Oil & gas, metals, banks and auto sectors will drive earnings; cement and telecom are expected to lag behind; low base effect may be over for the Sensex from this quarter, according to a brokerage house
An important factor to keep in mind when looking at the October-December 2010 quarter results, says Motilal Oswal (MOSL), is that the low base effect is almost over. At an aggregate level, the Sensex PAT growth was 23% in 3QFY10 and the brokerage expects it to be 23% for 3QFY11. Oil & gas, metals, banks (especially private banks) and auto sectors are expected to perform well, while cement and telecom will probably be laggards. The pharmaceutical sector is also expected to do well.
MOSL states in its December quarter earnings preview report, "Nine of the top 10 earnings growth companies in the Sensex are expected to be from autos (Tata Motors, M&M), commodities (Tata Steel, ONGC, Hindalco, Reliance Industries, Sterlite), and private banks (HDFC Bank, ICICI Bank). Telecom is the biggest drag on Sensex PAT growth with Reliance Communications' PAT expected to be down 67% year-on-year and Bharti's PAT (may be) down 23%."
With reference to the auto sector, MOSL expects volumes to be strong. An increase in end prices may cushion margins somewhat, but overall EBITDA levels are expected to come off a bit due to higher raw material prices.
Going forward, the auto sector is expected to face headwinds in the form of higher interest rates, steeper fuel prices, and higher product prices. This could be a trend across consumer-driven sectors in India, which is why MOSL says that export-driven sectors could perform better than domestic ones.
The report says, "We believe near-term challenges will impact performance of several sectors, particularly those dependent on domestic markets. We expect rising input costs, fuel prices and interest rates to impact discretionary consumption spends including (the) auto (sector). In this backdrop, global commodities and export-oriented sectors like technology and pharma would continue to outperform."
For the December quarter, in banking, MOSL expects credit growth to remain strong, but deposit growth to lag, putting pressure on net interest margins. Further clarity is expected on pension and gratuity related liabilities. Margins seem to have peaked for this sector, the brokerage believes.
Cement demand momentum is muted with volume growth of 7.3% year-on-year, but down almost 10% quarter-on-quarter. Domestic prices are about 7% higher quarter-on-quarter and 4.5% year-on-year.
Overall EBITDA margins may improve quite a bit quarter-on-quarter, but they are still down almost 800 basis points year-on-year. MOSL believes prices have bottomed out and that utilisation will improve from here.
The construction sector is expected to benefit from order flows from the National Highways Authority of India (NHAI) and the building segment after a sluggish first half. Construction costs and interest rates will rise, but MOSL expects "EBITDA and net profit margins to stabilise with growing composition of higher margin contracts in the order book."
Growth in the FMCG sector is expected to be volume-led, as very few have taken price increases. Although input costs have risen, players haven't passed all of them on. But this may not impact margins yet because of cost cuts.
The information technology (IT) sector is expected to see 5%-7% topline growth; commentary on near-term prospects is expected to be bullish; and rupee appreciation will hurt margins.
In metals, domestic steel demand and pricing was sluggish and only picked up towards December. "The shutdown of Ispat Industries in November helped in a supply-side correction. Improved price sentiment globally helped in recovery of prices in the domestic market." Margins may be under pressure due to higher iron ore prices. Zinc and aluminium prices have been strong and may reflect in earnings.
Inventory gain is seen for oil & gas companies, as crude gained $10 per barrel this quarter. It also expects strong GRMs (gross refining margins), led by naphtha cracks. Polyester margins were strong but polymer margins were weak. Despite a number of new launches, real-estate sales momentum could have been impacted due to sharp rise in prices and higher interest rates, says the brokerage.
In telecom, MOSL expects a revival of revenue and operating profit growth after a sluggish September quarter, "driven by a seasonal volume uptick and relatively stable pricing environment." For utilities, imported coal prices were higher and merchant prices continued to be lower.
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)
It’s a warm, emotional campaign that tugs at the heartstrings. But, my ‘positioning’ concerns for the car remain
I quite like the earthiness and joie de vivre of the Tata Nano commercial. In fact, this treatment one expected for the brand, so that’s cool.
But before I discuss the creative, a strategic point on Nano: It’s NOT a one-lakh rupee car as we all know, for even the most basic model is priced much more than that for on-road. But by repeatedly announcing that it costs just a lakh, the Tatas have positioned it as the broke bugger’s car, so there’s zero status associated with the brand. And status is paramount in this category, across all segments. I mean, what’s the point in buying a car if the peers perceive you as a poor man? May as well invest in a jazzy bike, and not worry about parking blues. This perhaps explains Nano’s sluggish sales. In short, the Nano is stuck in the price/image conundrum, and it’s difficult to see how they will work their way out of this self-created chakravyuh.
However, the ad itself is nicely done. It features a little, small-town girl excitedly awaiting delivery of the family’s first car, the Nano. And she goes ballistic when she spots it arriving. The Nano is a big hit in her mohalla, as all the other residents eye it curiously, jealously. Along the way we notice the car negotiating a rough terrain. A passerby admires the size. So the functional cues are also taken care of. Finally, the little girl, worried about the neighbour’s ‘buri nazar’, applies a black tikka on the Nano—warm, emotional treatment that tugs at the heartstrings. The setting and target audiences are bang on too. So, no issues on the creative. But it’s wishful thinking, really.
Because like I said, my ‘positioning’ concerns for the car remain. To be honest, I actually want to buy the Nano because I adore small cars. Not just for the mileage, but because of Mumbai’s pathetic driving conditions where your car takes a hit now and then. And it makes sense to invest in a cheap car as repairs don’t make a serious dent in your pocket. I live close to a Tata showroom, and I often stop by to stare longingly at the little car, but just don’t have the heart to make a booking. Because I am paranoid that my pals/peers will snigger, ‘Saala Thakraney ekdum bhikhari ho gayaa!’ And mind you, this would be the case even if I lived in Ajmer’s Babu Mohalla.
Yes, the Tatas will find a way to stop the odd Nano from catching fire. But I have no idea how they will deal with the marketing inferno.
Natural rubber prices are at their highest-ever, as heavy rain hampers production, increasing concerns that supply may not keep pace with demand
Natural rubber prices have climbed to record highs and are likely to continue to climb in the near-term on falling output by major rubber-producing countries and higher demand from consumers, particularly tyre manufacturers.
On Thursday, the prices extended their gains to hit a new record high of Rs213 a kg in the Kottayam market and Rs214 in Kochi, even as prices in overseas markets rallied on a supply shortage.
"The price of natural rubber in the international market is increasing sharply and that trend is reflecting in the domestic market too," George Vally, president, Indian Rubber Dealers' Federation, told Moneylife. The price went up by Rs2.50 a kg on Thursday after a one-rupee gain the previous day.
"The current price trend is driven by non-availability of production due to unseasonal rain on account of which the state missed out a favourable period of harvesting," Santosh Kumar, head of rubber sales at Harrisons Malayalam, told Moneylife. "The international price trend is also a factor." The RPG group company, which is based in Kochi, is India's largest producer of rubber and pepper.
Prices in the international and domestic markets have been rising daily since the start of the month. Yesterday, in Bangkok, the natural rubber price was at $525 per 100 kg. On 4th January, spot natural rubber in Malaysia climbed to $497 per 100 kg from $488 on 30th December 2010. In Thailand, the largest supplier of rubber, the price was at $502 per 100 kg on 4th January compared to $495 on 30th December 2010.
Mr Vally said, "Prices may go up further as there is still a difference between domestic and international prices." Mr Kumar added, "The prices will rule high till May."
Natural rubber is the main raw material for tyres, and prices have been moving upwards over the past two months, following heavy rain in rubber-producing countries in Southeast Asia that interrupted tapping and plantation activities.
The Association of Natural Rubber Producing Countries (ANRPC) has lowered its estimate for global natural rubber production in the October-December 2010 period, saying it would be down by 6.3% in the quarter compared to the previous corresponding period. It had previously estimated a 3.8% drop for the quarter. ANRPC represents countries that account for 92% of the global rubber output.
The association estimates that the production in India would be 4.6% lower in the October-December period from that in the corresponding period a year ago. This is a change from the 1.8% drop it estimated earlier. It attributes the lower production to the unseasonal rain in Kerala, the largest rubber-producing state in the country.
The dealers' federation chief said that while the market expects a slight slowdown in production in India, growth in production is taking place. "I don't see any fall in production in the current year," Mr Vally said. "The rising price of natural rubber globally is encouraging rubber producers to increase production, and now the weather is very favourable."
The Rubber Board of India expects the country's yield area could expand by 14,000 hectares in 2011, helping supply to grow at 5.3% to 890,000 tonnes during the year.
"There is heavy rain in rubber-producing areas in Kerala which may hamper production, but tapping goes on in summer also," Mr Vally said. "Normally tapping gets over by January, but it would be extended till March. As per the Rubber Board of India, we have a stock of three lakh tonnes, so we won't face a deficit."
However, there is another point of view which suggests that there will be a drop in production despite the extended tapping season. "Tapping may go on till March as rain got delayed this year, but the quantity will drop. When does the drop take place, we need to look into," the Harrisons Malayalam official said.
The increase in demand for tyres from auto makers in India and outside is another reason for rising rubber prices. According to the Automotive Tyre Manufacturers' Association, production of tyres increased by 15% to 8,56,396 in November from the corresponding period a year ago. Export of tyres also increased by 19% in November on higher demand. Tyre output in the first eight months from April to November surged 26% to 7.7 crore from the previous corresponding period.