With most listed players yet to announce fourth-quarter numbers, Mr Dipen Shah, Senior Vice-President, Research, Kotak Securities, spoke to Business Line on expectations over corporate results and also shared his medium-term outlook for the market. Excerpts:

How will the companies do in Q4? Which sectors will do well?

We expect a 20-23 per cent top line growth in the fourth quarter, excluding oil and gas and banks. Margins will be under slight pressure for most of the companies because of higher raw material prices. We do not cover pharma, FMCG and telecom. From the other sectors that we cover, we feel that IT, infrastructure and cement companies will be giving a good set of numbers for Q4. March is generally a weak quarter for IT companies. Even if the larger players here show a 4-5 per cent volume growth sequentially, it would be good.

What do you expect out of the cement companies in Q4?

The March quarter will be a good one for cement companies, as prices are up year-on-year. But we continue to maintain our cautious stance largely because capacity additions have far exceeded the demand growth. The demand growth in FY11 was at a low of 4 per cent while in the same period the industry's capacity has increased by 10-12 per cent. And around 50 million tonnes of additional capacity is coming up in the current year again. So, capacity is increasing while demand has slowed down, and companies are using 75 per cent of their capacity against 90 per cent earlier.

We do not see any fundamental logic for cement stocks to move up from current levels. The bigger cement companies are available at 12-15 times P-E (price-earnings ratio), and we do not think they will hold up.

For the commodity sector, valuations are high if companies generally have pricing power.

As far as our observation goes, cement companies do not enjoy pricing power. There could possibly be some kind of an understanding between companies that is keeping prices up. However, this will not continue for long, and it is likely that in the lean season from June, prices will come down.

After moderating, the rally has started again in consumer-durable stocks. The valuation has moved from 10-12 times to over 20 times now. What is propelling them?

Over the last one month, there has been a revived interest in consumer stocks. We can give only one logic to it — the census report. The growing population has made the outlook positive for consumer stocks, given the kind of spending power rural India is showing and rising urban income. We also believe that consumer stocks will be the theme to buy for the next two years at least. In the basket of goods for the Industrial Index of Production, consumer-durable goods is the one bunch where growth is sustained. What we need to watch out for are raw material prices and whether companies are able to pass them on to customers.

What is the outlook for the near term?

The market will moderate a bit from the current levels, since nothing has improved for companies fundamentally.

The market has been moving on the back of fund flows spurred by carry trades. But carry trades are not attractive anymore. So when this stops, the market will correct by around 5 per cent, and then one should start taking some good bets. Markets will stabilise a little lower from current levels in the next one and one-and-a-half months.

But after that the market should start picking up — there is a confluence of factors behind this expectation. We had some seven-eight major reform proposals announced for the financial sector in this Budget. They may be passed in the monsoon session in June-July. And we also expect Government spending, frozen for quite sometime, to pick up.

Inflation will also, in all likelihood, moderate because of the base effect. And finally, the monsoon would also be decent this time.

So, when all these factors start playing, markets will firm up. Assuming that crude oil behaves itself, market will start trending up in June-July. But till then, there will be stock-specific movements based on results announced and guidance given.

What is your view on the IT sector?

IT players are poised to see a good year ahead. From our interactions with companies we learn that most have already finalised their IT budgets for the next year and demand appears strong. Though the rupee is strengthening, it is not an issue. We expect foreign institutional investors to start pulling out money as the year proceeds — this will weaken the rupee. Even if the rupee is in the 44-45 band, it is not a risk. Many companies have given their rupee guidance at 45 levels and a slight disappointment is manageable.

Strong demand, increase in billing rate, attrition pressure coming down and the rupee being stable are all positives for the sector.

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