Earnings: Watch out for media, consumer discretionary, pharma and banking stocks
In its Q2 earnings preview note, Nomura has come up with a list of sectors and companies to watch. It feels media, pharma and consumer will trump while banks, automobiles, mining and electrical equipment might suffer
As we enter the earnings season, Nomura Equity Research has come up with a list of sectors and its views of each sector, including which companies are likely to get affected. We had written in our earlier piece on their overall views on the market (http://www.moneylife.in/article/nomura-expects-september-quarter-to-be-the-weakest-one-since-2008/28993.html). Now that Nomura expects this quarter to be subdued, we highlight some of the sectors that the brokerage thinks will be affected.
What investors can expect from each sector
• Automobile: The automobile sector can be used as a proxy for the overall economy. As more people become wealthier, more people will upgrade their lifestyle by getting a vehicle or upgrading to a better one. However, Nomura expects the quarter to be weak for the sector. It expects Exide and Amara Raja Batteries to do well.
• Agri-inputs: Agri-inputs is the derived demand of the agriculture sector. When the monsoons are good, the sector will do well, and vice versa. But poor and erratic monsoon season this year have had quite a dampening effect on the sector. Companies like United Phosphorus and Jain Irrigation are likely to be affected.
• Banks: Banks have done well of late, with share prices going up, due to ‘positive’ policy measures by the RBI in keeping rates steady while at same time cutting CRR. However, Nomura feels that the run-up has caught up with valuations and expects a correction. Apart from this, delinquencies are a concern as bad loans turn sour at increased rates.
• Cement: The cement sector largely depends on the overall construction and infrastructure activities. With the monsoons over, manufacturing of cement is expected to pick up as projects resume. However, the diesel price hike is expected to put a dent on margins vis-a-vis transportation of cement from plant to customers, though margins downfall is expected to be cushioned by higher realisations.
• Construction & infrastructure: Insurance companies can now invest more in infrastructure. Whether they will do that is another story altogether. Having said this, Nomura expects sluggishness to continue even though the government has initiated reforms measures.
• Consumer: One of the few sectors expected to do well despite economic difficulties is the consumer discretionary segment. With inflation stabilised and trending downwards, consumers are buying more soaps, eating more pizzas and such. While the spending hasn’t increased dramatically or significantly to cause cheer, it is relatively better than nothing at all. Nomura expects Jubilant Foodworks and ITC to deliver strong results while Hindustan Unilever, Marico, Colgate-Palmolive will be watched.
• Electrical Equipment: Much of the demand for electrical equipment depends on the health of the power sector, which is clearly in crisis. Power plants have been affected due to environmental clearances and fuel availability in the form of coal. All this has taken a toll on electrical equipment manufacturers. Even though some states have guaranteed electrical manufacturers like BHEL towards discoms, long-term prospects remain to be seen.
• Information Technology: The face of the Indian economy is going through a bumpy time. Global economic turmoil has taken a toll on exports. It is uncertain when developed countries will come out of the recession. The woes are further compounded by a strong rupee as Bernanke’s QE3 has printed dollars. Much of the sector is dependant on external factors which makes it look fundamentally unappealing for long-term investors. Nomura expects HCL Technologies and CTS to remain stable while bearish on Infosys and Wipro.
• Metals & Mining: This sector has been in the news of late with the government ban on mining in the state of Goa while production is yet to resume in Karnataka—two of the big iron ore areas—on charges of irregularities and corruption. The raw material for steel is iron. Tata Steel is expected to be subdued according to the Nomura report.
• Oil & Gas: India imports oil & gas and is thus exposed to the vagaries of global oil prices, and must pay in dollars, which means it is also affected by currency movements. Nomura expects (Brent) oil to be range-bound, meaning not fluctuating wildly, at around $110 per barrel.
• Pharmaceuticals: It used to be the darling of the Indian corporate sector, and still is. With patents of branded products expiring, generics are expected to increase. However, a lot of litigation and compliance cost is involved, which eats into the margins and brand equity (i.e. reputation). However, Nomura expects the sector to deliver strong performances this quarter. It advises investors to watch out for Dr Reddy’s, Sun Pharma and Glenmark Pharma.
• Power: As mentioned earlier, the power sector is expected to remain subdued on account of policy inertia. According to Nomura, JSW Energy and Adani could surprise while preferring ‘defensives’ such as Power Grid Corporation, Coal India and NTPC. It must be kept in mind that Coal India has skimped on its PPA commitments to various power and power-related firms.
• Property: This is one sector that is saddled with too much debt and too little cash flow. The only way to revive this is to hope that the economy does revive better than expected. However, this event seems unlikely. A flailing economy means people aren’t buying much and are deferring consumption in anticipation of benign times ahead. Nomura believes Prestige can do well while has put a ‘reduce’ call on DLF.
• Telcos: Intensive competition has almost completely eroded the margins of telecom operators. While the consumer has largely benefited, the service levels have dropped alarmingly. Already beset with the 2G scams, there are questions about 3G and 4G auctions, which has put the sector in negative light. Nomura advises to keep a watch for Bharti Airtel and its performance in Africa. Recently, price tariffs have increased which may be good for the companies but not necessarily for consumers.
• Media: Media has been in the limelight as there’s a lot of chatter on how digitization can reform and change the industry forever. It is been seen as a good move and more people will watch quality programming at higher prices, which also might boost ad-spend. It could be a game changer. Nomura expects sales of Zee to increase