Banking, telecom set to ring in robust Q3

But rising rupee threatens to slow down growth in export volumes

The corporate earnings in the second quarter ended September 2007 were driven by the strong performance of banking and financial services, capital goods and telecom sectors.

According to research analysts, the third quarter earnings will be more or less driven by these sectors. The impact of the rupee appreciation will continue to haunt export-oriented units, leading to lower export growth in rupee terms.

The second quarter corporate results showed a significant slowdown in the growth of sales and profits. In spite of a 37 per cent surge in other income, the net profit of manufacturing and services companies rose only 22 per cent.

The slowdown in the growth rate of profits was attributed to the sales growth of 10.2 per cent, the lowest since March 2004.

During the second quarter, the impact of the recession in the automobiles sector was most pronounced in the top line of motorcycle manufacturers, which saw sales fall 4 per cent.

The sales of heavy commercial vehicles rose by a dismal 2.3 per cent. The automobiles sector did not do well during the first two months of the third quarter, with two-wheelers and heavy and commercial vehicles lagging light commercial vehicles and passenger cars.

Sales in the cement sector increased 22.8 per cent, which is healthy at the first glance, but the lowest in the past four quarters. The growth in profits at 45.2 per cent too was the lowest in the last three quarters.

The growth in despatches during the first two months of the third quarter remained depressed, with cement companies posting 9 per cent growth in October 2007 and a dismal 3.4 per cent in November 2007.

Though cement prices were marginally higher, they have failed to match the rise in cost of production. Hence, the profitability of cement companies is likely to decline further in the third quarter.

Ferrous and non-ferrous metal companies underperformed in the second quarter due to a fall in international prices. Sales of integrated steel companies rose 12.3 per cent and their net profit went up 16.1 per cent. Small and medium companies in the sector did better, with their sales and profits growing by over 25 per cent each.

The third quarter is likely to be subdued following a softening of international non-ferrous metal prices. Besides, rising raw material prices will impact the profitability of metal companies, with non-integrated players set to take a knock in the third quarter as well as during the remaining part of the current financial year.

The average realisation for steel companies during the second quarter remained low on a sequential basis as most of the domestic steel price hikes took place in September and October.

An analyst at Kotak Securities is of the opinion that the realisation in the third quarter will improve substantially on a quarter-on-quarter basis as the uptrend in steel pricing continues. moreover, the growth in volumes continues to remain strong during the quarter.

Input costs for steel companies increased substantially during the second quarter. However, leading steel companies were able to safeguard their margins due to previous long-term contracts and captive raw material availability.

However, due to a strong rise in prices of iron ore and coke, non-integrated players will have challenging times, going forward. Leading companies continue to report strong growth in their profits on the back of improved efficiencies and increased focus on high-end steel production.

The performance in the fast moving consumer goods sector was slightly below expectations in the second quarter. The third quarter will be in line with expectations, with the pricing environment remaining buoyant in most categories except for soap and malted-food drinks, according to the India Strategy report by Kotak Securities.

Higher product innovations, improved quality of products, higher disposable incomes and significant cost inflation are likely to be the drivers for price hikes. Higher realisation will be primarily driven by price hikes.

The media and entertainment sector is set for another robust quarter, with most companies likely to outperform analysts' expectations. The second quarter results of most of the companies in the sector as a whole were a mixed bag, with several companies on an investment spree to augment the future growth.

The revenue growth for almost all companies in the sector is likely to be robust for the third quarter and may beat expectations. However, the absolute profitability may be subdued as most of the companies are in the investment phase.

The capital goods companies are also likely to post robust growth in the third quarter on the back of huge order-book position. Order inflows continue to remain strong, even as unexecuted orders reached a new high.

Considering the infrastructure expenditure lined up in the country across oil and gas, metals, roads and transportation sectors, the demand outlook remains buoyant for the capital goods companies. The strong demand will provide the pricing power to capital goods companies, at least in the near future.

The performance of the pharmaceuticals sector too remained a mixed bag. Analysts expect companies such as Cipla, Orchid Chemicals, Aurobindo Pharmaceuticals, Lupin, Nicholas Piramal, Elder Pharmaceuticals and Wockhardt to perform better.

Generics exports continue to be the main growth driver for most of the companies, while Wockhardt and Cadila will benefit from the consolidation of their acquisitions. However, the appreciating rupee has affected export revenues of some of the Indian companies, notable among them being Unichem, Ranbaxy and Torrent Pharmaceuticals.

The information technology sector is likely to be hit by the rupee appreciation, with the growth in rupee revenues set to be in line with the guidance.

The demand continues to be robust with no signs of a slowdown in the business from banking and financial services clients. However, there continues to be uncertainty about the possible fallout of the economic conditions on the overall growth of the companies' IT budgets in 2008.