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Q4 Will Be Better

Monday, January 14, 2013
By Manik Kumar Malakar

The previous quarter witnessed a slew of festivals but, this apparently did not extend to the corporate sector, which in the December quarter put up performance that may best be described as muted.

Now, however, we may look forward to a better Q4; but and only, if some extraneous factors work in favour of the corporate sector.  

“We expect another weak performance for 3Q FY13 from 91 companies under our coverage universe, reflecting a moderate domestic growth outlook amid elevated retail inflation and slower-than-expected recovery in developed economies,” says Hemindra Hazari an analyst with Nirmal Bang in a Q3 FY 13 Results Preview.

There are a multiple of factors that are responsible for the weak sentiment. Economies across the globe are still struggling to get into the growth phase. Demand is still weak and the emerging economies are yet to get a boost demand-wise from the slowing-down developed economies, thus in turn rendering them vulnerable for further shocks.

“We expect a muted Q3 with Sensex ex-oil sales expected to grow at 8% year-on-year,” says Tirthankar Patnaik of Religare Institutional Research. Profits for the companies that Religare tracks would grow by 12.7%; however this growth is largely propelled by Maruti and Tata Motors without which the growth would have been 8.5%.  

There is a broad consensus that earnings will be under pressure. ‘EBIDTA (Earnings before Interest, Depreciation, Tax and Amortisation) margins for the sectors under our coverage are expected to be flat on a YoY basis,’ informs Kotak Securities.

Thus, the auto, cement, oil & gas and IT companies are expected to report lower margins YoY. On the other hand construction, media and metals are expected to witness an improvement.

The pressure on margins for some sectors like cement is due to lower realisations and higher raw material prices, which companies have not been able to pass on fully. For the IT sector, margins are expected to be lower, largely due to the subdued revenue growth and lower utilization rates, believes Kotak.  

Before going forward a look at the various reforms initiated by the government would be needed. ‘Since September 2012, the government has taken a number of positive policy steps in the areas of structural reforms, fiscal consolidation and investment revival. The slew of reform measures announced has led to a renewal in investor sentiments and business confidence,’ says Angel Broking again a Q3 FY13 Results Preview.  

‘We believe that further positive actions by the government such as implementing GST and DTC, alleviating constraints in the mining and power sector to remove supply-side bottlenecks, clearing hurdles for land acquisition and expediting investments are likely to augur positively for market sentiment,’ the reports argues.

So the broader political spectrum appears to be favourable to the Indian corporate sector. But what about the   Q4 period, the final quarter of the current fiscal year?  

“Yes. The business environment is improving and likely to improve further, if the RBI gives its support by reducing the policy rates,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. He expects that earnings will grow by 14% to 15% in Q4 YoY, with a small margin expansion. Besides that an improvement in demand, a fall in commodity prices and the strengthening of the Rupee is likely to support earnings growth.  

“After the government’s stand over economic reforms, its positive outcomes may be seen in coming quarter. Also, hopes of rate cuts in near term can also be beneficial, particularly for rate-sensitive sectors,” says Nidhi Sarswat, Senior Research Analyst, Bonanza Portfolio.

Looking at the factors extraneous and otherwise that will affect India’s economy is needed. “I don’t see any major shock coming in the next three to six month apart from RBI policy hangover and an over populist budget from the Finance Minister,’ says Dubey. He does qualify that some global shocks such as the US Debt Limit or poor corporate earning and a possible spike in crude prices might hurt the investor’s sentiment.

Maintaining top line growth in a sluggish economy and also sustaining profit margins in a competitive environment will be a challenging task for the Indian corporate, says Sarswat.

And let’s look at the great bugbear – inflation. Here there may be good news, at long last. “A slowing economy, excess capacities and easing international prices; all these factors can lead to bringing inflation under control,” says Sarswat. If this occurs then the RBI may go in for a rate cut.

I think by March 2013, WPI inflation likely to settle near 6% to 7%,” says Dubey. “Improving macroeconomic indicators, monetary easing and further reforms are likely to push growth upward in FY14,” he adds.

“Q4FY13 is likely to be better in fundamental ways,” says Sarswat of Bonanza.

Commodities and the Q4 period
Commodity prices have corrected in recent months in dollar terms. “Further, by Q4 we expect commodity prices to correct further on the back of a strengthening US dollar and slowing global demand,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global. “As far as crude oil is concerned we expect Brent crude to remain in the range of $90 to $115 for Q4 2013,” he continues.

Higher commodity prices do not bode well for Indian Equities as well as Corporate due to higher dependency on imported commodities especially crude. “However, post the government reforms push, we expect the Indian Rupee to appreciate which might translate into weaker commodity prices which will benefit the corporate earnings. However, Rupee appreciation will take time which means earnings will bottom out in coming quarters,” Dubey clarifies.

Sectors to watch and sectors to be cautious  
“Private Banks and pharma, despite already gaining much in the recent past, still holds much potential for upsides and another 10% to 12% gains may be expected in the coming quarter,” says Nidhi Sarswat, Senior Research Analyst, Bonanza Portfolio…  infrastructure  is likely to show improvement and may perform well too,” she continues.  “The IT sector and capital goods sector may be seen underperforming,” Sarswat says. IT because of factors related to slowing global demand and rupee fluctuations and Capital Goods also because of clearance issues and slowing sales growth.

 “It is very difficult to take call on specific sector, but we believe sectors in the consumer consumption space like Auto, Bank, selective FMCG companies and Pharma to do well,” says Uday Narayan Dubey VP, Research & Institution Business from R K Global.

To be sure, the Indian economy is a consumption driven one with improving outlook on GDP growth and with rising per capita income it is to be expected that consumption themes would do well. “As far as banks are concerned, we expect credit growth to peak up due to falling rates,” he says. “On the lag side, we expect Metals to continuously underperform due to higher volatility in currency and falling global growth,” ends Dubey.

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