September Results Losing Steam?

Ali On Content / 22 Nov 2010

A dip in the data showed that factors such as rising input costs, higher depreciation charges and tax provisions led to the squeezing of profits for India Inc.

There is an interesting common factor between the stock market and India Inc. results. Though there are 1.73 crore demat account holders in India, active investors are a little over 2 lakh and they generate 90 per cent of the total volumes. Similarly, India Inc. has a total of 6,700 listed companies (BSE NSE combined) but only a handful of frontrunners that have the capability to skew corporate results either way. For example, there are only 200 Group A companies, but they account for 84 per cent of the total market capitalisation, 46 per cent of the total average daily turnover, but more importantly they account for 71 per cent and 85 per cent of India Inc sales and profits respectively. Thus, though the overall results are important, what is more significant is how the frontrunners have fared as it gives a clear snapshot of the quality of earnings and its impact on the sustain-ability of the broader market.

As the corporate report cards for September were pouring in, the Sensex continued its surge ahead and closed above the 21,000 level for the first time in its history. This came at a time when investor expectations were already high, post the June quarter results where the bottomline grew by more than 15 per cent. Considering that we are almost at the fag end of the results season, it is time to take stock of things and under-stand how the numbers have panned out for India Inc.

Of the 3,077 results that we have with us so far, India Inc. seems to have surprised everyone yet again by posting a stellar performance of 20 per cent topline and a massive 46 per cent bottomline growth on a year on year basis. Backed by such a thrilling accomplishment, it is no wonder that the September results have acted as a major trigger for the Sensex to scale new highs. Plus, these gross numbers certainly look better than the June quarter. There is an old adage that says, ‘Seeing is believing’ and it is so true here. Nonetheless, a few of the numbers in this case feel too good to be true and even after seeing them on paper, some may still find it unbelievable. Besides, one must also note that even a single factor is enough to skew the overall results. Hence, as a general rule we always adjust the aberrations i.e., refinery and extraordinary items to get a clear picture.

In fact, if readers could recollect the special report on results in DSIJ’s previous issue, we have seen the impact of Piramal Healthcare’s one time gain to the tune of Rs 16,209 crore could do to the results. Thus to end the suspense, we adjusted the refinery and extraordinary items from the gross India Inc. numbers. To our surprise, we found that despite the number of companies posting their results rising sharply, the bottomline growth remained stunted at 6 per cent while the topline continued to show its inherent strength with a 19 per cent increase. Looking at the bottomline results, it is clear that this is indeed a below expectation result from India Inc. However, Navneet Munot, CIO, SBI MF feels, “The September quarter results are broadly in line with the expectations but there is no secular trend and there is lot of divergence seen across the sectors in these results.” Kishor Ostwal Managing Director CNI Research too feels, “We could not have expected a much better growth than this. There is no problem of consumption, the demand is not slowing down, but there are certain sectors where one feels the pressure. But growth cycle is going on, demand cycle is picking up and the stock market is responding accordingly.” But what is important now is to understand the reasons behind this underperformance.

A dip in the data showed that factors such as rising input costs, higher depreciation charges and tax provisions led to the squeezing of profits for India Inc. Raw material and power and fuel costs have gone up by 15 per cent and 13 per cent respectively. It should be noted that the prices of commodities such as copper, steel, iron ore, coal and crude have all seen an uptrend during the quarter. Kishor Ostwal, Managing Director, CNI Research explains, “We have seen commodity prices rising substantially this quarter leading to clear impact on the bottomline. But with commodity prices falling steeply this month, we will see the profitability going up the next quarter.”[PAGE BREAK]

The sectors that dragged down the overall performance include cement, telecom and chemicals. Their profits declined 78 per cent, 32 per cent and 4 per cent respectively. Others sectors that disappointed with single digit growth were IT at 6 per cent, power at 8 per cent and steel at 9 per cent. However, sectors that grew more than 25 per cent in profits include pharma, infra, engineering, oil & gas, media, real estate and textile.

Having said that, there is always a silver lining to the dark clouds and these results are no different. Firstly, depreciation charges increased sharply by 24 per cent, which indicates that India Inc. is on a capex spree in anticipation of future demand. This we believe is a good sign. The other factor is tax provision that increased by more than 32 per cent. It should be noted that a higher tax provision is a good indicator of better results for the coming period. This reas-sures us that though the September quarter wasn’t up to expectations; the December quarter might provide some respite with good results though ris-ing interest rates and crude oil prices could be a cause of concern. In our opinion, these numbers better be good if India has to sustain its P/E ratio of 20x-plus.

Automobile
A Few Speed Breakers
I t is a known fact that automo-bile manufacturers witnessed a dream run in FY10. In our previ-ous quarterly results analysis, we had stated that their honeymoon period got extended in Q1 FY11 too. But the moot question is can the sector sus-tain this kind of growth? If the Q2 FY11 figures are anything to go by, the auto industry continues to pres-ent a rosy picture in terms of volume growth which stood at 31 per cent on a YoY basis.

On the negative side, the country’s leading automobile companies witnessed hardly any improvement on the realization front as growth remained flat on both YoY and QoQ basis. This resulted in some contraction on the margins front. A combination of both these factors resulted in a topline growth of 33.50 per cent while the bottomline growth stood at 16.19 per cent.  Further, if we compare the results on a QoQ basis, the topline growth is not too high at 10 per cent but some improvement on the margins front and a few savings on raw material costs resulted in a bottomline growth of 17.25 per cent.

If we take a look at the YoY perfor-mance, there are certain factors that attract our attention. Firstly, there is no improvement in realizations. For instance, Maruti’s average realization stood at Rs 2, 84,935 which is flat on a QoQ basis and slightly lower on a YoY basis. As a result, the EBITDA margins in Q2 FY11 declined to 10.80 per cent from 12.70 per cent in Q2 FY10. Even M&M posted similar results. However, an increase in volumes helped auto-makers deliver better topline growth.

In case of Hero Honda, realiza-tions are up 1.7 per cent on a QoQ basis and 3.2 per cent on a YoY basis. But the margins continued to dis-appoint on account of higher raw material costs. The EBITDA margin that was 18.30 per cent in Q2 FY10 declined sharply to 13.40 per cent in Q2 FY11. Additionally, Bajaj Auto too was under the margins pressure but a strong growth in sales volumes helped the company put in a better performance.

As far as expectations for the next quarter are concerned, we feel volume growth in this sector may continue but it will be difficult for automobile players to sustain margins as realiza-tions are slated to decline somewhat. Further, the basis is going to be higher and hence we expect growth on the earnings front to be in the vicin-ity of high single digit to low double digit numbers.[PAGE BREAK]

Cement
Concrete Challenges
I f investors haven’t already seen the worst in the previous quarter, the cement sector’s Q2 FY11 results have gone on to deteriorate further with the topline growing by a mere 2.6 per cent, while the bottomline dipping sharply by 78 per cent. Due to the monsoons and a lull in con-struction activity, it is understood that this is indeed a weak quarter for the cement sector. Nonetheless, the numbers reflect a gloomy picture.

Factors such as the monsoons, a seasonal decrease in demand, a fall in realisations, a sharp rise in input costs and a higher base effect on bet-ter performance due to the delayed monsoons last year are some of the reasons for the dismal performance of this sector. The dispatches too have been weak. They increased by 1.63 per cent, dipped by 17 per cent and rose again by over 5 per cent during the months of July, August and September respectively. This was one of the weak-est performances seen over the last two fiscals.

Cement prices witnessed a correc-tion of around Rs 30-40 per bag on an average in July and August, though companies did raise their prices in the month of September. Industry experts feel that the sudden spurt in prices during the month of September was not due to a supply demand mis-match, but an attempt by companies to avoid negative growth in profits. In fact, according to a media report, the Competition Commission of India (CCI) was set to investigate this price hike by cement manufacturers and also look at whether there might be a cartel at work. However, there haven’t been any updates on this issue since then. On the other hand, cement manu-facturers maintain that the price hike was purely due to the rising produc-tion costs.

It should be noted that coal prices have shot up by more than 30 per cent during the quarter while freight rates are up by 20 per cent on account of a rise in diesel prices. One should also note that coal and freight costs togeth-er account for 50 per cent of the total production cost. It has been seen that the performance of the cement indus-try tends to improve in the second half, post-monsoon.

Moving ahead, prices may firm up considering that a huge capacity of close to 40 MT is slated to come on stream during this fiscal and the previ-ously commissioned additional capac-ity is reaching its full potential. Pricing is bound to stay under pressure and the rising input costs will further make it difficult for cement companies to post good profits.

Pharmaceuticals
Keeping Good Health
W e continue to hold our bull-ish stance on this sector which has witnessed bet-ter numbers for the quarter ended September 2010. The sector has posted a topline growth of 15.29 per cent and bottomline growth of 25.76 per cent (adjusting for Piramal Healthcare) which is a satisfactory growth level. India has the largest number of USFDA-approved plants outside the US and is likely to emerge as a global player in the generic space and also in the contract research and manufac-turing services (CRAMS) sector. The superior chemistry skills and the long relation with the innovator drug com-panies is likely to drive the sector to newer heights.

The Indian companies are 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, push by global governments for generic penetration in regulated markets such as the US and Japan, and patent expi-ries. Further, the bigger innovators are now focusing on generics to maintain their growth momentum and revenue share, which indicates a strong future for the generics market.[PAGE BREAK]

The domestic pharmaceutical mar-ket witnessed 15 per cent CAGR over CY05-09 and it is expected that the trend will continue over CY09-14 led by lifestyle (chronic) diseases, increas-ing reach in the rural markets through a growing field force and awareness, and a continuous rise in the private final consumption expenditure. The chronic diseases segment would out-pace the industry growth rate because of the changing lifestyle leading to diseases related to cardiovascular irregu-larities and diabetes. The Indian for-mulations market grew at a healthy 17.4 per cent in 2009 to Rs 401 bil-lion, mainly driven by strong growth in the anti-diabetic, cardiac, gynecol-ogy, and anti-infective segments. We believe that the Indian pharmaceutical Oil & GasOn Slippery TurfThe announcement and action taken by the government at the fag end of the first quarter of FY11 (June 26, 2010) has yielded sector will continue to perform well going forward and that explains our bullish stance.

Telecom
Losing Its Buzz
he telecom sector in India continues with its bleeding in Q2FY11 and has posted de-growth in its bottomline for the fourth consecutive quarter on a YoY basis. The sector as a whole reported a topline growth of 13.17 per cent while the bottomline witnessed a de-growth of 32.29 per cent. India is still one of the most under-penetrated markets for mobile telephony in the world. However, wireless penetration has increased by 55 per cent in October 2010 as against 40.31 per cent in October 2009. The minutes of usage (MOU) has also witnessed an uptrend at 480 minutes as of October 2010 as against 404 minutes in October 2009. Although the MOU and the penetra-tion witnessed growth, the average rev-enue per user (ARPU) has witnessed a decline as it has decreased from USD 5.02 in October 2009 to USD 4.60 in October 2010.

The 3G rollout and the mobile number portability (MNP) are yet to be launched and therefore the change in the dynamics for the sector can only be understood after all the develop-ments are rolled out. The price war between the service providers has come to a halt for the moment. The topline of all large service providers except Reliance Communications has wit-nessed a growth but has suffered in terms of bottomline. This is mainly due to the huge pre-paid base that the com-panies have which constitute almost 90 per cent of their subscriber base where the margins are thinner than the post-paid connections.

The  MNP which is slated for launch on  November 25, 2010 in Haryana is likely to create another stir and some more price wars among the service pro-viders cannot be ruled out. Therefore we continue to hold a bearish stance on the sector.

Oil & Gas
On Slippery Turf
The announcement and action taken by the government at the fag end of the first quarter of FY11 (June 26, 2010) has yielded results in terms of the performance of the oil & gas companies in this quar-ter. The results of the 12 companies analysed so far has revealed that their sales have increased by an average of 23 per cent on a yearly basis. A part of this increase has come from the deregulation of petrol prices and the upward revision in the prices of diesel and LPG. The biggest yearly jump in revenue was posted by Hindustan Oil Exploration Company that increased by 447 per cent (albeit with lower base) to Rs 67.62 crore.[PAGE BREAK]

The cash compensation granted by the government to oil marketing com-panies helped the industry to reduce its under-recoveries for Q2FY11 that dropped to Rs 11,400 crore -43 per cent down on a sequential basis. The crude throughput remained flat sequentially but increased on a yearly basis for all the companies except Reliance Industries Limited (RIL) that saw a fall due to  an unplanned shutdown at the Panna-Mukta field. In terms of GRMs (gross refinery margins), there were mixed results. BPCL saw its GRMs declin-ing whereas RIL’s premium over the Singapore Complex GRM remained stable at USD 3.6 per barrel on a quarterly basis but increased sharply by 23 per cent on a yearly basis, pri-marily due to an improved heavy-light crude differential.

The average crude oil prices of Q2FY11 at USD 79.2/bbl against USD 81/bbl in Q1FY11 helped these companies to post profit increase of 82 per cent on sequential basis and on yearly basis profit increased by 41 per cent. This even helped company like BPCL to turn into black.

Going forward we feel that if the government does not act decisively on the pending reform process such as the de-regulation of diesel that con-stituted larger absolute losses for the downstream companies it may have a negative impact on the companies’ finances in the coming quarters. The problem will be accentuated by the fact that the quantitative easing (QE) II by USA might inflate the commod-ity prices that will increase the under-recoveries. Therefore we feel that the outperformance of the sector in the coming quarters very much depends upon what the government decides to do.

FMCG
More Buying Power
FMCG stocks have always been considered as a safe haven for investors. When we try to analyse the sector, the most important param-eter is the volume growth in the sec-tor. The bigger players like Hindustan Unilever (HUL), Marico, and ITC have witnessed good volume growth for Q2FY11. HUL witnessed a vol-ume growth of 14 per cent, Marico 15 per cent, and ITC 20 per cent for Q2FY11.
ITC recorded 18 per cent YoY revenue growth that was driven by growth of 15 per cent in its cigarette business, 22 per cent in the ‘other’ FMCG business, 21 per cent in hotels, 17 per cent in paper, and 22 per cent in agriculture.

Despite innovation and a high level of advertising to support the person-al care products business, its ‘other’ FMCG saw a 21-24 per cent decline on both QoQ and YoY basis. HUL with its aggressive advertising and promo-tion spend and selective re-launch and re-positioning of key brands sprung a positive surprise by continuing with its volume growth momentum in Q211. HUL recorded spectacular volume growth of 14 per cent in Q2FY11, except for its personal care products which recorded 330 bps YoY and 180 bps QoQ reduction in the EBIT mar-gins. Meanwhile, healthy revenue trac-tion was witnessed in personal products, beverages, and processed foods, whereas the performance of soaps and detergents was influenced by price reduction.

Marico reported revenue growth of 13 per cent YoY on volume growth of 15 per cent. The price cuts in the previous quarters led to a price-led 2 per cent revenue decline. The company had initiated price hikes of around 5 per cent in September 2010. The full impact of these hikes would be felt only from 3QFY11. All the major brands continue to do well. Parachute, Saffola, and hair oils have reported volume growth of 10 per cent, 18 per cent, and 14 per cent respectively. The raw material costs were a bit on the higher side which played a deterrent role for the Q2FY11 results. The penetration in new and under-penetrated markets is still their focus and is likely to gar-ner results going forward. However, intensified competition can also prove to be a deterrent for the sector. But the impact will be less when we look at a huge market like India.[PAGE BREAK]

IT Sector
Progressing Gradually
T he recovery of the IT sector has not only been very slow but it has also failed to surprise investors over the last six quarters. According to the IT/ITES results, the sector’s topline grew by 16 per cent while the bottomline grew by almost 7 per cent on a YoY basis. These are much better numbers than June when the bottomline growth was a mere 3 per cent on a YoY basis. In fact, on a sequential basis, the numbers are even better with the topline and the bot-tomline growing by 10 per cent each. The double digit increase in bottom-line indicates that growth is now a mix of both volumes and pricing compared to just volumes like we have seen previously. The best part is the client’s intent to spend on technology. This move comes at a time when clients will be once again finalising their budgets in a couple of quarters from now. Taking a cue from the clients’ optimism seen in this quarter, we can expect their budgets to be liberal in the coming fiscal. The Infosys management, in their results conference call, said that the clients are not simply spending on technology but they are very clear on where they want to invest and have also increased outsourcing. We believe this will bring in more volume.

With a rise in demand for IT servic-es in the coming future, the pricing sce-nario is bound to see further improve-ments. Barring TCS whose pricing remained flat, Infosys and Wipro have already seen their pricing improve by 3.2 per cent and 1.1 per cent respectively in Q2 FY11. However, the only concern that many have is related to rupee appreciation. We believe this really shouldn’t be a cause for alarm as one tends to forget that IT companies were managed well in both scenarios – where the rupee was at Rs 51 to a dollar and  Rs  39.5 to a dollar. Investors must understand that it is a slow but steady recovery for the IT sector and hence remaining bullish and taking the long term view would be prudent.

Infrastructure and Realty
Good & Bad
During our earlier analysis of the results of Q1 FY11 for the real estate sector, we had predicted better YoY results for Q2 FY11. And that is precisely what has happened. For Q1 FY11, real estate companies have posted topline growth of 74 per cent and bottomline growth of 117 per cent. Surely these figures are impres-sive, but unfortunately they have not translated into a better performance of realty counters on the bourses. However, the reason for this under-performance is clear. The YoY growth was anyways expected on account of a lower base in Q2 FY10 results when realty companies were struggling and volumes were not picking up.

With respect to performance on a sequential quarter basis, the topline growth is 22 per cent and the bot-tomline growth is 18.21 per cent. Nonetheless, there are some noticeable factors here. The growth on sequential basis is mainly on account of higher prices and not due to an increase in volumes. This is a matter of concern for many realty players. Recent data from Knight Frank suggests that the absorp-tion rate in Mumbai has declined to as low as 2000 units – significantly lower than the 3000-5000 units witnessed during the earlier real estate boom.

The key reason for such poor vol-umes is unaffordability following the 15-20 per cent property price hike over 2010 till date, which has resulted in lower absorption. Among other factors contributing to this situation are the current interest rates that despite hav-ing firmed up, are still benign. In spite of the fact that housing finance players like HDFC and SBI have extended their teaser home loan schemes, the absorption rate has plunged. Looking at the scenario, developers are offering discounts up to 5 per cent on their new schemes. We feel more efforts are needed to bring regular volumes back to the sector. With the RBI introduc-ing more stringent norms by raising the provisioning for home loans and curbing teaser loan rates from banks, there is going to be a negative impact on the sector. Volumes are not likely to pick up signifi-cantly in the next quarter too.[PAGE BREAK]

While this is the scenario on the residential property front, volumes in the commercial segment too have not picked up. The demand supply sce-nario is still tilted towards the supply side thus increasing the pressure on commercial volumes and realizations. Going into the next quarter, one may expect good YoY results but again, the performance on a sequential basis will be almost flat.

On the other hand, the infrastruc-ture sector’s performance has been very good with a YoY topline growth of 12 per cent and bottomline growth of 35 per cent. But the best part is that this sector has shown good progress on a QoQ basis as well. Here, the topline growth is 7 per cent and the bottom-line growth is 29 per cent. A thorough analysis indicates that a sharp decline in raw material costs (11 per cent on a YoY basis) has resulted in better bottomline growth. In addition, proj-ects that began four quarters ago are yielding results now. Hence, we have high expectations from infrastructure companies in the years to come. For instance, take L& T who have posted excellent results this quarter. The order books of most of the infrastructure companies are looking good with high margin projects. Further, these mar-gins are expected to remain stable on account of steady raw material prices. In the next quarter, we expect another round of good performance from infra-structure companies.

Banking
Poised For Moderation
The banking sector was in the thick of action during the last quarter with the implementa-tion of the base rate effective from July 1, 2010, increase in the key policy rates, and the buzz around the grant-ing of new banking licenses. All this, fortunately, didn’t deter the dream run of the banking sector. The topline of the 39 banks analysed so far, including the public and private sector banks, has grown by 16 per cent. It is the lot of the public sector banks which took the lead and their topline grew by 17 per cent com-pared to 14 per cent posted by their private sector counterparts. Yes Bank, for instance, recorded the highest increase in revenue at 81 per cent on a yearly basis.
The increase in topline was mainly supported by a huge jump in the net interest income (NII) growth. Many banks saw their NII growing more than 50 per cent and for IDBI Bank it shot up by more than 1.5 times. This has been reflected through an improvement in the net interest mar-gins (NIMs) of the banks and for Corporation Bank it increased by 30 bps. The credit off-take in the quarter of 20-25 percent was mainly assisted by large industries, including infra-structure (especially power and tele-com) and the housing sector. As per Alok Mishra, CMD, Bank of India, “The overall credit growth in FY11 will be in the range of 19-20 per cent for the industry.”

The revenue growth of the banks was somewhat muted due to a lower non-interest income growth. This was primarily due to the hardening of the bonds and the lower or negative growth in treasury income. For example, Dena Bank saw its non-interest income falling by 5 per cent on a yearly basis. Similarly, for Axis Bank the non-interest income during the quarter contracted by 3 per cent YoY to  Rs 1,033.2 crore on account of a 52 per cent YoY drop in the treasury gains. The profit of the banks observed growth of 19 per cent on a yearly basis and banks in the private sector wit-nessed their profit growing faster at 31 per cent than that of the public sector banks at 16 per cent.

As far as the bank’s asset qual-ity is concerned it remained large-ly stable. For most of the banks it remained at the same level as a year ago barring a few like Andhra Bank that saw its NNPA increasing to 0.5 per cent from 0.2 per cent during the same period last year. But going forward we may see some concern in the asset quality of the banks due to rising slippages from the restructured assets and the increase in NPA provision-ing. We feel that after the huge outperformance of the banking stocks in the last quarter we may see some moderation in the coming quarters.[PAGE BREAK]

Steel
Losing Sheen
The steel sector seems to have lost some of its sheen this quarter due to the volatile and rising raw material cost and decreasing steel prices. There has been increase of 14 per cent in the topline of 79 com-panies analysed so far. This increase in topline has been primarily achieved through volume growth rather than price growth. The positive impact of volume on topline was moderated by a decline in the average realisations of steel which, for most of the steel com-panies, saw a beating on both sequen-tial and yearly basis. SAIL saw its aver-age realisation falling by 2.7 per cent on a yearly basis to  Rs 33,448 per tonne whereas JSW Steel’s average realization fell by 7 per cent sequentially despite a better product mix.

In terms of volume, all the major steel players witnessed robust demand and improvement. For Tata Steel’s India operations its sales volume was up by 14 per cent to 1.66 million tonnes in Q2FY11 on a yearly and 19 per cent on a quarterly basis. The lower realisation and the increase in raw material prices have taken a toll on the EBITDA per tonne that declined for most companies. The key raw material prices of steel i.e. iron ore and coal saw a surge in prices in the range of 25-50 per cent on a yearly basis and hence the cost of the raw material as a percentage of sales has increased by 300 bps on a yearly basis to 51 per cent of sales in Q2FY11. The result is a less than expected increase in the net profit.

The bottomline of these companies has increased by a mere 10 per cent. This would have been further subdued had there been no substantial increase in ‘other’ income, which has doubled. It was Tata Steel which saw a massive increase in its ‘other’ income owing to its sale of investment in group com-panies to Tata Sons and the sale of its non-core business. The situation may improve from the current level as there is hope of an increase in the margins of the steel companies with realisation likely to improve due to lower imports from China since the inefficient mills are being closed down.

Textile
Robust Demand
Ruled out by many a couple of fiscals back, the textile sector is making some good noise on a consistent basis. With topline growth of over 30 per cent and bottomline growth of a massive 133 per cent, the sector’s revival story continues to gain strength with every passing quarter. As a matter of fact, this segment has displayed a stellar perfor-mance for six consecutive quarters in a row. The textile segment’s success story continues unabated even on a sequen-tial quarter basis where the topline and bottomline growth remain very strong at almost 15 per cent and 96 per cent respectively.

These favourable results are driv-en by both domestic growth and an increase in exports. A scan exports data to the US shows that exports have bur-geoned steadily every month. During August 2010, (export data available till August only) total textile exports were up by more than 8 per cent on a YoY basis. The US accounts for almost 50 per cent of textile exports and on a year to date basis, this share increased by more than 15 per cent, which is quite commendable. On the domestic front too, companies have been able to put up a good show due to the demand remaining intact and the rising dispos-able incomes.

However, the soaring cotton and yarn prices are a concern in addition to rupee appreciation. The price of the former commodity has shot up to  Rs 41,000 per candy from  Rs 23,000 per candy last year (A candy equals 356 kg of cotton) while the latter’s cost has increased thrice in a month! The gar-ment manufacturers’ production costs have clearly escalated thus affecting their margins. Besides, if these com-panies aren’t able to pass on the costs then realisations will dip, affecting margins further. However, in a bid to protect the domestic industry, the gov-ernment has put restrictions on cotton exports to 55 lakh bales. This is despite high overseas demand and intense criticism from global textile asso-ciations. But having said that, we believe the third quarter results will continue to remain strong as festivi-ties are likely to boost demand both on the domestic as well as the exports front.

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