as GCPL had exceptional items on record. The former had a gain of Rs 607 crore from the sale of properties during the June quarter, while the latter posted a decline in bottomline during this quarter as it had posted exceptional gains of Rs 140 crore in the same quarter last year. Further, the growth in the topline was a combination of volumes and price rise. In the domestic business, of the 19 per cent growth reported by HUL, volume growth was around nine per cent, while Marico’s consumer business grew by 22 per cent, wherein volume growth stood at 16 per cent.

Companies in this space have benefited from the cooling of raw material prices. However, the rupee depreciation took some of these benefits off. The prices of palm oil (a major input for HUL and GCPL) declined around 14 per cent in US dollar terms but increased by eight per cent in rupee terms from June 2011 to June 2012. Overall, the raw material expenses increased by 16 per cent on a YoY basis.

However, raw material costs as a percentage of sales decreased by 137 basis points to 41.75 per cent. The advertisement expenses increased by approximately 33 per cent while the ratio as a percentage of sales increased by 98 basis points to 9.55 per cent. In the past, companies in this sector restricted these expenses as the input cost was high. However, with some easing of the raw material prices, it seems that they are campaigning aggressively now.

Where on one hand the input costs have come down, on the other, a properly calibrated ad spend has resulted in an improvement of the EBITDA margins. The overall EBITDA margins for the sector increased by 96 basis points to 13.68 per cent.

With a shortfall in the monsoon, market reports suggest that a rural slowdown would impact the growth of FMCG companies going ahead. However, the managements of various FMCG companies have clarified that they have not seen any slowdown as yet, and expect that growth would continue to remain robust.

We believe that the companies in this sector will perform well in the coming quarter, with Marico, Dabur and Britannia Industries being our best bets.[PAGE BREAK]

Infrastructure & Realty

After March, the quarter ended June 2012 was another one when factors like a slower reforms process, lower IIP growth, higher inflation leading to a higher interest cost regime and the higher cost of financing leading to slower capex have severely impacted the performance of the infrastructure companies. What added to the woes was an unfavourable macro-economic situation on the global front as well.

With the IIP growth numbers at a dismal 0.10 per cent for April 2012, 2.50 per cent for May and -1.80 per cent for June 2012, the infrastructure and core sectors have continued to remain under stress. This should not be surprising. Though the overall topline growth was 18.82 per cent, the bottomline has witnessed only marginal growth of seven per cent on account of factors like higher raw material costs and rising interest costs.

If we further analyse the results of the leading infra companies, it can be clearly seen that the EBITDA margins have been impacted due to a highly competitive scenario. A sharp rise in the interest cost (up 32 per cent on a YoY basis) also added to the woes. The overall EBITDA margins stood at 16.50 per cent as compared to 17.30 per cent in June 2011. In case of the largest player, L&T, the EBITDA margins for the June 2012 quarter declined to 9.10 per cent from the levels of 12.10 per cent in June 2011. Similarly, for the sector as a whole, a combination of all these factors resulted in a marginal growth in the bottomline.

However, some positivity was seen in terms of order inflows. Order inflows for some leading companies have improved marginally during the June 2012 quarter. L&T witnessed an improvement of 21 per cent, with the order inflows standing at Rs 19600 crore. Similarly, NCC also witnessed some improvement in the order inflows during the June quarter. However, HCC witnessed some decline, with its order book standing at Rs 15020 crore during the quarter as compared to Rs 16200 crore in the June 2011 quarter.

As for the next quarter, we feel that the situation may improve. Some action is expected on the policy front after Chidambaram has taken over as the Finance Minister. One can also expect rate cuts, as industrial growth is at abysmal levels. So, with some decline in the raw material prices, a little bit of margin improvement is expected in the September 2012 quarter with a rate cut (if it comes)providing some impetus to the capex cycle. The infrastructure companies can expect a better September quarter.

Coming to realty, the financial numbers seem to be improving. The topline has witnessed a marginal improvement of five per cent and the bottomline has increased by 36 per cent. However, this is because of the low base. As a matter of fact, quarterly performance does not have much relevance for realty firms. The overall struggle that has been witnessed for the past eight quarters continued in the June 2012 quarter too. The higher interest rate regime directly impacted the sales volume growth in a majority of areas.

The debt burdens continue to play havoc on the realty sector, and even biggies like DLF are taking the route of land sale to lower their debt burdens. We feel that the scenario is unlikely to improve any time soon, and expect another poor quarter ahead for the real estate companies.[PAGE BREAK]

IT

FY13 started off on a negative note for the Indian IT sector, with the industry body NASSCOM projecting 11-14 per cent growth over the year against a projection of 16-18 per cent for FY12. Moreover, Infosys disappointed investors with the announcement of a sub-standard yearly guidance of eight to 10 per cent for FY13. These figures highlighted the slowdown that the Indian IT industry has been facing due to weak global economic cues, which have resulted in IT spending cuts from the key geographies of US and Europe and fromkey verticals like Banking, Financial Services and Insurance (BFSI), and have also led to delayed decision making. “Businesses are also faced with secular changes driven by the mega trends of digitalisation, consolidation, consumerisation, globalisation, demographic shifts, government- andated change and new disruptive SMAC (social, mobile, analytics and cloud) technologies”, said R Chandrasekaran, Group Chief Executive, Technology and Operations, Cognizant.

For the top four IT companies in India, the Q1 FY13 results have been a mixed bag. A steady and robust performance by TCS and Cognizant has been countered by the underperformance of Infosys and Wipro. TCS, which does not follow the practice of giving out a guidance, announced that it is confident of beating the NASSCOM guidance. The company’s performance for Q1 has been in line with this. Its revenue grew sequentially by 3.03 per cent to reach USD 2.728 billion. The net profit too grew by a strong 4.04 per cent sequentially, from USD 0.587 billion in Q4 FY12 to USD 0.611 billion in Q1 FY13.

In terms of revenues, Cognizant beat Infosys in the quarter under review, with Cognizant posting revenues of USD 1.795 billion, up 4.97 per cent, as against USD 1.752 billion reported by Infosys, which saw de-growth of 1.07 per cent. Moreover, Infosys saw a decline in profits to the extent of 10.15 per cent, falling to USD 0.416 billion in Q1 FY13 from USD 0.463 billion in Q4 FY12. The company also revised the yearly guidance from the already sub-standard eight to 10 per cent to a mere five per cent. Wipro also underperformed, with a revenue growth of 0.34 per cent and a QoQ net profit growth of -2.41 per cent. Wipro’s guidance for the coming quarter too is sluggish, in the range of -1.3 to 0.65 per cent.

Mid-Cap IT stocks, on the other hand, outperformed the industry standards due to the changing market dynamics, led by the disintegration of larger deals into smaller ones and the multi-sourcing of deals. Of these, CMC, KPIT Cummins, Geometric, Hexaware, MindTree and NIIT Tech have all outperformed in Q1FY13. This has also been mirrored in their stock price returns to date, which ranges from 21.72 per cent for CMC to 103.52 per cent for Geometric.

In the backdrop of these changing trends, companies are increasingly looking at expanding into emerging areas like analytics and cloud computing as well as into emerging geographies like Latin America and Eastern Europe. The approach is also turning customer-centric towards developing integrated platforms and tailored solutions, wherein companies are looking at strategic partnerships, with cost effectiveness being a mandate.

How companies deal with these changes will define their paths over the coming quarters.[PAGE BREAK]

Oil & Gas

For the oil & gas sector, the June 2012 quarter has been in complete contrast from what it was during the preceding two quarters. While oil marketing companies (OMCs) were the shining stars in the December and March quarters of FY12, this time around (June 2012 quarter), they have proved to be complete laggards. The 13 companies (including OMCs) that we have analysed have posted a mere seven per cent increase in the topline, while registering an enormous combined loss amounting to Rs 30424 crore at the bottomline level. Such has been the negative impact of the OMCs that if we were to exclude them, the sector has posted a face-saving 15 per cent and a nine per cent increase in the topline and bottomline respectively on a YoY basis.

The financial performance of the OMCs has slipped back into the red owing to an unfavourable business environment, coupled with the absence of any budgetary support from the government and inadequate upstream discounts. However, it has been historically observed that the quarterly results for OMCs have become less relevant, as their financial performance is based mostly on the budgetary support provided by the government and the upstream sharing of the subsidy burden. Though the quarterly results  may see wide swings, they are expected to remain profitable at the end of the year. However, given that the combined  quarterly losses of the three OMCs – IOC, HPCL and BPCL – have risen nearly four times to Rs 40536 crore as against Rs 9360 in the June 2011 quarter, the task in the hands of the government seems to be a daunting and uphill one.

Moving on, the June 2012 quarter has been a triumphant one for the upstream companies like ONGC, Oil India and GAIL. ONGC reported a sharp 48 per cent (YoY) rise in its bottomline to Rs 6078 crore, thanks to the increased net realisations led by a sharp rupee depreciation and significantly lower drilling expenses as a result of fewer dry well write-offs. Oil India, on the other hand, saw its bottomline rise by 10 per cent (YoY) to Rs 930 crore despite a fall in crude oil and natural gas production.

ONGC also reported a major oil discovery near Bombay High in D1 field, and has increased the D1 field initial in-place oil resource estimates from 600 million barrels of oil equivalent (mmboe) to 1 billion barrel of oil equivalent (bboe).

This discovery would help ONGC to break its domestic production growth deadlock, which has been flat for the past six years. Going forward, the company expects the D1 production to increase from the current 12.5 thousand barrels per day (kbpd) to 36 kbpd by February 2013 and to 60 kbpd by January 2014.

As for the private companies, Reliance Industries (RIL) saw its net profit decline by 21 per cent (YoY) on the back of sluggishness seen in all three business segments, viz. refining, petrochemicals and oil & gas. While the gas output from the KG-D6 basin continues its relentless sharp fall, the outlook on its refining and petrochemicals business also seems gloomy and weak. Going forward, the stock is likely to remain weak and underperform the markets.

On the global front, the brent crude oil prices retreated sharply by nearly 20 per cent during the June 2012 quarter, which managed to negate the effects of the sharp rupee deprecation and bring some relief to the ailing domestic oil & gas sector. Since then, however, the international crude prices have sparked off a new rally. At the current prices of USD 114 per barrel, the Indian crude basket stands expensive at Rs 6327 per barrel (Rs/USD at 55.5750).

Going forward, the long-term benefits for the Indian oil & gas sector lies in the government’s ability to speed up the reforms process and initiate some key policies. At the current rate, the under-recoveries for FY13 are estimated to be at Rs 140000 crore, which calls for some serious action from the government’s end on de-regulating subsidised fuels like diesel, LPG and kerosene. This would not only help in reviving the financials of the ailing OMCs but would also provide some much-needed relief to the upstream companies, as they would have to share a much lesser portion of the subsidy bill at the end of FY2012-13. However, considering the ad-hoc and uncertain subsidy sharing mechanism, whether or not the government steps up its efforts to rejuvenate this sector and make it investor friendly remains to be seen.[PAGE BREAK]

Pharma

On the face of it, with a decline of five per cent in the bottomline, the pharma sector results for the June 2012 quarter is apparently very weak. This, however, is due to the huge losses posted by Ranbaxy Laboratories. Excluding Ranbaxy, the sector has performed well once again, with the aggregate topline and bottomline growing by 25 per cent and 22 per cent respectively. Many companies have reported a rise in their margins, due to which the profitability has improved.

The June 2012 results for the pharma sector are far better than those seen in the same quarter of the last fiscal, where the topline and bottomline growth stood at 11 and 17 per cent respectively.

This is a very good start to the new fiscal, in which we expect very high growth for this sector aided by the generics boom in the regulated markets.The BSE Healthcare index has surged by 17 per cent on a YTD basis based on the high expectations that the sector looks set to meet.

During the quarter, the rupee continued to slide against the dollar, touching the 57 mark at one point of time. This boosted the export revenues for the sector. Many companies have reported very high growth in their US business. Indian companies have a strong pipeline of USFDA approved products and are monetising these products, which is resulting in higher earnings. Business from emerging markets such as Brazil, South Africa, Russia, etc. have also shown high growth.

In the domestic space, we believe that the Indian pharma market is growing strongly. Many companies have grown at a rate of over 20 per cent, suggesting that the overall Indian market for pharmaceuticals is growing at more than 15 per cent. We expect the generics segment to post good numbers going ahead, which will help the small-to-medium scale pharma companies. The quarter has also seen healthier balance sheets of some companies like Wockhard, Lupin, Strides Arcolab, etc.

Ranbaxy represents about eight-nine per cent of the consolidated topline of the Indian pharma sector. The 180-day exclusivity for its blockbuster drug Lipitor is over, and hence, we may see a decline in revenues for the company in the next quarter. Besides, good numbers can be expected from Cadila, Wockhardt, Lupin, Sun Pharma, DRL and Strides Arcolab.

Recently, the USFDA has cleared the manufacturing facility of Cadila Healthcare. Claris Lifesciences has also received a positive response from the regulator. Led by these developments as well as by key product launches, the September quarter is also expected to be strong, with good margins. We reiterate our bullish stance on this vital sector.[PAGE BREAK]

Power 

It is impossible to write about the power sector without mentioning Coal India (CIL), which enjoys a monopoly on coal in the country. After the presidential directive on CIL this year, there are signs that coal supply to the power sector may improve. Currently, CIL has signed Fuel Supply Agreements (FSAs) with 29 power utilities. Power major NTPC, however, has raised concerns over the lower penalties set by CIL. The CIL board is discussing this issue further, and the situation may improve by end of the fiscal.

As of now, though, the mess in the power sector continues, and the same is reflected in the June 2012 quarter results. The overall topline of the sector grew by 18 per cent, while the bottomline declined by 21 per cent. At the EBITDA level, due to the higher input costs, the margins have fallen by about 500 basis points, indicating that profitability has gone for a toss.

According to Tata Power’ management, the domestic coal demand-supply gap has increased significantly. A delay in clearances and the tightening of environmental norms for existing projects have added to this problem. The shortage of coal is affecting the operational plants, and is also raising concerns on the viability of future power projects. The lack of coal linkages is also making it difficult for power-generation companies to raise capital.

During this quarter, the electricity generation in the country grew by 6.43 per cent over the same period last year. The coal-based power plants have shown a remarkable 13.56 per cent growth, with more capacities commencing during the last one year. However, the PLFs of coal-based plants declined due to the lower coal supply as well as transmission constraints. Gas-based generation has also declined by 17 per cent, with a huge decline in PLFs from 64 per cent to 50 per cent due to lower gas availability. The gas-based power plants in the South have the lowest PLFs, i.e. 40 per cent, due to lower gas output from the KG-D6 basin. The hydro power generation has also tumbled by nine per cent due to a delayed monsoon.

Thus, it is clear that the power generation has not been very robust overall. Due to this decline, there is a drop of 400 basis points in the sector’s topline on a sequential basis, indicating that investors will have to wait on the sidelines for some more time.

Both the hydropower majors, NHPC and SJVN, have reported a nine per cent decline in the topline, indicating that the fiscal will not be good for them. From the total of 23 companies that we have analysed, six have posted losses and nine have reported a decline in profits. CESC has posted a 13 per cent rise in profits due to tariff revision, while NTPC and Reliance Power have reported a rise of over 20 per cent in the bottomline on the back of higher power generation.

Besides these exceptions, the June quarter results are not very encouraging. The power index saw a decline of five per cent during the quarter, indicating weak investor sentiment. The recent event of the grid failure in North India created chaos in the country. The grid failure was a result of overdrawing power from a few state electricity boards due to the high demand for electricity.This crisis in the power sector demands urgent reforms in the sector. We believe that there will not be any change in the scenario even in the next quarter, and hence, we reiterate our ‘avoid’ call on the sector.[PAGE BREAK]

Retail

The slowdown in the overall economic growth has a direct and negative impact on the retail space as the disposable incomes in the hands of consumers starts disappearing, thereby affecting the sales of companies. Further, most of the companies in the sector have huge debts on their balance sheets and pay a significant portion of their earnings as interest, which impacts their bottomlines. Therefore, it comes as no surprise that companies in the retail space have posted a muted performance in the June 2012 quarter.

For the five major companies in the sector (excluding Pantaloon Retail), the topline increased by a meagre nine per cent while the bottomline saw de-growth by three per cent on a YoY basis. The only positive for the sector was that the companies maintained their margins at almost the same levels as those in the corresponding quarter last year.

Pantaloon Retail (PRIL) posted a similar kind of performance, with its topline growing by 9.5 per cent. However, after adjusting for exceptional gains (Rs 258 crore), its net profit plunged by 81 per cent to Rs 3 crore. High interest rates continued to be a spoilsport for the company as its overall interest spend increased by 72 per cent to Rs 116 crore.

The Same Store Sales Growth (SSSG) for PRIL was a mixed bag, with segments like lifestyle growing by 4.7 per cent while value grew at 0.4 per cent. The home segment saw de-growth of 0.9 per cent. The SSSG for Shoppers Stop grew by a meagre one per cent. During the quarter, companies continued to expand their operational areas. PRIL added 0.55 million square feet, taking its total to 16.71 million square feet, while the Shoppers Stop group added around 0.06 million square feet, its total standing at 4.64 million square feet as on 30th June 2012. Muted sales growth coupled with the expansion of their operational areas ultimately resulted in the companies posting lesser revenues per square feet.

Titan Industries also disappointed the street, with its numbers at the topline and bottomline showing marginal single digit growth of nine per cent each. On account of fewer wedding dates during the quarter, the jewellery segment, which contributes to around 80 per cent of the sales of the company, grew by only nine per cent. The operating margin increased by 10 basis points to 9.6 per cent thanks to the reduced input costs.

We believe that this sector is facing serious headwinds as higher rentals affect the companies’ margins. Further, weak consumer demand is just not allowing the sector to grow at a handsome rate, thereby creating a challenging environment for the companies. For the sector to revive strongly in the short-to-medium term, it is of prime importance that the government takes some bold steps by carrying out long pending reforms, particularly allowing FDI in multi-brand retail in the country. In the absence of the same, the sector would continue to face challenges.[PAGE BREAK]

Steel

In the backdrop of a weakening economy, the Indian steel industry has once again reported a subdued performance for the June 2012 quarter. In fact, the situation has only worsened from the previous quarter, with a further decline in demand, rising fuel costs and a depreciating rupee. These factors, coupled with the higher interest rates, have led to a significant jump in the interest cost, impacting the bottomlines of the steel companies during the quarter.

The dismal performance of companies in the sector can be gauged from the industry aggregates. Due to a slowdown in the demand, the toplines of 108 steel companies that we have analysed have grown by only 14 per cent on a YoY basis.

This too was mainly on account of better realisations on the back of firm steel prices during the quarter. However, due to rising raw material costs (up by 20 per cent YoY), the hike in freight rates and rising interest cost (up by 58 per cent on a YoY basis), the bottomline declined by 25 per cent YoY.

The more worrying factor was the sector’s inability to reap any major benefits from the decline in coking coal prices due to the weakening rupee, which depreciated around 10 per cent against the dollar. On the other hand, the currency depreciation has also provided support to the falling domestic steel prices against the backdrop of weakening demand and falling international steel prices.

JSW Steel saw its realisations jump up by 4.1 per cent on a YoY basis, while those of Tata Steel and SAIL were up by 13 per cent and 11 per cent respectively. JSW Steel’s sales volumes jumped by 23 per cent on a YoY basis to 2.1 MTPA due to a low base effect.

The weak IIP figures, slowing industrial activity and a slowdown in GDP growth indicates that all is not well for the domestic steel industry, where demand is on a decline. The revival of the monsoon suggests that infrastructure and construction activity will see a further slowdown, which will impact steel consumption. This certainly poses a serious challenge for the steel industry. Also, though steel prices for the June quarter remained steady, there could be pressure in the near term due to a surge in imports and a fall in rupee value. There could be a double whammy effect if the rupee does not appreciate from here, as it will lead to higher import costs and forex losses for companies with exposure to foreign currency. On the whole, therefore, we expect the steel companies to post muted results for the September 2012 quarter as well.[PAGE BREAK]

Telecom

The Indian telecom sector continues to face challenges, with intensifying competition, regulatory uncertainties and the anxiety about the latest spectrum auction (scheduled for 30th August, 2012). The margin pressure during the June 2012 quarter reflects all these factors.

The aggregate total income of the companies in the sector increased by nine per cent, while the net profit declined by 30 per cent on a YoY basis. The decline in net profit and the pressure on margins are attributable to lower volumes and the decline in tariff prices.

On a sequential basis, all the companies showed lower Average Revenue Per User (ARPU), with Bharti and Idea witnessing the highest decline of 2.1 per cent and 2.5 per cent respectively and RComm going down by one per cent. We believe that intense competition forced companies to lower their tariff prices, which further dented the ARPUs and intensified margin pressures. New customer additions for Bharti were up 3.3 per cent and those for Idea and RComm grew by four per cent and one per cent respectively, lower than the previous quarter figures.

The Average Revenue Per Minute (ARPM) also continued to decline. Industry leader Bharti Airtel saw its ARPMs declined by 2.3 per cent QoQ to Rs 43 paise, while those for Idea and RComm fell by 2.4 per cent each. The falling ARPMs are a grim reflection of the hyper competition, low growth and regulatory uncertainty in the sector.

The growth in the average Minutes of Usage (MOU) per user was also quiet disappointing as compared to the growth reported in the March 2012 quarter. The MOU for all the companies grew by just 0.5-0.9 per cent against the growth of 1-3 per cent seen in the March quarter.

The Supreme Court has set the reserve prices for the pan-India spectrum at Rs 14000 crore. This was 22  per cent lower than the Rs 18000 crore minimum rate suggested by the sector regulator, TRAI. These allocations would definitely increase the debt burden of operators whose licences were cancelled by the February 2012 judgement of the Supreme Court, as well as for the incumbent operators whose licences are due for renewal. For example, Idea Cellular will have to shell out a minimum of Rs 10000 crore if it wants to get back the eight licences cancelled by the court order.

In our opinion, increasing competitive intensity in the industry is what will prevent any major improvement in the voice business any time soon, as telecom companies (including RComm) have taken a significant cut on 3G tariffs and a lot of regulatory uncertainties continue to prevail. With regulatory uncertainties as well as muted margins, the outlook for the near-term would continue to remain an overhang on the industry.

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

Multibaggers28-Mar, 2024

Interviews28-Mar, 2024

Multibaggers28-Mar, 2024

Multibaggers28-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR