The quarter ending September has been full of exciting developments for both the economy as well as corporate India. The BSE Sensex has crossed 20,000 and the markets are eagerly waiting to see the Q2 numbers before taking fresh direction. Here is what analysts are expecting in the power, real estate, retail and telecom sectors
The second quarter of FY11 has turned out to be one of the best quarters for Indian markets with the Bombay Stock Exchange (BSE) Sensex breaking away from a tight range and reaching new highs. Between 1st July and 30th September, the Sensex rose 15% to 20,069 points.
However, during the quarter, markets were driven mostly by foreign institutional investors (FIIs) and not by domestic buyers. In Q2, FIIs infused almost $12 billion into equity markets, taking their total inflows to $14 billion for the first half that ended 30th September. At the same time, domestic institutional investors turned sellers. During Q2, domestic investor sales were at around Rs23,800 crore or $5 billion.
According to analysts, metals, financials, petrochemicals, engineering and retail sectors would come out with good numbers. Sectors like cement, telecom and real estate are most likely to be underperformers. Fast moving consumer goods (FMCG), capital goods and information technology (IT) sectors are likely to perform in line with the Sensex growth.
Although India Inc is expected to come out with strong sales figures, the net profit growth would not match top-lines due to decline in operating margins. "For 2QFY, while we have estimated net sales of Sensex companies to increase by about 20% year-on-year (y-o-y), net profit is expected to post 13.5% growth. A part of the same would be because of about 54 basis points (bps) dip in operating margins (OPMs). Overall, OPMs are expected to be around 25.6%, while net profit margins (NPMs) would decline to 14.4% for the quarter," said a brokerage in a note.
With all companies set to announce their second quarter profit & loss numbers, here is a preview of power, real estate, retail and telecom…
For FY11, the Central Electricity Authority (CEA) has set a capacity addition target of 21.5GW and as per its recent review in August 2010, 19% of the target has been realised. This could mean further bunching-up of capacity addition towards the latter half of the year.
Good monsoon season and higher hydropower generation has improved the availability of steam turbine (ST) power as reflected in higher sales bids against purchase bids, leading to significant decline in spot prices on the Indian Energy Exchange (IEX). The Central Electricity Regulatory Commission (CERC), in its analysis of bilateral rates, pointed out a trend of backwardation for one to three months forward rate, entailing possible impact on Q3FY11 realisations of merchant power projects.
During the first half of FY11, all-India generation was up 4.2% y-o-y to 329.7 billion units (BU). During the quarter to end-September, the Moneylife Energy Index rose 5% to 1014.8 points from 966.5 points as on 1st July. According to the latest report, the forward looking curve in the over-the-counter (OTC) markets for September showed likely price transacted was about Rs5.28 per kilowatt hour (Kwh), much higher than transacted on IEX at Rs2.33 per Kwh. The forward-looking curve for October-November shows the price in the bilateral market at around Rs4.28 per Kwh from Rs3.84 per Kwh on IEX last year.
IDFC Securities Ltd, in a report said, "Power utilities to witness 17% y-o-y growth in revenues. Led by commissioning of new capacities, EBITDA is likely to increase 14%, however pre-exceptional net earnings for companies may remain flat on y-o-y basis. We maintain our overweight stance on the sector with our top picks being Reliance Infrastructure, Lanco, Adani Power and KSK."
Factors to watch out for in the power sector are lower-than-expected load factor and merchant power realisation, increased import of T&D products from China and Korea that could depress realisations and margins as well as lower-than-expected execution of order books and cost overruns may pose downward risk.
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Source: IDFC Securities Ltd
After the strong recovery in the residential vertical during the first half of 2009, there was some cooling off in the sales volume in the first half of 2010 due to the substantial price hike. The muted phase has continued in Q2FY11. Prices in Mumbai and Delhi are 15%-30% above their peak levels in 2008, whereas prices in most other markets are still 10%-15% lower than their last peak levels. This has resulted in the tapering of volumes in cities like Mumbai, where prices have gone up substantially.
During the quarter to end-September, the Moneylife Real Estate Index rose 18% to 4454.2 points from 3767.1 points as on 1st July.
ICICI Securities Ltd in a research note said, "In the residential space, prices in the Mumbai and National Capital Region (NCR) segments are at their peak levels indicating a moderation of demand growth. Revenue booking in Q2FY11 may get impacted for real estate companies due to heavy monsoons, which could slow down construction activity. On the positive side, on the commercial real estate front, lease rentals have seen stability in prices. There has been an improvement in leasing activity."
There were a number of new projects that were launched in the last fiscal but that could not cross the revenue-recognition threshold level during that fiscal. Thus, the revenue growth for Q2FY11 is likely to be driven by revenue recognition from these projects. However, the growth will be limited by the impact of an extended monsoon on construction activities.
"During Q2FY11, we expect our real estate universe to post revenue growth of about 29% y-o-y, EBITDA growth of around 8% y-o-y and net profit to remain flat y-o-y," said Motilal Oswal Securities.
Factors to watch for in the real estate sector include total area booked during the second quarter, pricing trends from metros, Tier-I and Tier-II cities, new launches and price points, funding plans of developers and disbursement of funds raised through qualified institutional placements (QIPs).
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Source: Motilal Oswal Securities Ltd
The quarter ending September 2010 marked monsoon season sale, with all major retailers cashing in on the sustained pick-up in consumption sentiment. Notably, the trend of up-trading was clearly evident, with strong response to premium apparel, high-end consumer durables (including furniture) and home improvement products. Industry players expect the momentum to sustain ahead of the festive season.
Retail sector stocks broadly outperformed the Sensex in Q2FY11. Titan emerged as a clear winner by outperforming the benchmark BSE Sensex by a whopping 26%. Pantaloon Retail India Ltd and Shoppers Stop Ltd outperformed the Sensex by 1% and 4%, respectively. During the quarter to end-September, the Moneylife Retail Index rose 15% to 1368.1 points from 1191.2 points as on 1st July.
Motilal Oswal Securities in a research note said, "We believe that the sales momentum is likely to remain strong for major retailers through FY11 on account of low base, cyclical upturn in consumption sentiment and pent-up demand. We remain positive on the likely same-store sales (SSS) growth for the sector in general and home retailing and lifestyle retailing in particular (discretionary spend)."
"We expect the retail universe to report a 41.1% increase in revenue on the back of healthy same-store sales growth, improved revenue per sq ft and resurgence in consumer demand. We expect Pantaloon Retail to grow faster than the industry. However, lower space (y-o-y) and lower revenue per sq ft will lead to a dip in Kouton's revenues. We expect Pantaloon to face pressure on the operating front on account of the home solutions business," said ICICI Securities in a note.
Factors to watch out in the retail sector include high rentals, especially in metros and Tier-I cities, low asset turns, funding constraints, high wage costs, inflation and increasing overheads due to new expansion.
During the second quarter, major telecom operators have shown pricing discipline. However, new entrants like Uninor, MTS and Videocon have offered significant discounts, causing some disruption in the market.
Industry subscriber additions in July and August 2010 averaged 17.6 million per month against 17.1 million in Q1FY11. The increase was driven by Uninor, BSNL, Idea and Videocon while subscriber additions declined for Bharti, Reliance Communications (RCom) and Vodafone.
IDFC Securities in a research note said, "We expect Q2FY11 to be seasonally weak for telecom companies and minutes growth should moderate to 5%-8% q-o-q from double-digit growth in the past two quarters. Average 6%-8% q-o-q subscriber growth should largely offset 3%-4% q-o-q average revenues per user (ARPU) decline leading to low-single digit sequential growth in wireless revenue."
The second quarter is generally weak for telecom operators resulting in lower minutes of usage (MoU), which is likely to fall 3%-3.5% across operators. However, Tata Teleservices Maharashtra Ltd changed its reporting structure last quarter to active subscribers from total subscribers, resulting in higher key metrics. Other operators may also follow suit in this quarter.
"With lower MoUs and 3G rollout related expense, telecom operators are expected to witness a decline in margins. Rising interest cost because of 3G related debts is expected to weigh on the bottom-line. We expect our telecom universe to post a 23.5% q-o-q decline," said ICICI Securities in a note.
Key factors to watch out for in the telecom sector are MoU growth for Bharti, Idea and RCom and margins at Africa operations for Bharti.
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(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).
The domestic market snapped its two-day winning streak, ending in the red on dismal global cues and profit booking in heavyweights. Sentiments were also down as government data showed a fall in industrial growth for the month of August.
The market opened on a subdued note tracking its Asian peers and on cautiousness ahead of the release of the industrial growth data for the month of August. Selling pressure in heavyweight stocks and lower-than-expected Index of Industrial Production (IIP) data pushed the indices down further. The market traded sideways in the post-noon session as the key European barometers were trading with deep cuts. It ended the session down nearly three-quarters of a percent.
The Sensex closed 136.55 points (0.67%) at 20,203. The index touched a high of 20,368 and a low of 20,107, mid-session. The Nifty settled at 6,090, down 44.95 points (0.73%) after touching an intraday high of 6,145 and a low of 6,058.
The losers outnumbered the gainers today. Of the 30 Sensex stocks, 22 ended in the red while eight settled higher. The Nifty had 39 declining stocks against 11 on the advancing side. Among the broader indices, the BSE Mid-cap index was down 0.51% while the BSE Small-sap ended flat.
Mahindra & Mahindra (up 1.31%), Reliance Communications (up 1.06%) and TCS (up 0.89%) were the top gainers on the Sensex while DLF (down 2.07%), Hindalco Industries (down 2.05%) and Jindal Steel (down 1.97%) were the main losers on the bellwether index.
The sectoral gainers were BSE IT (up 0.22%), BSE Healthcare (HC) (up 0.18%) and BSE TECk (up 0.10%). The sectoral losers were led by BSE Realty (down 1.80%), BSE Capital Goods (CG) (down 1.58%) and BSE Metal (down 1.43%).
Industrial growth slowed down to 5.6% in August from 10.6% in the corresponding period last year, on the back of a 2.6% contraction in the capital goods production.
Among the main industry segments, manufacturing activity declined to 5.9%, mining grew by 7% electricity generation grew by 1% while capital goods sector contracted by 2.6% in August.
Markets in Asia, with the exception of Shanghai Composite, ended the day in the red on concerns about earnings reports from corporates. Besides, a stronger yen has analysts worried as it would dent exporters’ fortunes.
The Hang Seng was down 0.37%, Jakarta Composite was down 0.04%, KLSE was down 0.06%, Nikkei 225 tanked 2.09%, Straits Times was down 0.44%, Seoul Composite lost 1.16% and Taiwan Weighted shed 1.06% today.
Finance minister Pranab Mukherjee today met financial sector regulators, including Reserve Bank of India (RBI) governor D Subbarao and Securities and Exchange Board of India (SEBI) chairman C B Bhave, to work out a framework for the Financial Stability and Development Council (FSDC) - a body which will deal with inter-regulatory issues.
Wall Street closed a tad higher on Monday amid low volumes on concerns about earning reports from corporates. Investors chose to book profits after the recent rally in stocks. Besides, expectations of the Federal Reserve’s move to prop up the economy, has already been factored in.
The Dow gained 3.86 points (0.04%) at 11,010. The S&P 500 added 0.17 points (0.01%) to 1,165.32. The Nasdaq rose 0.42 points (0.02%) 2,402.
The Insurance Regulatory and Development Authority (IRDA) today said the guidelines for insurance companies to tap the capital market for funds were awaiting the Securities and Exchange Board of India's (SEBI) nod and would be out soon.
"Initial public offer (IPO) guidelines for insurance companies will be out soon. It has been approved by the joint committee of SEBI and has to be approved by the SEBI (board)," IRDA chairman J Hari Narayan said.
Foreign institutional investors were buyers of stocks worth Rs810 crore on Monday. Domestic institutional investors were sellers of Rs575 crore worth equities on the same day.
Third party administrators have moved the Competition Commission to block public sector insurers from floating their own TPA entity. Will the private TPAs’ move hold water?
Third party administrators (TPAs), intermediaries who handle insurance claims, have moved the Competition Commission of India (CCI) and the Insurance Regulatory and Development Authority of India (IRDA) to block a move by state-owned non-life insurers to float a captive company to manage claims.
However, the TPAs' case could considerably weaken given the plans of government-controlled insurance companies. Speaking with the media at a press conference of LICHFL Financial Services Ltd and United India Insurance, G Srinivasan, CMD, United India Insurance said, "We will not get rid of TPAs, only give partial business to a new common TPA entity." This stance taken by PSU insurers will surely weaken the TPAs' case.
Mr Srinivasan declined to give specifics on proportion of business distribution between common TPAs and existing TPAs. According to sources, "It is expected that 50%-75% of the health insurance premium of four PSU insurers would be transferred to the new (TPA) entity by its third year of operation and 75%-100% of their health insurance premium would be transferred to it by the fifth year. But all this is subject to its performance, especially in terms of reduction in claims."
The CCI has set Wednesday (13rd October) as the date for the hearing of the petition submitted by TPAs.
Last week Mr Ramadoss, CMD, New India Assurance, told the media at a seminar that they have received 24 bidders to partner in their TPA venture. He added that GIPSA has not yet received any notice from CCI.
Meanwhile, IRDA is understood to have refused to entertain the complaints of the TPA Association, association sources said.
According to Sunil Sarnobat, co-founder and director of Medimanage insurance brokers, "All four public sector insurance companies coming together and deciding on a single TPA could be interpreted as cartelisation as these four government companies are separate legal entities. However, the TPAs cannot force an insurance company to use their services and insurance companies have been selecting TPAs for their various offices based on capability, fees charged, claims processing quality & technology implementation. We have examples of private insurers going in for in-house claims processing and hence you cannot stop insurers from setting up their own TPA. So it's not what is being done that is questioned. It's about who is doing it and the manner in which this is being done that makes it questionable."
Most of the TPAs are not eligible to bid because of the criteria that require the bidder or their parent to have a net worth of Rs250 crore.
TPAs fear that the captive company will put them out of business which will result in cartelisation, market dominance and monopolisation by state-owned companies who account for over 80% of the TPA business. The association has alleged that through the new TPA company, insurance companies would try to become a third party which would defeat the very purpose of consumer protection and neutrality which a third party has. Existing TPAs would have to stop their investments in business and IT and lay off the 10,000 people they have employed.
TPAs allege that if they shut shop, no insurer will be able to give policyholders a choice of TPAs as required by IRDA. Moreover, no new health company can come up as there wouldn't be any independent TPA to provide it with infrastructure support. The regulator has so far not permitted private insurers to take a stake in the TPA business. Given this stance, TPAs say the regulator cannot grant permission to public sector companies.
"The move will result in closure of all existing TPA companies. This will give rise to an arbitrary increase of premium, refusal of policies to the elderly, restrictions on cashless network, favouritism under the guise of preferred network of hospitals and corruption," TPAs have alleged in their letter to IRDA.
So who will blink first - the TPAs or the public sector insurers?