Strong credit growth is expected to boost the financial sector and economic growth should spur the retail sector, but telecom would be subdued due to competition

IDFC Securities sees huge potential for the financial sector in the fourth quarter of fiscal 2010-11, on the back of strong credit growth and a limited decline in margins. The banking segment is poised for a 42% y-o-y rise in PAT, helped by a low base. While PSU banks are expected to report a 45% growth, private banks are likely to see a 37% growth and non-banking financial companies about 22% increase in net profit y-o-y.

According to Reserve Bank of India (RBI) data as of 11 March 2011, bank credit off-take remained strong, growing by 22% y-o-y, and deposit mobilisation gained pace with a 4% q-o-q rise, leading to a comfortable incremental CD ratio of around 55%. While the rise in deposit rates would exert stress on margins, moderation should be limited in Q4FY11 as banks continue to benefit from lending rate hikes and faster asset re-pricing. Net interest income (NII) for PSU banks is seen up 34% y-o-y, private banks and NBFCs are also likely to see a strong 22% and 29% y-o-y rise respectively.

The IT services sector, which normally has lower project pick-up in January, is expected to see a slower quarterly performance. Top IT companies are likely to see revenue growth of 3%-5% in dollar terms, q-o-q, which will be mainly volume-driven, while tier-2 companies would report revenue growth in the range of 2% to 5%. The sector would witness a modest increase in margins on the back of a weaker rupee, favourable cross currency and flatter employee pyramid.

Among companies in the sector, MindTree is expected to see an improvement in its performance, while TCS would be a let-down on account of a write-back in Q3FY11. Infosys Technologies is expected to announce a guidance of 17%-19% revenue growth in dollar terms and 12% to 14% EPS growth in rupee terms. IDFC is overweight on the sector, with TCS and Infosys as its top picks. Mahindra Satyam from the large-cap space and Persistent Systems from the small-cap space are also expected to do well.

Logistics companies are expected to report revenue growth of 14% y-o-y for the quarter under consideration. Operating margins will receive a boost on higher ground rent and low base effect. However, earnings growth will be under pressure on account of higher depreciation, interest charges and lower other income. IDFC rates Gateway Distripark as a strong company in this sector.

The retail industry is expected to sustain its over 25% growth in the fourth quarter of the just-concluded fiscal. Titan Industries is expected to see a 30% growth with its watch business improving by 20% and jewellery business expanding by 33%. However, EBITDA margins are expected to fall on lower sales. Shoppers Stop profit is likely to be impacted due to losses in HyperCity.

Pantaloon Retail's margins are expected to remain flat on higher input costs in the garment segment. On the other hand, Provogue's revenue growth has been pegged at 5% for Q4FY11 on high base effect in its export business while its retail business is expected to grow at over 20%.

Subscriber additions in the telecom sector at 6%-9% are expected to aid volume growth in the last quarter of fiscal 2010-11. The strong growth is expected to make up for the 3% fall in average revenue per user (ARPU), which would lead to low single-digit sequential growth in the wireless segment.

The GSM segment is expected to see a 7%-9% minutes growth, while Reliance Communications is likely to witness a subdued quarter on the disappointing performance in the earlier nine months of the fiscal in review. The mobile number portability driven re-adjustment of post-paid tariffs would trigger a 2%-3.5% decline in average realisations (ARPM) in Q4FY11.

Margin improvement in African operations is expected to offset the pressure for Bharti Airtel. Besides, the cricketing extravaganza is expected to boost the DTH fortunes of RCom and Bharti Airtel.

In the transportation segment, Jet Airways is expected to report a net loss for the fourth quarter due to spiralling crude prices and subsequently higher jet fuel prices. The airline is expected to report a net loss of Rs25 crore in Q4FY11. Yields are likely to come in 8% to 10% q-o-q as the fourth quarter is normally a weak period for the airline industry.

The shipping business is expected to see a 38% y-o-y decline as the outlook on freight rates remains subdued with global fleet additions keeping freight rates under pressure. GE Shipping is expected to end the quarter with a 23% decline in revenues and PAT at Rs93 crore.