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 ( 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



Sensex, Nifty sideways for now: Thursday Closing Report

The indices closed above yesterday’s high today. The downtrend has been arrested for now but a strong uptrend looks doubtful


After remaining in the negative for a major part of the morning session, the announcement by the government approving direct transfer of urea subsidy and a positive opening of the European markets resulted in a green close. Today's gain on the Nifty reversed yesterday's losses. We may see the index moving in a range of 5,635 and 5,730. The index may probably see a reversal in the trend in case if it manages to make a close above previous day’s high in the next few trading days. The National Stock Exchange (NSE) saw a higher volume of 85.30 crore shares and advance decline ratio of 912:528.
The market opened almost unchanged from its previous close on growth concerns after global ratings agency Standard & Poor’s  (S&P) on Wednesday cautioned threatened to downgrade India’s sovereign rating to junk status in the next two years. This apart, the ratings agency has downgraded Spanish debt for a third time this year citing a severe recession that is limiting the government’s policy options.
The Nifty opened 12 points higher at 5,664 and the Sensex resumed trade at 18,627, down four points from its close on Wednesday. The market remained in the negative terrain in morning trade in the absence of any domestic triggers and as investors turned cautious ahead of the second quarter earnings season, which formally kicks off on Friday.
The benchmarks fell to their lows at around 10.30am amid a fair degree of volatility. At the lows the Nifty fell to 5,637 and the Sensex went back to 18,581.
The indices continued to move sideways till the noon session on reports of India’s exports sliding 11% to $23.69 billion in September, declining for the fifth month in a row. The decline in exports comes amid India’s economic growth slipping to 5.5% in the first quarter of this fiscal and subdued industrial output.
However, the market bounced back into the green on a positive opening of the key European indices. The Cabinet’s approval for direct transfer of urea subsidy also supported the gains.
The rebound resulted in the market hitting the intraday high in late trade with the benchmarks breaching their psychological levels. The Nifty rose to 5,721 and the Sensex scaled 18,848 at their highs.
The market settled near the highs on continuation of the economic reforms and support from its European peers. The Nifty closed 56 points (0.99%) higher at 5,708 and the Sensex climbed 174 points (0.93%) to finish the session at 18,805.
Among the broader markets, the BSE Mid-cap index surged 1.16% and the BSE Small-cap climbed 0.84%. 
BSE Healthcare (down 0.13%) was the only sectoral gauge to settle in the red. The top gainers were BSE Realty (up 4.61%); BSE Capital Goods (up 2.04%); BSE Metal (up 1.61%); BSE Power (up 1.41%) and BSE Bankex (up 1.30%).
Twenty four of the 30 stocks on the Sensex closed in the positive. The gainers were BHEL (up 2.61%); Larsen & Toubro (up 2.25%); Tata Motors (up 2.22%); Tata Steel (up 2.11%) and Bharti Airtel (up 2.06%). Cipla (down 1.97%); Wipro (down 0.61%); Maruti Suzuki (down 0.59%); Mahindra & Mahindra (down 0.18%) and GAIL India (down 0.15%) settled at the bottom of the index.
The top two A Group gainers on the BSE were—Unitech (up 17.49%) and Jaiprakash Power Ventures (up 10.14%).
The top two A Group losers on the BSE were—Cadila Healthcare (down 3.64%) and Lupin (down 3.12%).
The top two B Group gainers on the BSE were—Bheema Cements (up 19.97%) and Burnpur Cements (up 19.94%).
The top two B Group losers on the BSE were—Principal Pharmaceuticals & Chemicals (down 13.77%) and Paradip Overseas (down 12.01).
Out of the 50 stocks listed on the Nifty, 41stocks settled in the positive. The key gainers were Jaiprakash Associates (up 3.72%); DLF (up 3.71%); Bank of Baroda (up3.43%); Punjab National Bank (up 3.28%) and Axis Bank (up 2.91%). The main laggards were Lupin (down 2.905); Cipla (down 2.15%); Maruti Suzuki (down 0.61%); UltraTech Cement (down 0.53%) and Ambuja Cement (down 0.45%).
Markets in Asia closed mostly lower on concerns about slowing growth. Besides, South Korea’s central bank today cut its growth estimates for 2012 to 2.4% from 3% announced in July and that for 2013 to 3.2% from 3.8%. The country’s central bank also cut its base rate by 25 basis points to 2.75%, the second time in four months.
The Shanghai Composite declined 0.81%; the KLSE Composite fell 0.24%; the Nikkei 225 dropped 0.58%; the Straits Times shed 0.04%; the Seoul Composite contracted 0.78% and the Taiwan Weighted tanked 1.85%. On the other hand, the Hang Seng gained 0.38% and the Jakarta Composite rose 0.12%.
At the time of writing, the CAC 40 of France was trading 0.66% higher, DAX of Germany was up 0.76% and UK’s FTSE 100 was up 0.60%. At the same time, the US stock futures were in the positive.
Back home, foreign institutional investors were net buyers of shares totalling Rs407.60 crore on Wednesday while domestic institutional investors were net sellers of equities amounting to Rs396.35 crore.
Coimbatore-based auto components major Pricol is planning to tie up with a foreign partner in its move to focus on the Japanese auto companies that have a presence in India. The firm said it would transfer technology meant for Japanese cars to a subsidiary.
Towards this end, the company has decided to transfer Denso Technology instrument businesses undertaking for Japanese cars to a wholly-owned subsidiary, Pricol Components, and thereafter form a JV with a global instrument supplier. The stock fell 0.53% to close at Rs18.80 on the NSE.
Everest Kanto Cylinder (EKC), a top player in high pressure seamless cylinders segment, has redeemed the entire obligation of $49.98 million (Rs265 crore including premium) towards its zero coupon foreign currency convertible bonds (FCCBs) which matured on 10th October. The company has funded the redemption from a combination of rupee term loan and internal accruals. The stock surged 2.91% to settle at Rs33.60 on the NSE.
Syndicate Bank has raised $500 million through an overseas bond issue of 5.5 years tenor. The issue was priced at 4.125%. The public sector lender intends to utilise the proceeds of the issue to expand lending operations of its London branch. The stock rose 0.79% to close at Rs114.90 crore on the NSE.


Nomura expects September quarter to be the weakest one since 2008

In its latest “India Equity Strategy” report, Nomura remains very cautious going forward and has painted a bleak preview of the upcoming quarter. Media and consumer discretionary are likely to do well

Stocks are driven by earnings and sentiment. The more important of the two indicators is the former. Hence there’s a lot of anticipation on how earnings will be, especially in the just-concluded September quarter. In its latest note, Nomura Equity Research has painted a bleak picture of the just-concluded September quarter citing that it is the weakest quarter since the sub-prime crisis began. Nomura said, “In inflation-adjusted real terms, sales are expected to grow in mid-single digits, while real operating profit growth is expected to stay in negative territory for the fourth consecutive quarter.” In other words, the worst isn’t over and expect it to be a bumpy ride for the foreseeable future.

While the subdued earnings were already discounted by the stock market earlier, what was more surprising was the fact that the market has absorbed much of the positive news announced by the government vis-a-vis reform measures. It seems that, in this case, the government has largely tried the sentiment trick—by announcing various policy reforms, including FDI in aviation and retail. The market reacted immediately, by going up. The report said, “The around 8% market rally since 13 September 2012 and India’s outperformance relative to peers makes us believe that this optimism has been subsumed in recent market action.” The onus is now on earnings to deliver. Will they?

Check the charts below: The growth has been trending downwards. This hardly is any cause for optimism unless the government does something extraordinary or companies perform superbly. There are bound to be a few surprises though, which happens every earning seasons. But as far as overall economy is concerned, don’t get your hopes up. The sentiment, is by and large, negative, and policy measures are unlikely to affect this quarter earnings.


Given that the economy has been subdued as is demand, much of the earnings expectations will now rest on external factors vis-a-vis rupee-dollar movement, global factors as well as government ensuring that the reforms go through the parliament, especially FDI in retail which has been the flashpoint of late. With a weakening global economy and recent Fed QE3 (quantitative easing), the dollar has taken a hit already. In other words, the rupee has strengthened against the dollar, and this is bad news for exporters, especially the information technology (IT) sector. However, on the flip side, QE3 meant more foreign capital suddenly making investments in India vis-a-vis FII which boosted markets, only temporally.

Nomura opines that the market has not reacted negatively enough in the face of possible earnings disappointment even though the market is current quoting at a discount. It said, “At current levels, the market is trading at 13.6x 12-month consensus-based forward earnings, which translates into a 10% discount to the latest five-year average, and 6% discount to the latest three-year average. While at these levels, valuations do not appear to be sufficiently discounting the much-diminished expected growth scenario over the next 12 months, we would argue that incremental evidence of sustained reform momentum could well offset existing growth concerns, which have lingered for most of this year now.” As per Bloomberg estimates, Sensex earnings was downgraded by 4% from April 2012.

Further more, it said, “We remain cautious going into the earnings season, which we think could well drive further the wedge between recent market moves and the reality of continuing growth pressures. We note that the market still lacks meaningful support from earnings upgrades with net analyst earnings revisions remaining in negative territory year-to-date”.

The rest of the report delves into which industry and stock are likely to do well and which are expected to face challenges. While sales of its universe of 120 stocks are expected to be flat, overall profits and margins are expected to decline on a year-to-year basis. It remained largely cautious on most sectors but positive on media (in view of recent digitization) and consumer discretionary (lower inflation translating to more purchases). It expects bank shares to correct given they’ve risen sharply in the past few days.

Tomorrow: Earnings outlook of specific sectors


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