March Quarter Results - India Inc Racing Ahead

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Will Europe come out of the crisis and will the Chinese economy face the prospect of a hard landing seem to be the burning questions at the top of global investors’ minds and it’s no different in the Indian markets. Though it’s but natural for investors to track these significant global developments, the issues seem to be acquiring the maximum number of eyeballs and are stealing the thunder out of India Inc’s important fourth quarter results’ season. The benchmark index is down by 5 per cent since the beginning of the new fiscal and the markets have gone jittery, thereby turning the mood a bit somber. This is despite the fact that the numbers that we have with us have shown a good upbeat performance by India Inc in Q4FY10. But there are a couple of points here that should be noted. The first is that though the market does beam out a knee-jerk reaction to global events initially, it has a tendency to recover from the lows, which indicates that with better numbers coming in, the market does give its due and catches up with the valuations. Secondly, there is a marked improvement in the economic scenario in Q4FY10 as compared to Q4FY09 and with this scenario only expected to improve further the earnings’ expectation will only go up from here. Hence, the Q4FY10 results do attain more significance from a market point of view.

Of the 1,513 results that we have with us so far, for Q4FY10, India Inc’s topline grew by 26.13 per cent, while the bottomline grew by 30.07 per cent during the same period. The highlight of this quarter results is not the bottomline but the topline growth that India Inc has posted. This is by far the best topline growth India Inc has seen in the last four quarters and indicates the returning of the pricing power for the companies apart from the volumes they have been generating consistently. Though there has been a consensus about the better Q4FY10 results, we at DSIJ believe that it has exceeded market expectations by quite a mile. In fact, if we adjust for the aberrations (refinery numbers and the extraordinary items), India Inc’s revenues grew by 25.49 per cent, while profits have done even better at 33.10 per cent. The story is the same on a sequential basis where after adjusting for aberrations, India Inc’s revenues grow by almost 10 per cent and profits by 6.39 per cent. This clearly indicates that the growth has not come due to the base effect but more from the return of consumption demand across the industries.

Moreover, this growth is also broad-based and well-spread across the Sensex,  Group A ex-Sensex companies and the rest of India Inc. Besides, with more than 60 per cent of the companies showing growth in both topline and bottomline, it only underscores the fact that India Inc is back on track and the growth pattern looks sustainable. The other fact one should also keep in mind is that the manufacturing sector with topline and bottomline growth of 39 per cent and 70 per cent respectively has led from the front and clearly outshone the services sector which has been experiencing a very subdued quarter this time.[PAGE BREAK]

This could also be confirmed from the FY10 data on the IIP numbers, which indicates manufacturing growth of 10.9 per cent. What is apparent is that it is the capital goods sector at 19.2 per cent and the consumer durables segment at 26.1 per cent that have led the IIP growth. The sectors that came to India Inc’s results’ party include pharmaceuticals, steel, automobiles, construction and media, which posted the highest bottomline growth this quarter.

For the June quarter we expect India Inc to continue with this momentum and a similar performance cannot be ruled out. As for FY11 India Inc’s earnings, this growth could be in the range of 20 per cent. This is based on the consensus GDP estimate of 8 per cent. Usually India Inc’s earnings grow 2.5 times the GDP growth. The RBI and IMF expect FY11 GDP at 8 per cent while the World Bank and the government have put the figure at 7.5 per cent and 8.25 per cent respectively. Considering the consensus FY11 EPS estimate of around Rs 1,070-1,100, the Sensex is available at a PE of 15.8x, which is quite attractive and indicates an upside of 20 per cent from the cur-rent levels in one year’s time.
The next few pages of the cover story contain a detailed analysis of ten sectors and a list of the companies that have grown consistently in the last four quarters.

AUTOMOBILES - Driving In Low Gear
The Indian auto sector had a dream run for FY10. First, the stimulus package, wherein the excise on cars was brought down, was followed by the Sixth Pay Commission hike for government employees that helped raise the purchasing power for cars. The effect of all this has been quite apparent what with India selling 1.22 crore vehicles with a growth rate of 26.4 per cent over the previous year. This is the highest growth witnessed by the sector in over the last five years (our study being limited to only five years) with the second best growth witnessed in 2004-05 at 16 per cent.

But as we move into a new financial year, we feel that the honeymoon phase for this sector is over. This is primarily because the base has reached a much higher level, thereby making it difficult to report better volume growth numbers. Also, the input cost has moved up as the global economy is now in much better shape as compared to last year and last but not the least, the stimulus package has partially been rolled back and will be done so even further so that vehicles will become costlier in this financial year for the buyers. Also, the prices of petrol and diesel have been revised upwards and that can have an impact on the sale of automobiles.[PAGE BREAK]

The Indian auto industry indulges in a good amount of exports and due to the crises in Europe this would impact the exports numbers too. Rajiv Bajaj, Bajaj Auto’s Managing Director, has gone on record saying that the demand is softening for two-wheelers while Hyundai, the second largest car manufacturer in the country, has also indicated lower volume growth in the current year. With more cars entering the popular A2 segment, manufacturers would be forced to give freebies to push their brands and this too could hurt the margins. We expect single digit volume growth for the auto companies for the current financial year. The positives  are already in the stock prices of the auto companies and therefore the sector may underperform in the coming months.

CEMENT - Soft Patch Ahead
Q4FY10 is usually a stronger quarter for the cement sector as the construction activity is at its peak. And an initial glance at Q4FY10 numbers, indicates the same with topline and bottomline growth of 19.43 per cent and 12.53 per cent respectively. A deeper glance shows that the overall aggregates are sharply pushed by Prism Cement figures that include the numbers of recently acquired H&R Johnson India and RMC Readymix India businesses. Thus, adjusting this aberration the industry topline and bottomline grew 2.88 per cent and 9.40 per cent respectively.

Whatever growth that has come in the quarter is on account of volume growth that increased 9 per cent, while the realisations though have increased on sequential basis are still down by about 3 per cent on year-on-year basis. As for the bottomline growth, the input costs though are on an uptrend on sequential basis, they are still lower as compared to the peak they reached in Q4FY09. Hence the benefit of this is seen on the operating and net levels.
However, going forward bunching of capacity, few newer projects, rising input costs, lull season due to monsoon will affect the sector growth. Despatches have already slowed to single digit not only in February and March, but also in April (the first month of FY11). Cement prices have come off by Rs 5-10 per bag on an average in India on account of shortage of demand, poor availability of labour, etc. Dealers expect these prices to further drop by 15-20 per bag from June onwards due to monsoon. In fact, further price pressure will come from capacities that are coming on-stream. Already 23MT capacity has been commissioned in Q4FY10 taking total addition for FY10 to 48MT. Besides, 13.5MT of capacity is slated for Q1FY11. All this bunching will impact cement prices. Besides, international coal prices are up 60 per cent from its July 2009 lows, while domestic coal prices are up by 11 per cent. UltraTech Cement, Ambuja Cement, India Cement, Binani all import coal. Baltic dry index is up too and this will increase the overall freight cost for coal importing cement companies. Besides, Rs 50 per tonne cess on coal, hike in petrol and diesel prices, shortage of railway wagons, increasing fly ash prices will only put further pres-sure on the margins, thus impacting profitability. Hence we see a soft patch for the sector.[PAGE BREAK]

REAL ESTATE - Sheltering A Growth Curve
During our earlier analysis of the results of Q3FY10 for the real estate sector, we had stated that with an expected improvement in volumes, the Q4FY10 performance would be much better. And that is exactly what has happened. During Q4FY10 real estate companies posted a topline growth of 241 per cent and bottomline growth of 486 per cent on a YoY basis. Surely the growth is impressive, but the strong YoY growth was anyway expected on account of a lower base in Q4FY09 results when real estate companies were struggling and volume was not picking up. But the noticeable factor is there has been good volume growth happening on a QoQ basis too.

On a QoQ basis, the topline growth has been only 1 per cent but there has been a strong bottomline growth of 42 per cent. Another important factor is that with intense cost control measures undertaken by the real estate companies during the last few quarters, there has been good improvement on the margin front also. Therefore, good volume growth, increased price realisation and expansion of margins residential properties.

However, investors might be confused considering that the realty index has underperformed despite a better performance. This has primarily happened on account of negative news flow on the policy front, disallowance of restructuring of loans and imposition of additional taxes. As regards the sectoral update, there has been good appetite for the new launches. The analysis of new launches in the residential segment over January-March shows that those made by developers seem to have attracted good response across major markets. But the commercial sector is yet to pick up. As for the expected performance in the next quarter, experts are of the opinion that the best may be behind us in terms of volumes in 2009.

Further, incrementally the market is showing signs of stabilisation at its current price levels. Going ahead, we are of the opinion that rate hike is a matter of concern but at the same time income growth is also approaching the pre-crisis levels. Hence, affordability in the market can be maintained. Thus, expect better YoY results in the next quarter also. Keep in mind though that substantial volume growth is not expected.

POWER - Not Bright Enough
Here is something to think about: despite India being a power deficit country, power companies have been quite laggard in terms of their performance at the bourses. For quarter ending March 2010, the BSE Power index declined by 4 per cent compared to the broader market index which remained almost flat. Further, out of 12 companies (including power equipment manufacturers) analysed so far, the toplines of the company have increased by just 17 per cent on a yearly basis. This subdued performance was mainly due to lower PLF (plant load factor). For example, power generated by thermal (coal and lignite), which constitutes 64 per cent of the total generation installed capacity, has seen its PLF drop by 400 bps (basis points) to 81 per cent in the month of March.[PAGE BREAK]

However, there has been some improvement in the PLF of gas-based, nuclear and hydro that has helped to increase the overall PLF by 200 bps. But when we look at the bottomline of these companies, they have increased by 46 per cent in the same duration. The reason for such an increase in the bottomline was due to a rise in ‘other’ income by 43 per cent. Going forward, we feel that the power sector is not going to outperform the broader market due to uncertainties in fuel availability. For example, NTPC experienced generation loss due to shortage of coal and execution difficulties and it must be noted that only 66 per cent of the target generation capacity was added in FY10.

But one of the positive factors in favor of this sector, albeit for a shorter duration, is the expected increase of merchant capacity from 3.1 GW currently to 10 GW by 2013. As merchant rates command better prices than regu-lated and PPA, it will help to increase the topline of the companies. The aver-age realisation in the regulated market varies from Rs 2.3-4.7/Kwh whereas for the merchant category it is more than Rs 5/Kwh. But this applies only to a few companies like Jindal Power, JSW Energy and Tata Power who have size-able merchant capacities.

TEXTILES - Better Days Ahead
If there is one sector that has really written a strong revival story, it is the textile sector. An industry that contributes 14 per cent to industrial production, almost 17 per cent to export earnings, 4 per cent to the country’s GDP and second biggest employment generator after agriculture has only grown stronger every single quarter in FY10. After 5 per cent topline and 405.76 per cent bottomline in Q1FY10, 7 per cent topline and 411.24 per cent bottomline in Q2FY10, 19 per cent topline and 290 per cent bottomline in Q3FY10, the sector finally ended the fiscal on a very strong note with topline and bottomline growth of 30.49 per cent and profits of Rs 574 crore in Q4FY10 from a loss of Rs 260 crore during the same period last year. In fact, 23 per cent of textile companies in the pack have wiped off their losses and posted profits in Q4FY10.

The textile sector results have consistently been able to improve the sales growth every single quarter. This shows that the textile companies are able to generate good volume market growth, due to improving demand despite the pricing still flat on the domestic as well as on the international front.

In fact, with the economic scenario in US improving our overall textile sector exports to the US turned positive in the calendar year-to-date basis (Jan.to Mar.) and grew by 4 per cent. This is quite in contrast to negative growth in the last calendar year. In fact with the improved export demand compared to previous fiscals, improved economic scenario on the domestic front and increasing domestic demand will all help the sector put on a stronger growth in coming quarters. Besides, with government putting clamps on the cotton exports indefinitely as of now, it will address domestic manufacturers concerns of sourcing cotton at steep prices and thus safeguard their margins going forward. With the growth rate improving we expect the sector to get re-rated further and hence it is better to stay invested in the sector.[PAGE BREAK]

INFORMATION TECHNOLOGY - Growing In Bytes & Phases
Gauging the health of the IT sec-tor is no longer a simple task as the industry aggregates of its topline and bottomline performances in isolation alone may not tell you the entire story. Volumes, pricing, hiring targets, client budgets, rupee dollar situations etc aren’t just data points but clear indicators of the sector’s current state and expectations for the coming period. And we at DSIJ are tracking these in right earnest. For Q4FY10, the IT sector’s topline and bottomline grew by approx. 10 per cent respectively. This can be viewed as fairly subdued growth as compared to the energy of revival shown by the other sectors.

These results indicate that though the IT sector is on a recovery path, factors such as stunted client budgets, lack of pricing power and an appreciating rupee are putting strain on the growth of the Indian IT companies. Whatever growth the companies have seen in this quarter has come more or less from volumes. The volumes of Infosys, TCS and Wipro have increased by 5.2 per cent, 4 per cent and 4.1 per cent respectively. However, pricing remains a concern with Infosys witnessing a pricing decline of 1.5 per cent, while TCS and Wipro have managed an upward movement in pricing at 0.5 per cent and 1.3 per cent respectively. In our opinion, a further shift northward in terms of pricing would only be seen from the second quarter since the clients’ budgets continue to remain flat.

Thankfully, the business deals have been flowing in and the companies are benefiting from a better recovery rate in the US as well as Europe. It is indeed a good sign. Though the companies are being cautiously optimistic, they have nevertheless been hiring in anticipation of good business in the near future. In Q4FY10, Infosys, TCS and Wipro made a net addition of 3,914, 10,775 and 5,325 employees respectively and barring Wipro the other two have set up a hiring target of 30,000 each for FY11. According to the TPI Index that measures the commercial outsourcing contracts valued at USD 25 million or more globally, the indication is that in Q1CY2010 the total contract value of outsourcing deals has increased by 25 per cent YoY to USD 19 billion. This implies that clients have been renewing and renegotiating their contracts every quarter. Given this scenario, it would be advisable to stay put in the sector for long term benefits.[PAGE BREAK]

TELECOM - Hitches In The Way
The tariff war is playing a spoilsport for the telecom service providers. The result is in front of us: after the fourth quarter ended March 2010 the sector has posted almost flat growth on a Y-o-Y basis as the topline grew by 11.5 per cent and the bottomline growing by a mere 0.84 per cent. The topline has been growing on a consistent basis but the bottomline is getting impacted due to the pressure that is being witnessed due to the competition among the telecom peers. There is a significant rise in the number of subscribers using mobile phones as the tariff plan changes from the per minute basis to per second basis. The total subscriber base stands at 584.32 million with a wireless penetration of 49.60 per cent, which is one of the lowest in the world as compared to 91 per cent in the US, 84 per cent in Japan and 60 per cent in China. There has been a significant decrease in the minutes of usage (MOU), which stands at 375 minutes in April 2010, declining from 404 minutes at the end of November 2009. The Average Revenue per User (ARPU) also witnessed a drift down-ward from USD 5.02 in November 2009 to USD 4.26 in April 2010.

The recent proposal that Telecom Regulatory Authority of India (TRAI) has come out with is likely to act as a deterrent on telecom service providers, especially Bharti Airtel and IDEA. TRAI has recommended that the 2G operators hoarding excess spectrum will have to pay market rates for it. Excess means above 6.2 MHz, with charges being one-time 3G auction price for excess spectrum up to 8 MHz, and 1.3 times for that above 8 MHz. Bharti and Vodafone hold more than 10 MHz in many circles, including Mumbai and New Delhi; Idea far less so. Going for-ward, we maintain a cautious approach towards the sector and the clarity on the sector will only be visible after the 3G roll out at the end of this year and the ongoing issues with 2G spectrum are resolved.

FMCG - May Gather Speed
The sector, as a whole, has posted decent gains in the recently concluded final quarter of fiscal 2010. The topline has increased by 23 per cent on Y-o-Y basis while the bottom line posted a growth of 34 percent on Y-o-Y basis. Sales growth is slowing due to high food cost inflation, competitive pressures and lack of price increases. While gross margins were higher than estimated due to some low-cost inventory and product mix changes companies may find it difficult to continue to expand margins any further. Sharp increase in gross margins that is witnessed in FY10 may not be witnessed going forward as the prices of crude oil and palm oil have firmed up considerably. Godrej Consumer Products (GCPL) posted decent gains in both sales and net profits boosted by three factors, i.e. acquisition of the 49 per cent in Godrej Sara Lee, which per-formed well, benign raw material costs this quarter, so the margins improved considerably and lastly they did well to expand their reach to rural India and the cost-cutting initiatives. The concern for the sector is[PAGE BREAK]

that with valuations for most stocks above historical averages, and a lack of earnings upside surprises, any near-term upside as unlikely.We feel that the longer-term growth story for the sector remains intact and price increase in the future cannot be ruled out. The higher disposable income is likely to give a boost to the sector performance but the penetration in the rural markets of India is likely to play a vital role going forward.

STEEL - Gaining In Strength
The results of the quarter ended March 2010 have reinforced the fact that recovery in the steel sector which was evident during the last quarter is here to stay. The demand for steel has once again reached the pre-crisis level. According to World Steel, in the year 2007 the demand for steel was 1,219 million tonnes and for 2010 it would be 1,241 million tones.

The trend is now clearly visible in the fourth quarter of FY10. For JSW Steel there was a 43 per cent increase in the volume of steel sold on a yearly basis and it stood at 1.519 million tonnes for Q4FY10. The reason for such an increase in volume can be attributed to the increasing sales of automobile every month and pick-up in the infrastructure activities.

It is not only the demand that is escalating but there has been an upward shift in the prices of steel too. There has been an increase of around 22 per cent in the prices of HRC on a yearly basis and it is currently trading around USD 620 per tonne. This has helped the 40 steel companies analysed so far to post sales growth of 22 per cent. It is not that only the steel prices have moved up key raw materials have also witnessed a price rise. Iron ore and coking coal, which are important raw materials in steel production, have seen their yearly contract prices appreciating by 100 per cent and 55 per cent respectively.

This is the reason the cost of raw material consumed has increased by 42 per cent on a yearly basis and even as a percentage of sales it has increased from 50 per cent (Q4FY09) to 56 per cent (Q4FY10). This has led to a subdued increase in net profit which on a median basis has increased by 28 per cent. Going forward, we feel that the demand for steel will improve further as infrastructure activity kicks in with full throttle and this will also lead to better price realisation. A caveat to this is the Chinese economy, which if it crashes, will lead to adverse an effect on the entire commodity space.[PAGE BREAK]

BANKING - Counting It Faster
The latest quarterly results have reinforced the fact that the worst is behind for the banks in terms of credit off-take. At the end of March 2010, scheduled commercial banks posted a credit growth of 17 per cent YoY compared to 16 per cent targeted by the RBI. But this growth should be taken with a pinch of salt as a 50 per cent jump in this credit happened only in the last fortnight of March. Such a credit off-take was mainly supported from the retail, large and medium corporate segments. This helped the banks to improve their incremental credit deposit ratio (CD) from 66.1 per cent a year ago to 71.7 per cent.

The impact of such an improvement in the CD ratio was clearly visible in the net interest income (NII) growth of the banks. For example, the NII growth for ING Vysya for FY10 remained at 27 per cent whereas for Q4FY10 it was 52 per cent. All this along with the moderation of deposit growth and the re-pricing of deposits has led to an improvement in the mar-gin of the banks. Most of the banks saw their net interest margin (NIM) improving sequentially. For Axis Bank its NIM was 4.09 per cent during Q4FY10 as compared to 3.37 during Q4FY09 and 4 per cent posted in Q3FY10. Going forward, with the expected introduction of the base rate (the base rate will be fixed on the basis of the cost of the funds, including that required to maintain statutory deposits with the RBI) from the 1st of July, the margins of the banks are likely to be affected.

The asset quality of the banks was expected to deteriorate with the end of suspension for some of the loans restructured in the quarter a year ago but it remained largely under control and only a few of the banks like Bank of India saw its NNPA increasing whereas banks like ICICI and HDFC Bank saw their NNPAs improving. In terms of bottomlines, out of the 33 banks that we analysed, the bottomline has increase on an average by 17 per cent on a yearly basis and 6 per cent on a quarterly basis. We feel that the credit off-take will continue its buoyancy for the banks and any increase in the key policy rates will be negated by an increase in the credit demand.