Future expectation of profits is what drives stocks. If that is so, there is reason to worry. India Inc may not for a while report as good profits as they did for the last few years, after fourth quarter of financial year 2007.
Though analysts expect corporates to emerge unscathed for the fourth quarter of 2007 from higher interest rates; rising input costs and other factors could have an impact on the future earnings of companies.
"The Sensex companies are expected to log a significant revenue growth of 39.9 per cent. However, the market has more or less factored this in. And what matters now is how these companies' earnings guidance will be. During financial years 2007-08 and 2008-09, we expect Sensex companies to report a growth of a meagre 12.2 per cent in profits, steep fall from the 26 per cent CAGR posted during the last three years," says Lalit Thakkar, director of Angel Broking.
If analysts are to be believed, a change from past trends in earnings guidance could trigger a quick churn in portfolios at the institutional level. Fast moving consumer goods (FMCG) and metals stocks are expected to perform well during the next one year, while banking stocks are expected to be weighed down by a series of interest rate hikes and reserve requirements. Here is a sector-wise snapshot of expectations for fourth quarter of fiscal 2007 and thereon:
Though companies in the sector are setting up added facilities to meet demand and production has crossed 10 million in the first 11 months of FY2007, rising interest rates and inflation have turned the medium-term outlook bleak. However, volumes are expected to be in two-digits. But continued volatility in metal prices could put pressure on operating margins on these companies. The sector is expected to grow at 12-18 per cent in the next fiscal, say analysts.
The BSE Bankex has been an under-performer in calendar year 2007 so far due to interest rate concerns. With the RBI increasing the repo rate twice to 7.75 per cent, the difference between it and reverse repo has widened to 1.75 per cent. With this short-term credit getting costly, it would put pressure on banks that had been relying on short-term funds to meet asset growth requirements, particularly in the fourth quarter.
Further, the central bank has raised reserve ratio of banks by another 50 basis points, thus siphoning of about Rs 15,500 crore from the banking system. This has forced banks to offer higher interest rates on deposits to meet fund requirements, causing higher cost of funds.
Though private banks have already passed this cost on to borrowers, public sector banks may face some pressure on their net interest margins in the wake of the Centre reining them in from raising rates. Brokers put the rate of profit growth in banks in the range of 10-15 per cent.
Historically, capital goods companies report best figures in the fourth quarter and as a derivative of various other sectors, they are expected to repeat it this time too. Companies in the sector have got heavy order books and the earnings visibility extends easily beyond two years.
Going forward, the sector will benefit from the recent reduction in customs duty on basic raw materials like steel and copper. Further, huge investments in power generation facilities will augur well for major players like ABB and BHEL.
However, most companies in the sector have ramped up capacities and this could put some pressure in the short-term. Apparently, the only risk to the sector is delay in project executions due to higher interest rates.
"There may not be an expansion in order position. But you could see a margin expansion in these companies. They could grow at a robust rate of 20-25 per cent," says Rajesh Jain, managing director of Pranav Securities.
To say the least, the government's whip has spoiled the party in cement. Though cement despatches rose nearly 10 per cent in the nine-month period till February 2007 and could report strong numbers in the last financial year, the cap on pricing has caused a change in investor sentiment towards the sector.
Further, the government has scrapped 16 per cent Countervailing Duty and 4 per cent Special Additional Duty on cement with immediate effect, thus making imported cement cheaper.
Hence, the rise in input costs and government intervention are likely to see cement companies facing some pressure in the days to come.
"We don’t think there will be anything to cheer about in the cement sector. The sector may post a lower profit growth of around 20 per cent for the year 2007-08," says Rahul Nangalia of Nangalia Stock Broking.
This is one of the few sectors that remain unaffected by the high interest rates. Of late, companies in the sector have been continuously passing on the rise in prices to the end-consumer. For the nine-month period ended February 2007, most FMCG companies registered a strong earnings growth. Further, budgetary measures like reduction in custom duty on chemicals, excise duty cut on certain food articles, and even the focus on agriculture, augur well for the sector.
Profitability of companies in the sector is determined by international metal prices to an extent. Steel prices have been on a roll and those in the business are expected to put out good numbers for the last quarter of 2007. However, big-ticket debt-heavy acquisitions could play the profits a little down in the near future.
"Profit growth could show a flat trend in the near future as most of them are in an expansion mode. Once the capacities become operational, growth in profits would shoot over 30 per cent," says Rahul Nangalia of Nangalia Stock Broking.