Q4FY-13 Results Analysis

Corporate India’s scorecard for the March 2013 quarter has been largely subdued. While lacklustre, the results cannot exactly be termed as disappointing as factors like inflation, interest costs and slower GDP growth were expected to keep the performance muted. DSIJ dissects the details of the Q4 results story and tells you what to look out for in the forthcoming quarter

The curtains are drawn on the results season, and as was expected, the numbers are not exactly heartening. This is the second quarter on the run that the numbers have been dismal and Corporate India is finding it hard to keep its head above the water. Despite the efforts to cope at the micro level, the macroeconomic environment is making each quarter a hurdle race of sorts for India Inc. The policy measures to buoy them up have proved to be sorely inadequate so far, some in their concept and most in their execution.

While both inflation and higher interest costs have remained stubbornly on the higher side and have been playing spoilsport for many quarters now, weakening IIP numbers are proving to be a fresh sore point. Put together, these factors have only aggravated the situation for India Inc., whose bottomlines are weakening at the knees.India Inc.'s scorecard for the quarter more or less reflects the country's GDP growth performance, which at best can be described as lacklustre. A few factors that emerge clearly from the results are that sales growth is slipping, the profit margins are dull, while the bottomlines have hardly increased. Our analysis of 1502 companies (frequently traded companies from Group ‘A’ and ‘B’) reflects poor performance in terms of sales and profit growth.

Here, we would like to remind our investors that the stratum excludes refinery majors on account of their ability to skew the aggregates due to their disproportionate size and the impact of subsidies on their bottomlines. The numbers are also adjusted for extraordinary income and losses.

While the results are said to be below the street’s expectations, they hardly come as a surprise to us. In our review of the previous quarter’s numbers, we at DSIJ had called out that ‘as far as the March quarter of 2013 is concerned, one should not expect much of an improvement... while downgrades are a thing of the past, an upgrade from here on till the end of FY13 will also be a remote possibility’.

Q4 Results – A Sorry Picture

If we take a look at the numbers, the topline growth of just 6.90 per cent and bottomline growth of a paltry 0.16 per cent is much below the street’s estimates. Though the odds were of them being in the lower single digits, the below one percent growth in bottomline has proved to be a great disappointment.

What’s worse about the results is that the breadth has been quite a let-down on the bottomline front. In all, 723 companies have managed to put in higher net profits and 779 companies have put in lower net profits for the March quarter on a YoY basis.

One positive with regard to the coporate performance is a slight improvement seen on a sequential basis. On this front, while the topline has increased by 4.52 per cent, the bottomline has gone up 2.21 per cent. Though the figures may look small, sequential growth is a good sign.

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Interest Costs – Woes Continue

The pressure of interest and depreciation costs was slightly lower during the quarter compared to that in the immediately preceding few quarters, which enabled companies to maintain their net profit margins on a sequential basis. However, this does not mean that there has been any meaningful correction in the interest costs for India Inc. On a YoY basis, the interest costs (excluding banking and financial services) have increased by 12.28 per cent. This is still on the higher side, with the interest as a percentage of the EBITDA at 22.50 per cent, up from 20.10 per cent in the previous year same quarter. This clearly indicates that the impact of the two rate cuts is yet to have a bearing on the results. Though a few banks stepped forward to reduce the rates, this has hardly helped India Inc.

In addition, under the new norms of reporting interest costs, if the borrowings are in a foreign currency and the rupee has depreciated, the loss has to go towards the financing cost. This may impact the June 2013 quarter results too, as the rupee has depreciated sharply in the quarter under progress.

Higher Depreciation Costs – ‘A’ Good Sign

Depreciation costs for the quarter have increased by 15.19 per cent on a YoY basis and 3.26 per cent on a QoQ basis. This is the third consecutive quarter in which the depreciation cost has increased, and this is a positive sign as it indicates that some capex is being undertaken by India Inc. The best part is that the increased depreciation is mainly being seen in the ‘A’ group companies. With larger companies going ahead with some capex, this seems to hold out some promise for the order books of capital goods companies going forward.

Margins – Still Stagnant

India Inc. saw some improvement in margins in the December 2012 quarter. However, margin pressures came back to haunt in the March 2013 quarter, with the operating margins at 11.66 per cent as against that of 12.27 per cent in March 2012.

Another noticeable factor has been that the bottomlines have been boosted by higher Other Income, which stood at 33.16 per cent as a part of the net profit against that of 28.61 per cent in March 2012.

Looking Ahead – June 2013 Quarter

With the March quarter results done and discounted, the moot question remains as to what we can expect from India Inc. in the June 2013 quarter. There are quite a few factors to take into account here. With improvement hoped for in India’s GDP growth ahead (consensus at six per cent for FY14), we feel that India Inc. will start putting in better revenue growth from the June quarter. Apart from that, commodity prices have witnessed a significant decline and this is expected to help companies put in better operational performance. The margins would pick up in the coming quarters, though the improvement will be gradual.

In addition, we see some betterment on the bottomline front as the interest costs may decline, with the lag effect of the recent repo rate cuts getting factored in. It is true that the rupee depreciation will be one factor to be watched, as those with higher foreign debt may see a negative impact.

As regards the EPS upgrades, as we had anticipated in our December 2012 quarter results analysis, no upgrades have happened in March 2013 quarter results. Of course, there have been no downgrades either, and as a result, the consensus FY14 EPS estimate remains unchanged at Rs 1475.

Ahead in this story, we have analysed 11 key sectors of the Indian economy in detail, to review how they fared in the March quarter and take a peek at what one can expect from these sector in the forthcoming quarter.

There are three major factors to be looked out for in the June 2013 quarter. The first is better revenue growth, the second is some recovery in margins and finally, improvement on the interest cost front. Overall, one can look forward to a gradual betterment in the situation going ahead.

Fast Facts

• Out of a total of 1502 companies (From Group A and B, frequently traded) that have been considered, the sales of 880 companies have increased, while those of 595 companies declined and those of 27 companies remained stagnant.
• Out of total 1502 companies (From Group A and B, frequently traded) that have been considered, the net profit of 723 companies has increased and those of 779 has declined.
• Interest cost for India Inc. (Excluding that for Banks and other financial services companies) has increased by 12.28 per cent on a YoY basis and declined by 2.76 per cent on a sequential basis. Some impact of the 50 bps repo rate cut cumulatively made in 2013 by the RBI is visible in a decline in interest costs on a sequential basis. However, the impact is likely to be felt more strongly in the June and September quarters of 2013.
• India Inc. witnessed margin pressures in the March 2013 quarter, as the net profit margins declined to 9.50 per cent from the levels of 9.72 per cent in December 2012 and 10.14 per cent in March 2012.
• Depreciation cost for the March 2013 quarter increased by 15.57 per cent on a YoY basis and by 3.37 per cent on a QoQ basis. This is a good sign, as increased depreciation signals improved capital expenditure.

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AUTOMOBILES

Key Takeaways

• Sales volumes have been subdued across the board due to weak consumer sentiment.
• Monsoons are expected to provide short-term relief, but would reflect around Q3FY14.
• The overall situation would improve only with a drastic reversal in macroeconomic trends.

The automobile industry has been in a bad shape since the beginning of FY13, pressured by weak consumer demand resulting from high interest rates, soaring fuel prices and weak industrial activity.

In the four-wheeler space, M&M was the only one to achieve an increase in volumes over those in Q4FY12, having grown by 10.77 per cent. This was on account of its strong presence in utility vehicles, the only segment to be doing well. The domestic performance of the other players has been subdued for the quarter. Companies that posted good numbers have had to resort to efficiency improvement measures or depend on subsidiary performance.

Sales of two-wheelers continued to remain weak as about 70 per cent of two-wheelers bought are funded using borrowed finance. Interest rates being high, the effect on two-wheeler sales was negative. On an average, the volumes of Hero MotoCorp, Bajaj Auto and TVS Motor declined by 3.32 per cent in the quarter over those in Q4FY12. The revenues of these companies increased by a moderate 3.88 per cent while the operating margin dropped by 10.48 per cent.

Sales volumes are usually a good indicator of how a quarter pans out. These showed a flattish trend in April and May 2013, also indicative of a poor Q1FY14 ahead.

The main causes of the problem are expensive funding costs, high fuel prices and low industrial activity. A reversal in this trend is expected to take place only when macroeconomic factors show drastic improvement and start changing at the consumer end. Lately, we have seen a couple of interest rate cuts and some pullback in fuel prices. This is a good start towards corrective action. However, the trend has to be large enough to kickstart a serious revival in the industry.

The monsoons have begun strongly enough. This is likely to result in improved sales starting in the second half of the current fiscal as disposable incomes in rural India rise. Sales can, therefore, be expected to be better this festive season than those seen in FY13.

We are thus bullish on Maruti Suzuki thanks to its strong product portfolio and constant efficiency improvement measures, on M&M because of an improved outlook for tractors and a strong presence in utility vehicles and on Tata Motors because of the robust performance of Jaguar Land Rover, driven by new products and emerging markets.[PAGE BREAK]

R C Bhargava, Chairman, Maruti Suzuki shares with us his views on how the auto industry fared in the quarter and how it can drive growth in the changing economic scenario

How did your company improve profitability in Q4FY13?

Our profitability in Q4FY13 had nothing to do with enhancement in volumes; in fact, our sales did not go up. Profitability went up because there were certain favourable factors like the weakening of the yen, easing of raw material prices, extensive cost saving measures and more high-value cars being sold.

When do you see a revival in the industry?

At the moment, there are no signs of revival at all. It is difficult to predict when it will revive since there is nothing in sight yet.

How do you see the reversal in interest rate trends and easing of inflation affecting the automobile industry?

I’m not sure that inflation is going to ease out any time soon, with the rupee devaluing. And a half or one per cent decrease in interest rates is not adequate to revive the industry.

What effect do you think the monsoons will have on sales volumes?

The monsoons will certainly make a difference to the industry. But whether this difference will be long-term and widespread across the country is difficult to say. Income in rural areas will go up, but that is still several months down the road. If the monsoons are good, there would be some improvement in the outlook and growth from rural India may pick up by the festive season. However, other areas like industries and services and the overall feel-good factor required for people to buy cars remain at what they are.

What is your strategy to ride the current situation? Are you looking at model-specific success to drive growth?

Yes, but you can’t bank on that because a model becoming that successful has a little bit of gamble involved in it. More important is the ability of a company to cut costs and improve the overall efficiency in functioning.

What will your focus areas for the future be?

We go with the markets and follow consumer tastes. Diesel is no longer the hot favourite it used to be. We have to adjust for that and adjust for the fact that that there has been a slight shift towards petrol cars and their sales are not declining as fast as they were two years ago. These factors have to be taken into account.[PAGE BREAK]

BANKING

Key Takeaways

• Private banks continued with their strong performance, but public sector banks remained weak.
• On the negative side, the asset quality of the banks has further deteriorated.
• Falling bond yields and a moderate recovery in the economy going forward may help banks post better numbers.

The fourth quarter results of FY13 have seen the gap between the performance of private and public sector banks widening further. While public sector banks (PSBs) continued with their poor performance, those in the private sector maintained their momentum.

The Net Interest Income (NII), which is the difference between the total interest earned and the interest expended, has grown at a rate of a little over 20 per cent on a yearly basis for the new private sector banks, while it was less than five per cent for PSBs. Higher interest reversal and heavy slippages led to this lacklustre perform- ance for the latter group. This also impacted their Net Interest Margin (NIM) and most of the banks saw a contraction on this front. The sluggish yield on funds is another reason for the narrowing margins. For example, the country’s largest lender, SBI, saw its yield on advances declining by 50 bps on a yearly basis.

The asset quality of the banking sector remained under pressure, as we saw the net non-performing assets (NPAs) of the 40 banks analysed increase by a whopping 51 per cent on a yearly basis. The Net NPAs as a percentage of advances stood at around 1.72 per cent compared to 1.3 per cent in the corresponding quarter last year.

The overall impact of all this was a dip in the net profit of banks overall, which dropped by four cent on a yearly basis. However, in this regard there is a stark difference between public and private sector banks. While public sector banks saw their profits falling by 18 per cent on a yearly basis, this was up by 26 per cent in the same period for private sector banks.

Nonetheless, we believe that the worst is behind us now, especially on the asset quality front. If we look at the incremental slippages, upgrades and recoveries, these are showing signs of moderation. For FY13, the annualised slippage is 26 bps on a yearly basis, far lower than that of 38 bps witnessed in 9MFY13 and 57 bps in 1HFY13. It will receive a further boost from moderating inflation, which will lead to a downward movement in interest rates.

This will also help in the cooling of bond yields, which are already down by more than 60 bps in the last three months, and banks would be able to post a significant jump in the treasury gains. Although it will help the entire banking sector, it will create more impact on banks that have a larger AFS (Available for Sale) book. Canara Bank, Axis Bank and Punjab National Bank are some of the banks with significant amounts held under AFS.

In the next couple of quarters, we  may see the fortunes of the banking sector improve, especially those of PSBs, which have suffered the most in the last few quarters. As economic growth picks up, their asset quality is expected to improve and recoveries will jump substantially.[PAGE BREAK]

CEMENT

Key Takeaways

• Weakness in the sector internals is clearly reflected in the gloomy topline growth of cement companies.
• The volumes contracted by 2.6 per cent, has remained in the negative for two consecutive quarters now.
• The offtake trend of the commodity remains sluggish.

Cement companies have witnessed a muted performance in the concluding quarter of FY13. Frontline cement stocks like ACC, Ambuja Cements and UltraTech Cement witnessed some price correction owing to a continued slowdown in cement dispatches, higher volatility in pricing and higher valuations.

Weakness in the sector internals is clearly reflected in the gloomy topline growth of cement companies for the elapsed quarter. Revenue growth remained under pressure and grew at 1.5 per cent on a yearly basis, which is much lower than the street’s expectations. The volumes continue to witness a southward journey, declining at 2.6 per cent to remain in the negative for two consecutive quarters. The profitability of these companies was partially buffered by a substantial decline in international coal and pet coke prices.

However, the aggregate EBITDA per tonne for the 15 companies analysed came in at INR 810, lower than the expected levels of around INR 850-860.

With the early onset of the monsoons, the forthcoming quarters are likely to be more challenging as far as growth in topline and bottomline is concerned. It must also be remembered that none of the companies have provided for the impending final decision of the Competition Appellate Tribunal (CAT) regarding the CCI levying a fine over the cartelisation issues. This will remain an overhang on the sector.

At the start of FY14, cement companies have introduced an average price hike of INR 15 per bag in May 2013, which is a five per cent hike on an MoM basis. This was done primarily to accommodate the rising cost of production led by the recent increase in coal prices (CIL hiked prices on May 28, 2013) and an earlier hike in railway freight charges. But the offtake trend of the commodity remains sluggish. This can be attributed to the weak momentum in construction activities even in the peak construction season. Going forward, this overhang is likely to impact the performance of cement companies for the first two quarters of FY14. We, thus, advise investors to stay from the sector at this juncture.[PAGE BREAK]

FMCG

Key Takeaways

• FMCG companies saw better growth for the quarter.
• The revenue growth was led by both volumes as well as value.
• With the investment cycle behind, one can expect operating and financial leverage to drive earnings for the sector.

FMCG stocks have been able to outperform the broader indices in the concluding quarter of the last fiscal. This is evident from the numbers posted by most FMCG companies. The revenue growth was led by both volumes and value. During the quarter, 13 major FMCG companies that we analysed demonstrated healthy domestic volume growth. However, the international performance was a mixed bag.

The aggregate topline witnessed a growth of 15.03 per cent on a YoY basis for Q4FY13 and the net profit rose by 13.62 per cent. The EBITDA levels also came in higher, moving up by 15.35 per cent YoY on an aggregate basis and by 50 basis points in terms of margins. What has helped it post a better EBITDA is the correction in raw material prices.

Higher expenditure on advertisement and promotional activity has checked the substantial rise in EBIDTA margins. However, this spend on promotional activities has helped companies post better volumes growth. On an average, the FMCG pack has witnessed volumes growth of around nine per cent. N H Bhansali, CEO, Finance Strategy & Business Development, Emami opines, “There is no reason why the volumes growth will not be sustained at these levels for the sector going forward”.

Penetration levels are likely to play a vital role in the near future. Emami has clearly mentioned that an improvement in penetration levels will be a focus area for them. Apart from this, product innovation is also likely to play a key role in a highly competitive market. On the domestic front too, companies are likely to show strong growth led by growth in the market backed by an increase in penetration and product innovations.

The monsoons are likely to be another key trigger for the sector. A fall in inflation would increase the market share for consumer products and reduce raw material costs for consumer companies. It would also allow margins expansion without the need for price hikes. The investment cycle of consumer companies has already been executed, and we can expect operating and financial leverage to drive earnings for the sector going forward. We feel that companies like Dabur India, Godrej Consumer Products, Bajaj Corp and Emami offer potential for good returns.[PAGE BREAK]

Amit Burman, Vice Chairman, Dabur India throws light on the star FMCG performers for the concluding quarter of the last fiscal, and tells us about how the sector will perform in FY14

How have the March 2013 quarter results of the company been? Did they meet your expectations?

Strong growth across key categories like Health supplements, OTC Healthcare, Hair Care, Foods & Home Care helped Dabur India end the fourth quarter of FY 2012-13 with a 12 per cent surge in its consolidated net sales to Rs 1531.09 crore. The net profit for the quarter marked a 17.59 per cent growth to Rs 200.55 crore.

The domestic Consumer (FMCG) business reported an over 15 per cent growth during the quarter, driven by a volume growth of over 12 per cent. This is the highest volume growth reported by Dabur in 11 straight quarters. The business has performed well on all operating parameters. Our strong performance reflects the robustness of our business model and our ability to efficiently manage emerging challenges. We have managed our business dynamically through a combination of calibrated price increases and greater focus on cost efficiencies to deliver profitable and sustainable growth. Dabur recorded a 21.6 per cent growth in its EBITDA during the quarter.

At the industry level, which are the segments that have performed well during the quarter?

For Dabur, almost all key business categories reported strong growth during the quarter and the year. The Health supplements business, the OTC Healthcare business, Perfumed Hair Oil category, Shampoos, Home Care business, Toothpastes and the Foods category have all reported strong double digit growth.

In the recently concluded quarter, almost all FMCG companies have witnessed better volume growth. Do you feel that this trend will continue in FY14?

The volume-led growth is expected to continue going forward too. While we expect a slight moderation in the overall growth rate for the industry, I am confident the growth would be largely volume-driven.

With commodity prices coming down domestically and internationally, what impact do you foresee on the demand side and on the margins of companies, going forward?

We expect demand growth to remain steady.[PAGE BREAK]

INFRASTRUCTURE & CAPITAL GOODS

Key Takeaways

• Higher interest costs and raw material costs kept the operating margins under pressure and impacted the bottomlines.
• The margins are set to improve in the June quarter, as raw material prices have witnessed some amount of decline.
• With the RBI going ahead with two repo rate cuts, we expect a revival in the  capex cycle.

One sector that has been severely affected by the sluggish GDP growth and the slow pace of reforms is infrastructure. Higher inter- est costs impacted the capex cycle, ultimately affecting the order inflows. Apart from that, the rise in commod- ity prices along with higher interest outflow on account of working capital impacted the bottomlines. Most of the company managements concur with this view, with the largest infrastructure player L&T stating, “The challenges in the growth path of the Indian economy are still persisting in the form of infrastructure bottlenecks, resource availability, high fiscal and current account deficits. Moreover, constraints  to the speedy implementation of thereform process are adversely impacting the investment climate in India”.

On the financial front, the overall topline has increased marginally by 3.50 per cent on a yearly basis, while the bottomline has witnessed a decline of 27 per cent. The operating margins remained under pressure, which declined to 14.12 per cent for the March 2013 quarter from the previous levels of 15.48 per cent. However, the good news is that there has been some improvement on this front on a sequential basis.

Overall, we expect to see an improvement in the coming quarters. The foremost factor suggesting this is the two rounds of rate cuts that the RBI has effected this year, amounting to 50 basis points. This will certainly bring in some comfort on the liquidity front, and a lag effect of the same has already been witnessed in some of the results. This will also bring the interest cost (working capital) under control, helping infrastructure companies put in better bottomline numbers ahead. Apart from that, commodity prices have taken a significant amount of decline, and hence, we expect the margins to go up strongly in the June 2013 quarter.

As regards the order book, projects worth a total of INR 10 lakh crore have been stalled and we are hopeful that the Finance Minister’s recent efforts will give them a fresh lease of life. We expect upward momentum in the order inflow likely to sustain as the capex cycle is on a revival. The reforms process is expected to pick up at a faster clip ahead of the general elec- tions, furthering the capex drive. Once the momentum starts, a good deal of traction could be seen in the sector. In addition, though competitive, the international order book is also likely to provide growth opportunities in the coming quarters.

We have recommended counters like L&T and ABB under the infrastructure and capital goods sector, and these counters have yielded strong returns in the period. We continue to remain bullish on companies in this sector.[PAGE BREAK]

IT & ITeS

Key Takeaways

• Q4FY13 performance has been varying for companies, but overall performance for the sector flat to moderate.
• Managements of companies are cautiously optimistic about the outlook for FY14.
• Growth to be driven by emerging technologies, emerging markets and inorganically.

The IT industry has been seeing several secular shifts like the change in technological trends driven by social, mobile, analytics and cloud (SMAC) technologies and a shift in business model to a more relationship-based functioning with clients. The industry is thus posed with challenges in a global macroeconomic environment of delayed decision making and lower technology spends.

In Q4FY13, the performance of the top four companies - Cognizant, TCS, Infosys and Wipro - was moderate. The sequential growth in revenues of these companies was 2.18 per cent in dollar terms and 2.78 per cent in terms of constant currency. The margins were impacted, with the operating profit declining by 1.9 per cent sequentially. The trend here was the same as seen in the last few quarters. While Cognizant and TCS outperformed, Infosys and Wipro couldn’t keep up pace.

Other IT companies saw varying performance on an individual basis. Overall, the revenues grew by 0.12 per cent and net profit by 0.71 per cent, making for a rather flat quarter. Traditional services of application development and maintenance were under pressure. In terms of geographies, Europe surprisingly showed significant traction and growth, having grown sequentially by 5.53 per cent on an average. The utilisation rates continued to be at lower levels, averaging 72 per cent.

Due to the secular changes in the IT industry, performance has become more company-specific than industry-specific. This is mainly dependent on the companies’ ability to cope with changes, adopt newer models for growth and drive performance in this challenging environment.

While the macroeconomic trends are expected to remain volatile and uncertain in the near term, the performance of IT companies will depend on strategies, inorganic growth and fresh avenues of growth such as newer technologies and emerging geographies.

The quarter saw a number of partnerships and acquisitions in the IT space leading to a boost in growth, synergising operations and a wider presence. This trend of fuelling growth inorganically is expected to continue and drive growth for Indian IT firms.

In accordance with all these factors, companies like Cognizant, TCS, HCL Tech, Tech Mahindra, Mahindra Satyam, Persistent Systems, KPIT Cummins and NIIT Tech are expected to perform well. At the same time, near-term pressure/uncertainty is expected to continue on the performance of Infosys, Wipro and Hexaware.

The managements of various IT companies seem optimistic about Q1FY14 and have a positive outlook in the near term, although there is a certain amount of caution expressed. While improvement can be expected in terms of revenues, some boost in  profitability can also be expected giventhe depreciation in rupee.[PAGE BREAK]

R Chandrasekaran, Group Chief Executive – Technology and Operations, Cognizant tells us about the company’s performance in the background of the new trends in the industry and the unfolding horizon of opportunity.

How did you perform in Q4FY13 considering the macroeconomic situation and the dynamics of your industry?

We have delivered another strong quarter of industry-leading growth that was broad-based across our portfolio of services and geographies. Our revenues for the quarter were USD 2.02 billion, a sequential increase of 3.7 per cent and an increase of 18.1 per cent year-on-year. We maintained our non-GAAP operating margin at the higher end of our target range. Cognizant’s net headcount addition for the quarter was approximately 6000, taking the global headcount to approximately 162700 as of March 31, 2013. We expanded our share repurchase program by USD 500 million to USD 1.5 billion.

What are the major changes that you see in the industry?

While the economic uncertainty is leading some companies to be more cautious, we are encouraged that market demand remains healthy. With secular shifts in the economy, business and technology, enterprises are re-examining how they operate and moving from merely incremental levels of performance efficiency to building new digital business capabilities. Our clients are turning to us for more than just managing their businesses better. Not only do they wish to “run better”, they also need to “run different”. In order to maintain their market leadership, our clients are increasingly turning to us to conceptualise, architect and implement new, and increasingly different, capabilities. As a result, we continue to deepen our client relationships by challenging status quo, driving fundamental innovation, and unleashing new potential across their organisations by uniquely addressing this mandate from one global platform.

How are you planning to make the most of opportunities offered to drive growth?

The combination of economic shifts and technology transformation — driven by the SMAC stack of social, mobile, analytics and cloud technologies — is creating game-changing opportunities across the markets we serve. Well beyond cost-containment and efficiency, the mandate has moved to building new and different capabilities on the back of SMAC stack technologies. Over the last 18 months we’ve built our capabilities in each of the SMAC areas – both in terms of end-to-end services and also as intellectual property and thought leadership. We have a solid pipeline of SMAC opportunities and expect to deliver about USD 500 million in SMAC-related services in calendar year 2013.

We haven’t seen a material shift in decision-making or in the demand environment among our customers. As we look across our business, we are encouraged that the majority of our businesses are experiencing positive demand and growth characteristics.

What is your outlook for the IT industry in Q1FY14?

We are encouraged by what we see in the market and by our competitive position both for the current year and in the longer term. We are particularly pleased with the demand patterns across our industries and services, and our ability to meet clients’ dual mandate of running better and running differently also continues to gain traction. We anticipate the revenues for the second quarter of 2013 (quarter ending June) to be at least USD 2.13 billion, indicating a 5.4 per cent sequential growth, and expect fiscal 2013 revenue to be at least USD 8.60 billion, up at least 17 per cent compared to that in 2012. While there are some pockets of weakness, these are clearly outweighed by pockets of strength. Assuming that this demand continues to play out, we see some scope for outperformance for the full year.[PAGE BREAK]

OIL & GAS

Key Takeaways

• The subsidy burden has hampered the financial performance of PSU companies.
• Most companies have seen an improvement in their Gross Refinery Margins.
• Rupee behaviour will play important role in determining the future performance of this sector.

Oil & gas is one of the main sectors that define the outlook of India’s industrial performance. An energy starved country, India imports as much as 74 per cent of its crude requirements. With a declining rupee, the import bill looking set to move further northward in the future.

The financial performance of various companies was largely determined by government policies, especially the one regarding sharing of the subsidy burden. In fact, the subsidy burden on India’s most valuable company, ONGC, went haywire during FY13 to touch the INR 49421 crore mark, thereby impacting its bottomline. “Despite having a decent increase in topline, our net profit has declined by 40 per cent in Q4. We certainly expect this to come down considerably next year, as the government wants to curtail subsidies by 50 per cent to INR 80000 crore next year”, comments Sudhir Vasudeva, CMD, ONGC. In fact, ONGC has shown the best performance on the bourses, with 16 per cent appreciation during FY13 as against the Sensex returns of eight per cent.

The release of subsidies by the government is wreaking havoc for oil marketing companies (OMC) too, hampering their financial performance. In addition, interest expenses are also taking a bite out of the bottomlines. IOCL alone saw an increase of INR 1189 crore in interest costs, while its net touched INR 4449 crore during FY13, an increase of 5.27 per cent. The quarterly performance of OMCs has seen a good spurt owing to the release of subsidies by the government. IOC’s Profit After Tax (PAT) has appreciated to INR 14512.81 crore from INR 12670.43, while HPCL’s net touched INR 7679.31, a whopping rise of 65 per cent. BPCL’s net also climbed 21 per cent.

The Gross Refining Margins (GRM) were another significant factor. Here, Reliance Industries has taken a big leap, as its margins jumped from USD 7.6/bl to USD 10.1/bl. Riding high on this, the company posted a net profit of INR 5589 crore, marking a rise of 32 per cent. RIL’s net remained robust in spite of a 1.4 per cent decline in its topline to INR 86618 crore. The GRMs have somewhat compensated for the company’s exploration and petroleum segments, which have been laggards. The decline in the rupee will be also prove beneficial for the company in terms of exports. Aside from RIL, BPCL’s GRMs were the best among those of the PSU companies at USD 6/bl, while those of IOC and HPCL came in at USD 2.39/bl and USD 3.75/bl respectively.

Overall, Cairn India was the best performer in terms of topline and bottomline. The company’s net jumped by 17.2 per cent, while its topline surged 19.5 per cent to INR 4363 crore. With its production climbing, the next few quarters will see a much better performance.

On the other hand, though GAIL’s net profit jumped by 27.89 per cent on a quarterly basis, its net has dipped by 1.57 per cent on a consolidated basis in FY13. This certainly reflects concern about the performance. The profits of Petronet LNG also stagnated due to the rise in the cost of LNG, while its turnover showed a handsome growth of 32.8 per cent. “During FY13, we have operated more than our installed capacity that allowed us to achieve decent growth in topline”, comments A K Balyan, MD, Petronet LNG. As for the PAT not being in sync with the topline, he maintains, “This was mainly due big fluctuations in the price of the dollar and the cost of LNG going up during last year, which ham- pered the margins”.

Considering this, if the government would be able to control the subsidies on expected lines, the performance of OMCs would pick up. At the same time, the declining rupee will spell trouble for the companies, both upstream and downstream. If this fall continues, companies will see a huge shrinking in margins in the first quar- ter of FY14 itself as there continue to be high subsidies on diesel, kerosene and LPG. Put together, the subsidies and a declining rupee could prove to be a double whammy for companies in the sector.[PAGE BREAK]

PHARMA

Key Takeaways

• The high growth momentum has continued during the quarter.
• A superb product pipeline indicates that the June 2013 quarter would be fantastic.
• Depreciation in the rupee would have a positive bearing on earnings going ahead.

The pharma sector has been reporting outstanding results for a series of quarters on a trot. The momentum has continued in Q4FY13 as well, and the numbers speak for themselves. Barring a few companies (Ranbaxy, which saw higher revenues due to Atorvastatin exclusivity and Wockhardt, which reported losses due to derivative settlements and CDR provisions), the pharma sector has posted topline and bottomline growth of 16 per cent and 29 per cent respectively. The gross margins have also  improved by over 100 basis points.

The sluggishness in the domestic market continued in the March 2013 quarter, with growth coming in at nine per cent. The announcement of the New Pharma Pricing Policy (NPPP) has led to a slower offtake of drugs. In fact, there is a high probability that the NPPP will be implemented soon, and this will mean that domestic sales will take some hit. However, we see no major downside ahead in the profitability of the top companies, which generate only a fourth of their revenues from the domestic market.

In stark contrast to the domestic markets, the country’s top 10 pharma companies have reported more than 30 per cent growth in their exports in the quarter. The US exports (ex-Ranbaxy) were also seen rising by more than 40 per cent on a year-on-year basis. The contribution of the US exports has also gone up by about 500 basis points for these companies. The momentum in drug filings has continued, with an increasing focus on complex drugs such as those in the injectables and dermatology segments, which will benefit the companies.

In the period under consideration, three Large-Cap (Sun Pharma, Dr Reddy’s Labs and Lupin) pharma firms managed to beat the market expectations and also show fantastic growth prospects going ahead. Aurobindo Pharma reported good numbers. Cadila Healthcare’s revenues were fantastic, but the company has disappointed at the operating level. Cipla, on the other hand, has reported disappointing numbers with a decline in its net profit.

Recently, two developments rocked the sector. The first was an import alert on Wockhardt’s US FDA-approved facility, which will see its FY14 topline dip by about INR 550-600 crore. Further, Ranbaxy pleaded guilty before the US Department of Justice in a long pending case. This has raised red flags on the quality of Ranbaxy’s drugs. Both the cases are unique, but we have not seen much impact on the sectoral valuations.

Considering the huge product pipeline and the capabilities of the Indian pharma companies, we maintain our optimism on the sector. We continue to see slow growth in the domestic business and exports will keep the sales figures of the top companies fired. Overall, one can expect double-digit growth in the next quarter. Lupin and Sun Pharma remain our top picks from this sector.[PAGE BREAK]

Ramesh Swaminathan, CFO, President – Finance & Planning, Lupin tells us about the company’s focus areas and performance and the impact of the recent developments in the sector.

How has Lupin fared in the March quarter?

I am pleased to report that Lupin has clocked extremely strong quarterly growth across businesses globally. What is most heartening is that the growth has been secular across all the key markets. More importantly, we have reported an even healthier improvement vis-à-vis our EBITDA margins. Growth has been led by the outperformance in markets like America, which was due to launches of a few key products during the year. Lupin’s India business also seen over 24 per cent growth in revenues. The same is the case with our South African and Japanese business.

Which were the therapeutic segments that did well in India during the quarter?

Chronic therapies or lifestyle diseases like diabetes, cardiovasculars, gynecology, anti-asthma products led the growth during the quarter. These are the therapies that Lupin has been focusing on over the years. We believe that areas like nephrology, cardiovasculars and diabetes would remain areas of focus. This has actually helped Lupin consolidate on its leadership credentials within the domestic Indian pharmaceutical market. In diabetes, we have actually moved on to become the third largest in the country from being number eight or nine about three years ago. We would like to make further inroads in these segments. We believe that further growth will unfold in these segments and also in areas like oral contraceptives, oncology and CNS.

The new pharma pricing policy has been announced. What insights can you share in this regard?

If you see the entire draft of the DPCO (Drug Price Control Order) that came out, it is not as bad as people thought it would be. Lupin is one of the least impacted players, and we would not see more than one per cent impact on revenues from the Indian domestic market. Most reports that have come out in the market also suggest as much.

Can you tell us about the scenario on the exports front for Lupin?

Most of the top 10 Indian pharma players depend on exports for earnings. Most of their revenues actually come from outside the country than within it. So, while India remains a huge part of the strategic play that most India pharma companies have, export earnings will continue to grow given the fact that most large Indian pharma companies have build a sizeable pipeline for advanced markets like the US, Europe and emerging markets like Latin America and Russia.

In case of Lupin, around 75 per cent of our revenues are from outside the country and India contributes only 25 per cent. We would maintain our revenues from India at the current levels, but as and when the pipeline for advanced markets comes into actualisation the revenue breakup will become more tangible. We have around 176 ANDAs filed with the US FDA, out of which only around 80 have been approved. Having said that, there are still 116 ANDA filings that are pending. A lot of our exclusives opportunities have also come into play. Lupin has 29 first-to-file opportunities, out of which 14-15 are exclusive first-to-file. Once these materialise, there is going to be a larger revenue contribution.

We would like to maintain the pie more or less the way it is right now. But as and when the pipeline comes in to play, you will see some spikes.

In recent cases, two large pharma companies have received a setback, where one of them received a US FDA alert and another company pleaded guilty before the US department of Justice. How do you view these events and their impact on the pharma sector as a whole?

What happens with these two companies would really not impact how other companies will play in key markets like the US and Europe. Whatever has been said in the media would not have any ramification on the other Indian companies supplying drugs or receiving approvals in the US market.

There is no shortcut to compliance and we must adhere to regulatory standards globally. This is the only way to do business. Lupin, in fact, went through numerous US FDA audits last fiscal, and I am happy to note that we cleared all the audits with zero observations. That is the kind of regulatory rigour that one needs to have. As I said, there is no room for shortcuts in the pharmaceuticals industry. You have to follow the current good manufacturing practices and everything laid down in the books.

Is there any new facility coming up for Lupin this year?

Capital expenditure in the last five years has hovered a little over USD 100 million (Rs 550-600 crore) on an average every year. We are investing in our future, investing to build capabilities to service envisaged market demands. The new formulations plant that we announced last year would come into play this year at Mihan near Nagpur. This plant would cater to manufacturing formulations for the advanced markets as well as key emerging markets.

Can you share your views on the pharma sector going forward?

The Indian pharma sector is the best success story that the economy has witnessed in a decade or so. It’s a tragedy that the government hasn’t really focused on leveraging the success story of the Indian pharma industry. The pharma sector will continue to grow faster and better and continue to scale higher orbits of growth in the next five-10 years. We will continue to consolidate our position as the best manufacturers of quality generic formulations globally.[PAGE BREAK]

POWER

Key Takeaways

• The sector has missed its generation targets yet again in Q4FY13.
• Rupee depreciation would have a negative implication on companies like Tata Power, Adani Power and JSW Energy.
• A normal monsoon season may bode well for NHPC and SJVN.

Over the past few years, the Indian power sector has been reflecting steep underperformance on every front. In Q4FY13, the power sector has reported a year-on-year topline growth of 10 per cent, which was helped by capacity additions. The bottomline, however, has shrunk by 12 per cent. It is hardly any wonder then that the BSE Power index fell by 14 per cent on a YTD basis in 2013.

Questions could be raised as to why the sector is not out of the woods despite the addition of new capacities as well as the regulatory changes. At the industry level, power generating companies are still not able to utilise their capacities fully. This is clear from the PLFs, which were below 70 per cent for FY13 overall. The numbers also indicate that gas-based generation plants are hitting new lows every month.

Generation targets are also being missed consistently. For the March 2013 quarter, the Indian power sector missed the generation target by nearly five per cent, indicating that the situation is still precarious. In fact, with the new capacities being added, the picture may get far murkier in the future.

International coal prices are influenced by external factors and are difficult to predict. The prices of coal have continued to fall in the international markets in line with the drop in commodity prices. In Indonesia, coal fell by over 20 per cent to USD 88.6 per tonne in Q4FY13. This eventually proved to be profitable for entities like Tata Power, Adani Power and NTPC, which reported a rise in their EBITDA margins. Other companies, however, have seen their margins decline and a few reported losses at the operating levels. Overall, the sectoral margins showed some improvement but these look unsustainable.

As per the data published by the Central Electric Regulatory Commission (CERC), the short-term electricity market saw a rise in volumes and prices, which proved to be good for companies like JSW Energy and PTC India. For hydro power companies, the quarter spelled disappointment, as both NHPC and SJVN reported a decline in revenues and EBITDA margins.

During the quarter, the CERC upheld the petitions filed by Adani Power and Tata Power pertaining to their projects on imported coal. The regulatory body ordered the formation of a committee to decide the amount of tariff hike. This will be a decisive moment for private companies. Overall, the sector remains risky due to the range of issues it is battling. We believe that the rupee depreciation may cause the margins of a few power companies to stay under pressure. Gas-based power plants will face the heat over the lower gas supply. If the monsoons are normal, as predicted, hydro power plants may stay on course.[PAGE BREAK]

STEEL

Key Takeaways

• Steel companies saw muted growth for the quarter.
• The fall in commodities prices was negated by the increase in other expenses and employee expenses.
• The sector will remain under pressure owing to overcapacity and lack of demand.

The slowdown in the Indian economy is taking its toll, and the steel sector is among the major casualties. The topline of the 14 major steel companies we have analysed declined by 2.1 per cent on a yearly basis. This was on the back of lower realisations and lower volumes. Sector major SAIL saw its volumes and realisations declining by three per cent and six per cent respectively on a yearly basis.

Despite a heavy decline in the cost of raw materials, the EBITDA went up by just 1.2 per cent due to the rise in employee expenses (11.4 per cent) and other expenses (9.2 per cent). The cost of raw materials consumed declined by 16 per cent on a yearly basis primarily due to fall in the prices of coking coal and iron ore. The interest expenses and depreciation cost for steel companies rose by 5.2 per cent and 13.2 per cent respectively in the same period.

All this resulted in a sharp fall in the overall profitability of steel companies. On an aggregate basis, these companies slipped into a loss of around INR 5000 crore from a profit of INR 3565 crore in the same quarter last year. However, if we leave out a provision of INR 8355 crore for impairment of non-core business by Tata Steel, the average drop in the profits of these companies is arrested at 52 per cent.

After analysing the performance of these companies on a sequential basis, we feel that the worst is now behind us. On a quarterly basis, their topline has increased by a good 10 per cent and their profits have doubled.

Moreover, as the recent interest rate cuts are transmitted into the system, it will further help companies to report better profit figures. Of course, growth in the operating income of companies will largely depend upon how the infrastructure projects and other sectors such as automobile perform.

Looking at the recent trends in steel prices and the demand scenario from different sectors, we feel that steel prices will remain under pressure at least for the next quarter as the sector already has higher capacity levels. We hold that while the performance of steel companies will improve from here on, the uptick will be gradual.