The Hindu Business Line : Corporate earnings review

If the results declared so far for the January-March quarter are any indication, the India Inc juggernaut can be expected to roll on. In an analysis of the results of companies in the BSE-500, which represents nearly 93 per cent of the BSE's total market cap, the numbers for the 268 companies announced so far reveal a 21 per cent year-on-year topline growth. Aided by `other income', profits grew 21 per cent, while operating profit margins remained flat at 20 per cent. Interest costs went up while depreciation dropped marginally. Forty-four of the 268 companies posted over 100 per cent growth in adjusted net profits.

Will the story be the same across various sectors? What factors will play a role in the earnings outlook for the other companies, now and over the next couple of quarters?

Building on the boom

Frontline cement companies ACC and Gujarat Ambuja Cements (GAC) saw a jump of 50 per cent and 109 per cent respectively in bottomline growth. Holcim's presence in India through the above two players may well see capacity additions over the long term. Century Textiles, which is cement major, bucked the trend of robust growth in revenues of other majors; the company's textiles division spoilt the show with a lacklustre performance.

Mid-cap companies in this space are not lagging either. Mangalam Cements, Prism Cement and Shree Cement have shown relatively accelerated growth in bottomline on the back of higher capacity utilisation levels.

Cement stocks recently exhibited volatile trends after the Government advised the sector to initiate steps against rising prices. Though the Government is unlikely to interfere directly in the price mechanism, a possible surcharge or ban on exports can affect realisations. Even in this scenario, the robust domestic demand, fuelled by increased construction activities, is likely to drive volumes and protect margins.

Capex mantra

A 30 per cent growth in revenues and a 32 per cent increase in profits for 19 of the 28 companies in the BSE Capital Goods Index reiterate that the capex expansion mantra is still on. Siemens, Bharat Electronics and Greaves Cotton have once again emerged with stellar performances. Larsen & Toubro and BHEL's results are unlikely to disappoint, given the high-value projects executed.

As the sector has undergone quite a few bouts of re-rating, the returns expectation needs to be moderate.

The housing and construction sector has come up with stunning figures, with players such as Lok Housing coming up with a five-fold topline growth. While listed players in this space are not too many, the entry of Parsvnath Developers and DLF may serve as a benchmark for valuation metrics in the sector. Ansal Properties is likely to come up with inspiring results on the back of huge projects and further offer of shares.

In the mid-cap infrastructure space, Era Constructions and Madhucon Projects sustained their performance. While a number of these companies boast of bulging order-books, their capability to execute projects will determine revenue flows in the next few quarters.

Treat with care

Results in the pharma space have been a mixed bag. Pharma major Cipla bettered its previous quarter performance, with 80 per cent growth in Q4 profits. It has been a struggle for peer Ranbaxy even as its revenues inched up for the first-quarter ending March 2006.

Dr Reddy's Laboratories appears all set for yet another confident performance after three strong quarters. The company has de-risked its business profile through its deals with ICICI Venture for launching generic drugs and for proprietary research and development.

For Ranbaxy and Dr Reddy's the future appears woven around the $20 billion worth of drugs going off- patent in the next three years. Over 2006 and 2007 alone, 40 cases will be decided in the US courts, of which Ranbaxy and Dr Reddy's will feature in half the cases. Meanwhile, the success ratio of these companies in building business in research may provide more certainty in terms of revenues. Tie-ups with other drug-makers to launch generics in new markets is another approach the pharma companies have adopted. This inorganic route may be the way forward for other generic players as well.

Commodity fad

Primary sugar players seem to be in a sweet spot. Bajaj Hindusthan, Triveni Engineering and EID Parry performed on expected lines. The massive expansion drive of companies such as Bajaj Hindusthan needs to be closely watched for execution risks. Increased volumes enabled Balrampur Chini Mills improve performance over the December quarter. OPMs, however, declined on discontinuation of production of potable alcohol.

Although export prospects for sugar appear promising, any restriction on exports to contain domestic shortages may impose a threat on the earnings outlook for the sector. Increasing acceptance of ethanol as an alternative to petrol may throw open opportunities for ethanol trade by sugar companies. Despite the upward price trend in sugar, smaller players such as Mawana Sugars continue to experience a strain in their bottomline.

Steel companies had another lacklustre quarter. While the results of Tata Steel and SAIL are awaited, the staid performance of the last three quarters does not inspire confidence. The domestic consumption potential remains robust on the back of order flows in the construction space. Rising iron-ore prices in the international arena may not affect large companies, given their access to own mines.

Investors may repose faith on large integrated players rather than small companies as the former are better placed to control costs and execute expansion plans.

Fast business

FMCG companies appear to be riding on higher volumes and earnings. HLL sustained its profit margins though the March quarter results fell short of market expectations. Increase in the prices of some products has so far not disrupted volume growth for the company although it has expressed concern on input cost pressures. Cost efficiencies have, however, enabled companies such as Dabur India and Marico improve OPMs.

The improved standard of living, increased rural spending and rapid growth in modern retail are expected to keep the growth momentum intact.

Riding on advantages

Maruti Udyog continues to race ahead, with a huge cost advantage in the low-cost car segment. Recent cuts in excise duty may accelerate growth opportunities. The company's expected entry into the diesel segment in late 2006 may well strengthen its position.

Ashok Leyland has piggy-backed on the replacement market. The Supreme Court's ban on overloading may see increased volumes for the company. The much-awaited Tata Motors' results will depend on how well the company has managed to pass on pricing pressure. Ashok Leyland has overcome the above to some extent through increased operational efficiencies. Further, the sedate volumes of Tata Indica may soon be faced with a challenge from Maruti's diesel cars. Tata Motors, however, continues its stranglehold on the light commercial vehicles market.

High value from multi-axle vehicles and strong demand triggered by improved highways add optimism to the performance of these two companies in the next couple of quarters. Monsoons in the second quarter and entry of MAN (Force Motors) in the domestic commercial vehicle segment may be the key risk factors to look out for.

Private vs PSU banks

Frontline and second-rung bank results announced so far clearly indicate an enormous growth in volumes. Margin expansion, however, remains divided between public sector and private banks. While private outfits such as ICICI Bank or UTI Bank have shown sustained growth in margins, very few public sector banks, barring Indian Overseas Bank, reported margin expansion.

A few PSU banks such as, SBI, Corporation Bank, Punjab National Bank may, however, hold potential over the long term. Hybrid capital instruments may be the key for higher leverage for PSUs. IOB and UCO Bank have already raked in funds through this route.

Much depends on whether the investors are willing to take the high risks that come with high leverage through such instruments. The results awaited for other banks appear skewed in favour of private players.

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