Dec. Qtr.Results: Well Played

[INSERT_1]

It has often been said that the market has a mind of its own and does react in a manner that may not sometimes make sense to the investors. And this we believe is strange because despite a strong resilience shown by India Inc on the topline as well as the bottomline front in the December quarter, the broader market is still down by about 11.37 per cent from the beginning of the year. We all know that the market has been reacting to factors such as inflation,political uncertainty, etc and yet, the quarterly results should have stabilised some nerves and provided a trigger for the market, which was anyways looking for cues for the way ahead. But that doesn’t seem to have happened. Would it then mean that the market is reading and reacting to something beyond the obvious numbers? Before we try to answer that let’s have a look at how India Inc has performed during the December quarter Of the 3,523 results that we have with us so far, for Q3FY11 India Inc has put on a good show with toplinegrowth of 18 per cent on a YoY basis. But what is more important is that this topline growth has meaningfully translated into a fairly decent bottomline growth of 19 per cent. This looks like some sort of a comeback, particularly after two consecutive quarters of growth below expectations on the bottomline front. While these are overall numbers for India Inc we have further adjusted them to exclude extraordinary items as also the financials of the PSU oil marketing companies which provide a much clearer picture of the core performance of India Inc. Even after these adjustments there does not seem to be anything that can basically change the nature of the performance of Indian companies in the December quarter which can be described as a good show.Post-adjustments, while the topline firmly grew by 19 per cent, the bottomline too held its ground with a growthof 17 per cent. While in the first half of this fiscal the topline consistently grew in double digits there were concerns about the quality of growth on the bottomline front with the profit growth slowing to 7 per cent in Q2FY11 from 15 per cent in Q1FY11. Will India Inc be able to cope with a declining growth rate on the bottomline front?
This was a critical question worrying almost everybody and that is why the results for Q3FY11 were watched even more keenly. However, with the strong resilience shown by India Inc on the bottomline front, this concern is now put to rest. In fact, what increases our comfort level more is the sequential performance of India Inc, wherein the topline and bottomline grew by more than 5 per cent and 12 per cent respectively (adjusted for aberrations). Out of

[PAGE BREAK] [INSERT_2]

results of the total 3,523 companies, 2,316 companies have seen their sales grow over the corresponding quarter last year, sales of 304 companies have remained flat, while those of 903 companies have declined. Look at how the topline during the December quarter is spread out. Companies comprising the Sensex accounted for 27 per cent of the total topline during the December quarter while those forming part of the ‘A’ group (excluding the 30 Sensex companies) accounted for 43 per cent and the rest of India Inc brought in 31 per cent of the topline.Similarly, for the same set of 3,523 companies, 1,915 companies have seen their profits go up while profits for 162 companies have remained flat and 1,446 companies have reported a decline in profits over the corresponding quarter.So where did this growth come from? PSUs have been at the fore front of growth during the December quarter. Their topline grew by a solid 20 per cent while the bottomline was up by a good 33 per cent on a YoY basis. The private sector on the other hand reported an 18 per cent topline growth but the bottomline growth was well below their PSU counterparts at 14 per cent. Now look at the other set of comparison. Both manufacturing as well as services have done well in terms of their topline. While manufacturing companies have reported 19 per cent growth in their topline, the growth of companies in the services’sector was up by 20 per cent on a YoY basis. However, the manufacturing companies far outpaced the services sector with bottomline growth of 25 per cent compared to the 13 percent growth of companies in the services sector. All these numbers suggest that over all it has been a good show by India Inc. Why then has the market not taken cues from the December quarter results? As we had pointed out right in the beginning there is probably something more being read by the market than these numbers. Here are a few pointers. Though many believe that Q3FY11 numbers are in line with the expectations, these could have probably been better than what they are. Look at the topline growth posted by India Inc.
There is no doubt that 19 per cent YoY growth is certainly something that should have cheered the market but this growth has come more on the back of strong volumes rather than a higher pricing power. The realisations have not improved at a comparable pace,thus keeping margins flat. Sectors such as auto, FMCG, steel,and cement are the best examples of this. In case of these sectors the realisations haven’t gone up as expected, while the costs continued to rise. What this means is that India Inc is finding it difficult to pass on the increased cost to the end customers. According to Mohit Mirchandani, Head PMS Investment, Religare Portfolio Managers: “The topline growth for Q3FY11 has been mainly driven by volumes. There could be some price escalation as well, but it’s not much or else the margins would have sustained and it shows that the companies are not able to pass on the cost.” However,Andrew Holland, CEO – Equities,Ambit Capital provides a contrarian view. “The topline growth that we have witnessed in Q3FY11 is a combination of both,

[PAGE BREAK]
[INSERT_3]

volumes and prices. It is a bit difficult to get the exact mix of that, but I think it’s a combination of thetwo,” he states. Since volume growth is likely to continue and even in a scenario where margins end up being flat,the topline growth looks quite sustainable going forward.Another factor which the marketis probably looking at very closely is the lower rise in depreciation which points towards a depressed capex cycle. Depreciation was up just 8 per cent during the December quarter. This could be as no new projects have gone on stream during the December quarter.No let up in rising interest cost, which has already shot up by more than 24 per cent during the December quarter (excluding banks and financial institutions), can be expected in due course. Economic compulsions could see interest rates hardening further going forward and this will add to the interest burden of companies across the board.Though the gross numbers look good, there is a lot of divergence in the sectoral performance. For example, infrastructure and related sectors such as power, steel, cement, etc have seen their profits decline, while growth rates of sectors such as FMCG, auto, etc have moderated. Ajay Jaiswal President– Investment Strategies, Microsec Capital says, “On an aggregate basis the results are in line with the expectation, but in terms of sectors there certainly are some divergences.” Similar seems to be the concern voiced by Mirchandani who says, “There are disparities in performance within the sectors and there are no clear-cut trends coming out and those who are managing their business well are the ones who are doing well.” Now these are frontline sectors for India Inc and if these aren’t performing as expected then it raises concerns about the sustainability of the profitability in the coming quarters. These are some of the reasons as to probably why the market is not responding to India Inc’s growth in the December quarter.

What Lies Ahead?
Among the many concerns that need to be addressed, high inflation and hardening interest rates remain the key factors. The RBI, in a bid to rein in pressures, exerted by high inflation has resorted to rate hikes,the impact of which will be felt going forward. It doesn’t end there. There is every possibility that it may again hike rates by as much as 50 to 70 basis points, putting further pressure on the margins of India Inc in the short term.The good part, however, is that both inflation and interest rates are peaking out. A silver lining to the cloud is that inflation on the global front is on an upswing. The monetary tightening on the global front to check inflationarypressures is likely to push up interest rates globally.
This will reduce the speculative flow of money into commodities, thereby cooling down their prices to some extent and bringing down inflationary pressures. This we believe is a big positive to look forward to in the coming quarters and a factor which will probably provide the push on the margin front. Within these the last worry is on the crude front. Mounting tensions in the Middle East region are pushing up crude prices. These are likely to

[PAGE BREAK]
[INSERT_4]

remain firm for at least some time going forward. The impact of this will be felt on the performance of India Inc. In the light of the above factors, one can expect volume growth to continue and push up topline growth for the Indian companies. However, there could be some worries on the bottomline front as the realisations may not pick up as expected and this could be further complicated by factors such as higher input costs and hardening interest rates. Mohit Mirchandani too feels so and says, “It’s a very tight tope to walk on and there is a sensitivity level so that when the prices reach a certain level the demand begins to dry up and I think we have reached that stage. There is no scope to increase prices any more and so effectively the margins will keep falling out of pressure.”
However, Jaiswal provides another view and says, “I don’t think the contraction is going to happen in profit growth in a big way despite the concerns such as that of rising crude,rising inflation, etc. When we talk on an aggregate basis, if out of the top five sectors in the index, even two or three sectors out-perform in a big way then definitely it would make up for the sectors that have not performed.” Also, for the March quarter the high base effect of the corresponding period would come into play and pull down the overall growth rates. Last year India Inc reported a growth of 30 per cent in its bottomline on a YoY basis. To report a higher growth on that base would not be an easy task in the light of the above factors.
Automobile
It is a known fact that automobile companies witnessed a dream run in FY10 and carried the momentum through H1FY11 also. And despite worries in the form of inflation and rising interest rates they haven’t lost the lead in the third quarter too. They ended Q3FY11 with substantial volume growth. However, the rising input costs seem to be a cause for concern. If investors recollect, this is exactly what we had stated when we had analysed the September quarter results. We had categorically stated that “volume growth in this sector may continue,but it will be difficult for the players to sustain margins as the realisations are slated to decline”. Further, we had also expected a lower double-digit growth on the earnings’ front. As had been expected, on a YoY basis the volume growth has been good (see table on volume growth) resulting in a strong 30.35 per cent growth in topline, but due to no improvement on the realisation front there was a good amount of margin pressure and hence the bottomline growth stood at only 13 per cent.

[PAGE BREAK]
[INSERT_5]

On a sequential basis there has been good volume growth. The topline grew by a marginal 3 per cent, but with a decline in margins the bottomline eroded by 8.50 per cent. The margin pressure is clearly visible from the fact that the EBITDA per vehicle of Tata Motors for Q3FY11 declined to Rs 64,018 from Rs 72,575 in Q3FY10.Similarly, the operating EBITDA of Maruti Suzuki in Q3FY11 declined to 9.70 per cent from 15.50 per cent in Q3FY10 and 10.70 per cent in Q2FY11. Ajay Seth, Chief Financial Officer, Maruti Suzuki India, in an analyst presentation has pointed out that,“Commodity prices went up substantially during the third quarter and this has hit the margins.” He further added, “Steel prices went up by 10-15 per cent, and rubber prices were also up substantially. The third quarter of last year was the lowest point as far as the commodity prices were concerned.” In the case of Bajaj Auto also the EBITDA margins in Q3FY11 declined to 20.30 per cent from 22 per cent in Q3FY10 and 21 per cent in Q2FY11. In the case of Hero Honda, it was a consecutive third quarter of decline in the EBITDA per unit and the EBITDA margins. The EBITDA per unit for Q3FY11 declined to Rs 3,734 as compared to Rs 4,411 in Q2FY11 and Rs 5,722 in Q3FY10. So while volume growth was there, the pressure on the margin front impacted the earnings growth which showed a decline of 7.70 per cent on a YoY basis. As for the next quarter, inflationary pressures, rising interest cost,higher fuel prices, and rising competition is expected to impact the performance of the automobile companies. Although there is going to be volume growth on a YoY basis, there will be some amount of decline on a sequential basis. Realisations are again expected to be under pressure resulting in single digit growth on the earnings’ front.
CEMENT
There seems to be no respite for the cement sector as the numbers continue to deteriorate with every passing quarter. With the profits dipping by more than 20 per cent in Q3FY11, this would be the fifth consecutive quarter wherein the sector profits have fallen steeply. Surprisingly, the topline seems to have shown some resilience for the first time in the last five quarters with 22 per cent growth. However, a deeper investigation shows that the revenues are skewed due to the amalgamated results of UltraTech Cement (with Samruddhi Cement) and Prism Cement (with JR Johnson India and RMC Readymix India) respectively. Thus if we adjust for these numbers, the topline growth shrinks drastically to a mere 0.58 per cent.
It was a three-way hit for the sector with the volumes and prices continuing to fall, while production costs continued to rise. Factors such as a prolonged monsoon leading to a lull in the construction activity and poor labour availability due to the festive season have affected the overall demand for cement.Despatches dipped sharply by 3.45 per cent, 23 per cent, and 24 per cent on a YoY basis for October, November,and December respectively. With no demand in sight, the price was bound to take a hit. Barring October when the cement prices remained firm by almost Rs 50 per bag in strong anticipation of a fresh demand due to the end of the monsoon, the prices continued to dip in November and December by Rs 10-15 per bag respectively.If that was not enough, a sharp rise in the production cost has only made matters worse. Key input costs such as that of gypsum, fly ash and slag have all increased by around 10-13 per cent. Coal prices too have shot up by 36 per cent, while diesel prices have gone up by 15 per cent over the last one year.This was further complicated by rail freight rates going up by 4 per cent. All this has increased the overall cost further. One should note that power and transportation together account for almost 53 per cent of the total production cost. Further, the rising interest and depreciation costs only rubbed salt into the wounds. All these factors ate into the margins, leading to a sharp decline in profits.
However, we see some respite for the sector as the demand would now start to percolate with the construction season (January – June) picking up pace.Besides, the companies would now start to pass on the incremental cost to the customers. Already the prices have gone up by Rs 20 and Rs 10 per bag in January and February respectively and the cement dealers expect a further rise in March as well. Though all this augurs well, with 20 MT of capacity expected to be added in Q4FY11, this could impact the overall

[page braek]
[INSERT_6]

prices. Besides,with a high base of March 2010, the volume growth may not be that high in Q4FY11, while costs still continue to be a concern. Hence it is better to stay away from the sector.
PHARMACEUTICALS
With consecutive quarters of bottomline growth the Indian pharmaceutical industry has again remained in the limelight. In the recently concluded Q3FY11 the sector witnessed topline growth of 18 per cent and bottom-line growth of 28 per cent on a YoY basis. The Indian players are emerging stronger on both the domestic and the international front. Not only in formulations but India is also one of the leading players in the contract research and manufacturing services’ (CRAMS) segment. The superior chemistry skills and long-term relations with the innovator drug companies are likely to drive the sector to newer heights.The Indian pharmaceutical industry is well-placed to capitalise on the emerging opportunities in the generics space, driven by patent expiries worth more than USD 200 billion over CY10-15,and a push by global governments for generic drugs. In the recent past another development that has taken place in the sector is that several innovator drug makers have entered into partnership with Indian generic players, such as Pfizer-Aurobindo, GSK-DRL, etc, thus opening up a new horizon for the sector. Large-sized innovators are now focusing on generics to maintain their growth momentum and revenue share, which indicates a bright future for the generics market. It is believed that the generics business would remain the key growth driver on the back of India’s low-cost manufacturing advantage and the well-established presence of Indian
pharma players across the globe.With the increasing generic penetration in the developed economies, the Indian pharmaceutical players are likely to witness better growth going forward. Even in the emerging economies these companies are likely to perform better. The Indian pharma companies cater to niche segments like anti-diabetic,cardiac, gynaecology, and anti-infectives which have witnessed strong growth of around 17 per cent as per the latest ORG IMS report. This is likely to be a major growth driver for the sector going forward. We believe that the Indian pharmaceutical companies will continue to perform well going forward and we remain bullish on the sector as a whole.
TELECOM
The pain is not yet over for the telecom sector in India. Besides remaining one of the most under-penetrated markets in the world, the sector as a whole has posted a de-growth in the bottomline for the fifth consecutive quarter. The sector has been witnessing pressure on the margin front although the topline has witnessed growth as penetration in the country increases. For Q3FY11, as a sector the

[INSERT_7]

topline has witnessed growth of 7.50 per cent while the bottomline has witnessed a de-growth of 53 per cent on a YoY basis. The wireless penetration in India has increased to 59 per cent as compared to 48 per cent on a YoY basis. The minutes of usage (MOU) at the end of January 2011 stood at 454 minutes as against 404 minutes during the same period last year while the average revenue per user (ARPU) declined to USD 4.5 in January 2011 from USD 5.02 during the corresponding period last year. The recently concluded quarter has been very eventful for the telecom sector. The 2G spectrum allocation scam hit the sentiment for the sector very badly. In the recent release of recommendations, TRAI has advised a price for pan-India ‘contracted’ 6.2 MHz of 2G spectrum in the 1,800 MHz band to be set at Rs 11,000 crore. This price could be used for determining the spectrum renewal fee to be paid by the telcos on expiry of their license. The price for the ‘incremental’ 1,800 MHz spectrum is set at Rs 4,600 crore/MHz This price would be used for ascertaining OTF (a one-time fee). TRAI has sought an auction of the 2G spectrum,which may be freed if 2G licenses of the defaulting telcos are cancelled.
This could serve as a benchmark for determining the OTF liability if such an auction is conducted within a year. This recommendation may pose a threat to all the telecom operators. On the other hand, the much-hyped MNP (mobile number portability) has been rolled out and in the first month of its launch, around 17 lakh customers have opted for the same. MNP is likely to be a game-changer as you can change the operator service while retaining your old number. But, till the clouds get clear, we feel that the sector may witness pressure on the margin front going forward also.
OIL & GAS
This is one of the sectors that remained in action for the entire duration of CY10,whether it was RIL’s venture into shale gas or the presentation of the Parikh Committee report and the subsequent partial de-regulation of the petroleum prices. The last quarter was no different and the crude oil prices touched a two-year high. This adversely affected the oil marketing companies that saw their under-recoveries (UR) increasing. For example, the UR in diesel increased from Rs 6.8/litre to Rs 9.23/litre. This is also expected to increase the total UR to Rs 68,000 crore for FY11 from an earlier estimate of Rs 52,000 crore. But the timely cash compensation announcement from the government has helped these companies to post better profit figures.
For the total of 21 companies analysed (including upstream and downstream companies), the profit increased by 67 per cent on a

[INSERT_8]

yearly basis.During Q3FY11, HPCL has accounted for Rs 1,750 crore to be received as cash compensation from the centra l government for the UR incurred during the quarter. The compensation from the government led to a positive bottomline for the company, excluding which the company would have posted losses. There was also improvement in the gross refinery margins (GRMs) that helped the companies to post such good profit figures. A case in point is Reliance Industries that reported a significant improvement in its GRM, which stood at USD 9 per barrel in Q3FY11 against USD 5.9 per barrel in Q3FY10 and USD 7.9 per barrel in Q2FY11. However, the same growth as profit was not visible in topline as the total sales’ growth witnessed was just 15 per cent. It was ONGC that saw a major spurt in its sales that increased by 34 per cent on a yearly basis. This was mainly because of an increase in the gross realisations for crude oil by 16.3 per cent on a yearly basis to USD 89.1/bbl and a 79 per cent jump in natural gas realisations to USD 4.2/MMBTU due to a hike in the APM gas prices. Going forward we believe that the oil prices will strengthen further, driven by liquidity in the system and improving fundamentals in the US, which is a major consumer of crude oil. As India imports approximately four-fifth of its oil needs, the higher prices would put pressure on the economy and will further delay any plans for reforms in the sector. However, upstream companies would benefit from the higher price realisations and volumes.
FMCG
The first sector that comes to our mind when we talk about introducing an element of stability in a portfolio is the fast moving consumer goods (FMCG) sector. The fact is quite clear if we see the performance of the BSE FMCG index for the calendar year 2010 as compared to the BSE Sensex. The FMCG index has given a return of 31 per cent as compared to a 17 per cent return of the Sensex. The sector as a whole has witnessed good volume growth for the quarter ended December 31, 2010 and this trend has continued for the fifth consecutive quarter for all the leading players, including Hindustan Unilever, ITC, and Marico. The sector as a whole has posted 16.76 per cent growth in topline on a YoY basis and the net profit witnessed a growth of 8.09 per cent on a YoY basis. While analysing the results we find that although volume has witnessed strong growth, the higher raw material costs have played a deterrent role, having gone up by 17 per cent on a YoY basis. The increase in the raw material prices have, however, been passed on to the consumers as all the companies have increased the price of products in the recently concluded quarter. Another important expense that forms a part of the FMCG companies P&L is the advertising spend. Spending on this front seems to be peaking as for Q3FY11 it was in the range of 15 per cent of the topline as against a long-term average of 11 per cent. In the past we have seen that when companies have increased the prices they seem to have been losing on their market share, but in the last quarter this phenomenon has changed as all have been able to retain their share. Going forward we believe that volume growth is likely to play a vital role and set the pace in the sector.
Information Technology
If there is one sector whose revival story continues to strengthen with every passing quarter, it is none other than the IT sector. After 3.3 per cent bottomline growth in Q1FY11, followed by 7 per cent growth in Q2FY11, the sector posted 14 per cent bottomline growth in Q3FY11. This indeed is a clear-cut sign of revival that is now taking place in the sector. In fact what is heartening to see here is that the sector has continued to post double-digit profit growth on a sequential basis. While in Q2FY11 the profits grew by 10 per cent on a QoQ basis, this rate improved to almost 12 per cent in Q3FY11, which we believe is commendable.These results indicate that the recovery process is right on track and it’s time now for the sector to be truly out of the woods. Our confidence comes from the fact that the macro factors affecting the Indian IT sector have improved considerably in 2010.
The US’ corporate profits for Q3CY10 increased sharply by 28 per cent on a YoY basis and are now back to the levels seen in Q3CY07 or the pre-crisis levels. This indicates that the US’corporate health is sound and this will drive more IT spending and off-shoring in the coming period. The US accounts for over 60 per cent of India’s software export revenues. In fact in Q3CY10 itself the IT spend increased by 12 per cent, which was mainly driven by the hardware demand. Now this augurs well as it primarily indicates the clients’ readiness to come forward and therefore there is a good possibility that the forthcoming IT budgets will be on a higher side. Secondly, with the hardware now in place, the demand for software and services will increase in CY11, benefiting companies such as TCS,Infosys, WIPRO, etc. With the volume growth we have witnessed over the last six-seven quarters, the IT companies would now enjoy a better pricing environment. This will help them to improve not only on the revenue front but also their future profitability. In fact the Indian IT companies are readying themselves with the opportunities that lie ahead. This can be seen from the

[INSERT_9]

consistently upward revision of their hiring targets, which is a clear indicator of a good pipeline of business. The best example of this is TCS that is now close to hiring almost 64,000-65,000 people in this fiscal itself with  more than 50,000 people already recruited by the end of Q3FY11. In fact the other interesting factor is that the usually conservative managements are seen to be quite upbeat about the business pipeline and the very fact that they continue to win deals every quarter underscores the fact that the sector is expected to see better days ahead. Hence it would be better to stay put in the IT sector for long-term gains.
REALTY AND INFRASTRUCTURE
The December 2010 quarter started on a very poor note for the real estate industry as there was more of bad news than good. Factors like the alleged involvement of banks and housing finance institutions in the bribe-against-loan scam, risinginterest cost, liquidity issues, and a sharp drop in sales volume had a very bad impact on the sector. As a result, the average topline growth remained at 2.95 per cent and bottomline growth stood at 13 per cent on a YoY basis. But again, this does not show the true picture as Oberoi Realty, which tapped the primary markets in 2010, showed extraordinary results. If adjusted for the same, there is a decline of 5.37 per cent in topline growth and a decline of 1.80 per cent on the bottomline front. The story is similar on the sequential front where the topline growth is 4.75 per cent and bottomline growth is 15 per cent.But here also the profitability of DLF increased on a sequential basis on account of sale of land and not from the core business. Adjusted for the same, the results are poor on a sequential basis too. Investors were quick to reckon the same and provided a cold shoulder to realty stocks, as a result of which the BSE Realty index declined by 24 per cent in the December quarter. There were other factors which contributed to the poor performance of the realty sector. The debt burden of the companies in a scenario of the tightening of liquidity is expected to take its toll going forward. Bank finance is drying up as public sector banks have already tightened their lending to real estate firms in the aftermath of the bribe-for-loan scam. Further, with a correction in stock prices, the ability of the developers to raise funds, either through IPO or private equity, has been affected. Some are borrowing at a cost of more than 15 per cent. The impact of the same is visible in the interest cost which went up by 48 per cent on a YoY basis (Rs 146 crore in absolute terms as against the marginal increase of Rs 83 crore in sales). The increase in interest rates on one hand and a declining demand for properties is likely to affect the cash flows of the companies. This will make it difficult for the companies to take up new projects. So overall the scenario does not seem to be rosy and we expect realty firms to post poor results in the March quarter also. On the infrastructure front, the superficial look indicates that the results are not good with the YoY topline growth of 15.50 per cent and bottomline growth of just about 4.68 per cent. But this is not the complete picture as it is mainly on account of the poor performance of Punj Lloyd which has suffered a loss. But that being an exception, all the other infrastructure companies have performed well. Adjusted for the same, the topline growth is 23 per cent and bottomline growth is 15 per cent. While the better execution capability has resulted in higher topline growth, the impact of rising commodity prices and higher working capital cost is clearly seen here. Sequentially, the growth was good with topline going up by 23.32 per cent and the bottomline by 22 per cent. Going ahead, with the increased execution capability, growth is expected to be good. But the liquidity tightening mainly for long-term projects may create some road-blocks. A higher allocation on infrastructure spending by the government in the budget is likely to prop up the stocks in this sector.
BANKING
After out-performing the broader market index for most part of last year, the BSE Bankex saw a moderation in the last quarter and remained one of the worst sectoral performers. For the quarter ended December 2010, though the Sensex was marginally up, the BSE Bankex was down by 6 per cent. But the same is not reflected in the third quarter financial performance of the banking companies. The results of the 39 banks that were analysed by us have shown growth of 24 per cent in revenue on a yearly basis and 7 per cent on a quarterly basis. The higher-than-expected growth in revenues can partially be explained by the superior growth in advances due to a pick-up in credit and partially by the expansion in margins. Last quarter, the banking industry saw a credit growth of 24 per cent.
It was Dhanlaxmi Bank that saw the highest credit growth of 77 per cent albeit with a lower base. For us the drivers of credit were largely the retail as we have started various new services like mortgage, loan against property etc that have contributed in large manner” explained Bipin Kabra,CFO, Dhanlaxmi Bank.The expansion in margins came from the increase in BPLR and base rates. Most of the banks increased their base rate between 10 bps (basis points) to 50 bps. For example, PNB increased its base rate from 8 per cent to 8.5 per cent and BPLR (benchmark prime lending rate) by 75 bps. The increase in interest income translated into a similar increase in the profit.The net profit of these banks increased by 24 per cent. This would have been a better figure had it been supported by a similar increase in the non-interest income, which witnessed subdued growth due to the hardening of interest rates and a fall in the treasury income. A case in point is that of the largest lender of the country, SBI, which saw a decline of 1.5 per cent in its non-interest income on a yearly basis primarily due to a fall in its treasury income. The public sector banks were also hity an incremental provision for pension liabilities and gratuity. As regards the NPAs, they largely remained stable and barring a few banks like the PNB, IDBI Bank, and Federal Bank the asset quality also remained stable. But it was Bank of India that showed improvement in its asset quality with both gross NPAs and net NPAs on the decline. In case of private banks, ICICI Bank was one which saw its gross NPAs declining. Going forward we feel that the banks may not repeat their performance of the last quarter due to an increase in the deposit rates (to attract more deposits as during the last quarter the banks saw a stretched credit deposit ratio) that are exceeding the lending rates and a further increase in interest rates, adversely affecting the non-interest income.As the stock market acts as a lead indicator, this might be the reason why the banking stocks have underperformed the broader market in the last quarter.
STEEL
Much of the sheen from the steel companies has been lost due to an increase in the raw material prices in Q3FY11. For the total of 101 steel companies analysed, the sales grew by 16 per cent on a yearly basis. Nonetheless, the same did not percolate to the net profit that declined by 19 per cent during the same period. The result of SAIL truly captures this: The company reported a revenue growth of 15 per cent on a YoY basis but a 34 per cent drop in the profit during the same period. The increase in topline has been contributed by both, increase in volume as well as realisation. For example, JSW Steel saw an increase in sales volume by 12 per cent from 1.43 MT achieved during Q3FY10 to 1.59 MT during Q3FY11. In terms of blended realisation it increased from Rs 32,372/tonne to Rs 36,457/tonne in the same time but the long products saw a better improvement in the prices.However, the increase in realisation and volume could not overcome the increase in raw material prices which resulted in a drop of net profit. The key raw material prices of steel are iron ore and coking coal that saw a sharp increase in the last quarter. For example, the prices of iron ore increased by almost 60-70 per cent on a yearly basis. All this led to an increase in the raw material cost from 52 per cent of sales (Q3FY10) to 56 per cent of sales (Q3FY11) for the 101 companies analysed for this report.Going forward we feel that the situation is not going to improve much as the spot coking coal prices have already been northward bound due to severe floods in Queensland and other regions in Australia. The problem is further compounded by the limited ability of the Indian steel companies to pass on the increase in the raw material prices to the consumers as the global steel capacity utilisation is still at 75 per cent. Moreover, the Chinese steel demand is expected to moderate from a growth of 6.7 per cent in CY10 to 3.5 per cent in CY11, and Indian steel prices are capped by the import prices from China. Therefore we believe that the coming quarters will also
continue to be difficult for the steel industry.
TEXTILES
An industry that accounts for 14 per cent of our total industrial production, contributes nearly 15 per cent of total exports, and provides direct employment to about 35 million people and indirect employment to another 56 million continues to prove its mettle every passing quarter. Q3FY11 was no different as the textile sector posted topline growth of around 32 per cent while the bottomline grew by a massive 140 per cent,partly also aided by the low base effect.Having said that, the sector has continued to post robust profit growth for the seventh quarter in a row, which is quite commendable. These robust numbers are a result of both, a strong demand witnessed on the exports as well as the domestic front. Besides, historically the third quarter is usually strong for the textile sector as this is the quarter of festivities,which is not only on the domestic front, but also on the international front due to Christmas and New Year. Thus it was but obvious that the sector would post robust growth numbers. In fact a scan of the exports’ data to the US shows that the total textile exports have steadily increased every month in Q3FY11, while for the calendar year 2010 the total exports to the US increased by 19 per cent. In fact, the US’ consumer spending increased for the sixth straight month, having gone up by 0.3 per cent and 0.7 per cent in November and December 2010 respectively. It should be noted that the US accounts for 50 per cent of the total textile exports from India.On the domestic front too with the festival season picking up pace from September through December, the third quarter numbers for the domestic players have been strong as well. As for the coming quarter, the textile numbers should remain robust. This can be seen from the tax charges, which have shot up by 92 per cent. A higher tax outgo indicates that the companies are expecting a better quarter ahead. That apart, with the soft corner that the government has for the textile industry, we believe that the sector would see not only higher allocations in the forthcoming budget, but may also get an extension of the interest subvention of 2 per cent as well. This augurs well for the sector. Besides, with the government being firm on its stand of restricting the export of cotton to 55 lakh bales,this will go a long way in protecting the margins of the domestic industry and help improve the profitability further. Hence it would be better to stay invested in the sector with a longterm perspective.