December Quarter 2013 Results Analysis

Indian markets have remained highly volatile in the past few quarters keeping investors on their toes. Prime reason being a lot of negative macroeconomic data like consistently higher inflation, slower GDP growth, rising current account deficit and last but not the least the depreciating INR against the USD, impacting the sentiments in the markets. Apart from that the political paralysis and road blocks in terms of reforms added to the woes.

Despite these odds, the Sensex which is a barometer of India’s financial health, traded almost near the yearly high levels. It is a known fact that the consistent inflow of FIIs helped the indices sustain those higher levels. Though it is true that the FII inflow remained on higher side on account of easy money policy of the US, we cannot deny the fact that FIIs feel that Indian growth story has been strong enough and hence remained a favourite investment destination.

Many of our readers might get confused as on one hand we are saying that there are many problems, and on the other saying that the Indian growth story remains strong. Here, we would like to inform you that a lot has changed in the December 2013 quarter on the macroeconomic front.

CAD has witnessed a mark improvement. As against the earlier expected CAD of USD 85-90 billion by the FY14, it is now expected at just USD 45 billion. The fiscal deficit is expected to be contained and thanks to the declining vegetable prices, even the inflation is showing some signs of contracting. Th us all the leading macroeconomic data points are indicating towards some improvement. Further the improvement in the developed economies have also boded well for the Indian markets 

While most of the data points are good, the investor fraternity is now looking at another major indicator – December 2013 quarter results. The results season is over and hence everyone on the street would be awaiting the collaborative data of how India Inc has performed in the December 2013 quarter.

IN-LINE WITH EXPECTATION 

If we consider the street expectations about the December 2013 quarter, there were hardly any expectations about improvement in terms of sales as well as bottomline. Primary reasons being the inability of India Inc to boost its sales and pass-on the rising raw material cost to the end user. And the results have been in-line with the street expectations. If we take a superficial look at the performance of the 1566 companies (From A and B group and excluding the banking companies), with the topline growth of 5.60 per cent and bottomline declining by around 3.58 per cent, the results seem to be extremely poor. However, these are shallow figures and some adjustments are required to be made.

First the state run refinery companies need to adjust as the quarterly performance is irrelevant with subsidies being provided by the government at the end of year. Adjusted for the same, the topline growth now stands at 6.52 per cent and the bottomline growth stands at 2.90 per cent. If we further adjust the bottomline for extraordinary income, the bottomline growth stands at 4.36 per cent. On the sequential basis however the performance has been strong with the bottomline witnessing more than 20 per cent growth. However, this has much to do with the forex losses which the companies had incurred in the September quarter as the INR remained highly volatile.

Another noticeable factor is that if we adjust the numbers of financial companies, the bottomline of the Indian Inc seems to have contracted marginally. The data suggests that, adjusted for performance of the financial services companies, the bottomline of India Inc has declined by more than 4.80 per cent. It indicates that the financial services companies have been able to put up a better performance than their manufacturing counterparts.

INTEREST COST- WHERE IS IT HEADED? 

One of the important factors impacting the performance of the India Inc has been the interest cost. The higher interest rates resulted in higher interest out go ultimately eating in to the bottomline of the companies.

For the past few quarters the interest cost remained at higher levels. However this time some respite is seen. Adjusting for the interest cost of banking and other financial services companies, the YoY increase in interest cost of India Inc is less than 10 per cent. We feel the actions taken by the RBI to stabilise the INR has been the main reason behind lower interest cost. In one of our earlier reports we had categorically mentioned that the foreign debt is weighing high on the India Inc. Also, respite came on another front, as the depreciation cost increased by 10.58 per cent on a YoY basis. This clearly indicates that some amount of spending is going towards Capex expansion. Few infrastructure and automobile companies seem to be leading the pack.

GOOD SHOW BY SENSEX BASED COMPANIES 

If we consider the consolidated performance of Sensex-based companies, it has been better than the broader market. The topline on YoY basis has increased by 18 per cent and the bottomline has gone up by 34 per cent. This is really a stunning performance, but we have to look in to a different perspective here. The results are mainly driven by Tata Motors and Sesa Sterlite. Tata Motors performance is driven by the JLR segment (and some exceptional one-time income), while Sesa Sterlite witnessed a ban on mining in the previous quarter last year. So the figures were not comparable. If we adjust for the numbers of these two companies, the bottomline growth stays at 14.78 per cent on YoY basis. This is in-line with the street estimates. However, we cannot deny the fact that the Sensex companies have showed a marked improvement. 
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WHAT TO EXPECT IN MARCH 2014 QUARTER? 

A thumb rule to remember for the equity markets is that they move on the expectations of future performance. It is equally crucial to have a sense of the quarter ahead. Hence while the December 2013 quarter results are now a history, all eyes would be on how the last quarter of FY14 pans out. And our answer to the question would be that a good amount of improvement has been witnessed on the macroeconomic front, which will help the India Inc to witness some traction in the March quarter.

We expect that a few positives may emerge in the March quarter. Th e macroeconomic factors like CAD, Inflation and fiscal deficit are under control. While the CAD is likely to be contained at USD 45 billion for FY14, the fiscal deficit would be contained at 4.65 per cent. Apart from that the INR has stabilised providing ample time to India Inc to adjust accordingly. In addition, the stability on the raw material front would help India Inc sustain its margins. Some amount of improvement has been witnessed in the December quarter and we expect further improvement in March 2014 quarter as well. A few key indicators of the services sector have shown an uptick in the Q4FY14. Apart from that, some pick-up in exports and sporadic recovery of investments may help growth as well.

With general elections to be held in the month of April 2014, some of the infrastructure projects are also likely to pick up pace. We have reiterated that a marginal uptick in the infrastructure activity creates around ten-time leverage for the economy. 

However, there are a few worries too. While the companies’ topline has improved, the FY14 GDP growth is expected to come below 5 per cent – the street estimates are being placed at 4.6-4.8 per cent for the time being. There are few voices supporting the higher than 5 per cent GDP growth in Q3 and Q4 of FY14, but the FY14 as whole would remain in the range of 4.6-4.8 per cent. 

The RBI has increased the repo rate recently, and this would ensure that the interest cost remains high in the March quarter as well. The higher interest cost would eat up some part of the bottomline. But a positive here is the RBI has itself suggested that there is hardly any scope of liquidity tightening now.

On the valuations front, a good amount of downgrade was expected in the Sensexbased companies’ earnings (EPS). As we mentioned in our previous cover story (‘Brighter Days Ahead!’ DSIJ Vol. 29, Issue No. 5), we had stated that consensus P/E for the Sensex based on the FY15 the Sensex seems to be valued at 12.80x. The good news is that the street is not expecting any downgrades going ahead. 

With no downgrade happening in this quarter, the Sensex seems to be fairly valued at 15x on FY14 EPS basis. Hence we expect a little downside from current levels. But the volatility would remain in the markets till the general election results are announced. Once that happens, despite of whoever forms the government, the Indian economy would grow at a better pace and eventually India Inc would garner benefits. 

Ahead in this story, we present our exclusive analysis of how the macroeconomic factors affected the 12 key sectors and how they have fared in the December 2013 quarter.

Fast Facts

• Out of the total 1569 companies that we have considered from A and B group (Excluding Banks), the net profit of 779 companies increased, while 768 companies declined and 19 companies remained stagnant.
• The sales of 948 companies increased, while those of 597 companies declined and 21 companies remained stagnant.
• Despite rate cuts, interest cost still remains a concern. The interest cost for India Inc. (excluding Banks and Financial Institutions) increased by 9.50 per cent on a YoY basis. However on a sequential basis, the interest cost declined by around 1.50 per cent.
• Operating margins (excluding Other Income) for the quarter increased marginally to the levels of 11.97 per cent from the levels of 11.38 per cent in December 2012. 
• Depreciation cost increased by 10.58 per cent on YoY basis which indicates some amount of improvement on the capex front.

Automobile: Q3FY14 Review

India's automobile industry is supposed to be a replica of country's domestic consumption and consumer confidence over the years. Traditionally, the vehicles in India are purchased on finance provided by various financial institutions. However, the current interest rate scenario and subdue economic sentiments are weighing over the domestic automobile industry. Though the overall automobile industries third quarter numbers seem to be positive, only Tata Motors, the largest domestic automobile company by revenue showed a strong result and boosted the overall automobile industry's numbers. 

As we had predicted the subdue performance of the industry in the third quarter, but the industry showed a marginal de-growth of 0.22 per cent in its overall revenue on yearly basis, if we exclude Tata Motors quarterly results. Interestingly, the operational expenses for the industry were down during this quarter on yearly basis. The PBIT for the industry showed almost 13 per cent growth on yearly basis during Q3FY14. On positive note, the interest charges for the industry grew by 1 per cent, this was despite overall depreciation charges for the industry increased by almost 20 per cent on yearly basis during the period under review. However, on net profit front, the industry showed moderate 6 per cent growth during Q3FY14 against the same period last year. 

Tata Motors performance for the said quarter was so strong that including its quarter numbers, the automobile industry showed a robust 20 per cent revenue growth, 52 per cent PBIT growth and 74 per cent net profit growth on yearly basis during the December quarter. However, the pain continues to be in domestic automobile industry as Tata Motors performance was completely driven by its overseas subsidiary, JLR but was subdue on domestic front during the third quarter. 

Segment-wise, except the 2 & 3 wheeler segment which grew marginally by 5 per cent, other automobile segments showed contraction in their revenues on yearly basis. However, on net profit front, the 2 & 3 wheeler and passenger vehicle segments showed considerable realisation and showed growth in their net profits on yearly basis. Serious pain still persists in LCV and HCV segments on account of subdue industrial activities across the country. 

We stick to our stance and expect subdue volume growth in coming future in domestic automobile industry. The demand from rural India will be seen majorly in 2 & 3 wheeler segment and marginal in passenger vehicle segment. However, this volume growth will not be able to translate into major boost for the industry in coming future. As we had mentioned during Q2 review, demand recovery is key to a sustainable growth in profitability of this sector, the near future remains cautious. The continuing economic slowdown, policy paralysis, and higher interest cost will weigh the consumer sentiment.
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Banking: Q3FY14 Review

Banking sector is sulking due to the wound inflicted by the slowdown in the economy and its repercussions on various corporate. Net profit of the 40 banks (including 25 public sector banks and 15 private sector banks) that we analysed have declined by an average 21 per cent on yearly basis. The aggregate number is more hurt by the sharp fall in the profitability of public sector banks that had led to such a decline in the net profits. Net profit of public sector banks has declined by a huge 42 per cent on yearly basis while on the contrary their private counterparts saw it increasing by 15 per cent in the same period. The worst performer was United Bank of India that posted a loss of Rs 1238 crore in Q3FY14 against profit of Rs 42.2 crore in Q3FY13 while UCO Bank saw its profit grow by a staggering 207 per cent in the same period.

The subdued performance in Net Interest Income (NII), lackluster performance of other income and higher provisions were the factors that pulled down the performance of the banks. 

NII of the bank has shown an anaemic growth of mere 12.09 per cent on yearly basis. Aggregate of 15 private sector banks have exhibited better growth in the NII, which has grown at 14.6 per cent while public sector banks NII grew by 8 per cent. There are 8 banks (3 private and 5 public sectors) that have witnessed a negative growth in NII. UCO Bank witnessed the best rise in NII of 33 per cent on yearly basis while Dhanlaxmi Bank saw the worst decline in NII by 24 per cent.

Other income, which forms one tenth of the total income, has increased by 8.9 per cent on yearly basis. Lack of good treasury profits has led to such bad performance of the other income. There are 13 banks that have witnessed their other income declining, with worst performers being Dhanlaxmi Bank and IDBI Bank who’s other income has fallen by 45 per cent and 39 per cent respectively.

Deceleration in the economy has immensely impacted the repaying capacity of the borrowers and is reflected in the provisions and asset quality of the banks. Provisions of the banks have increased by 35.6 per cent on yearly basis. Asset quality has worsened on both sequential as well as on yearly basis. Gross Non-Performing Assets (NPA) and net NPA on sequential basis has increased by 6 per cent and 8 per cent respectively. Even percentage of advances on aggregate basis gross and net NPA has increased by 17 basis points and 13 basis points respectively. 

Going by the comments of some of the industry leaders, we believe banks will continue to face headwinds as the economy still has to turn the corner and especially public sector will continue to sulk.

Cement: Q3FY14 Review

Despite of immense potential in the construction business in India and being a developing economy, the cement sector is struggling since 2008 financial crisis. The very fact that the demand in cement industry is strongly associated to government spending will mobilise the infrastructural activities in the country. Furthermore, the demand for cement is also related to the capital expenditure across the country. However, post 2008 crisis, the government infrastructure spending and corporate Capex was at a considerable lower level from its peak. However, during the recession or economic slowdown, this sector was the first sector to take a considerable beating as most of the policy concentration of the government goes into survival of the economy. Further, due to policy paralysis during the same period, most of the existing infrastructure projects came to a stagnant phase and the new infrastructural project ceased to float into the market. 

Adding more pain to the subdue performance of the cement industry, the pricing power of cement companies was not in good state over last couple of years. The key parameter to success for any cement company in Indian industry is logistic cost efficiency of a cement company. Further, the energy costs for a cement company has gone out of control for last few years and further heat will be experienced by de-control of diesel prices and rising railway freights. Due to the subdue economic conditions, the companies are not willing to commence  new capital expenditures and the cement companies are trying to operate the old vintage plant leading to both logistically and operationally inefficient for them. 

For last few quarters, the cement industry was facing margin pressures due to uncontrollable rising cost coupled with weaker volumes. The scenario continues to be weak on all fronts for the cement industry during the third quarter for current financial year of 2014. However, on positive note, the cement industry showed marginal de-growth of about 0.5 per cent in its revenue during the said quarter against the same period last year. But, the pain still persists on the cost front which was clearly seen from 38 per cent de-growth in industry's PBIT during Q3FY14 on yearly basis. The fact that with marginal Capex in the cement industry, the interest cost for the industry during the third quarter increased by 4 per cent in tandem with growth in its depreciation which was almost 5 per cent on yearly basis. This clearly gives a positive signal for the industry as the rise in interest rate was only for Capex and not for working capital requirements. However, the net profit for the industry was down by almost 30 per cent on yearly basis, exhibiting continuing pain on operational expenses front. 

As per our Q3 result preview, we have predicted that Q3FY14 has not seen any change in the fortunes of the cement industry. While demand has been one problem, product pricing too remains a concern. A good monsoon was supposed to perk up demand, but that too hasn’t happened. We are still of the opinion that the volumes of the cement industry are expected to be weak compared to the preceding quarter levels despite of good realisation. Due to lower demand, capacity utilisation has been lower in turn resulting in higher fixed cost per unit of production. The profitability of these companies is expected to be impacted during the March quarter also. Furthermore, higher energy and transportation costs are likely to dampen the industry's margins. The weak demand resulted in a lower bargaining power and companies have not been in a position to pass on the rising freight charges and energy charges to the end users. The social spending and infrastructure development would certainly gain momentum after completion of the approaching general elections. Hence the excitement in the sector is not likely to be visible in till that time.
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FMCG: Q3FY14 Review

The Fast Moving Consumer Goods (FMCG) sector has once again posted better results for the quarter ended December 2013. The sector on an aggregate basis has posted topline growth of 12.48 per cent on YoY basis for Q3FY14 to stand at Rs 26077 crore. The bottomline has also posted better growth numbers posting a growth of 16.65 per cent on YoY basis. The above-mentioned figures are based on the 13 companies that we have analysed in the sector. The numbers posted by majority of the companies are better than the street expectations.

The main parameter on which FMCG companies are evaluated is the volume growth. In the recently concluded quarter, companies have done well on this front. In fact, there are certain companies like Godrej Consumer Products, Dabur India and HUL who have seen a good acceleration in their volumes. On the other hand, companies like Marico, Emami and Colgate have been able to keep their volume growth stable. The companies in this quarter have been able to rationalise their costs in a better manner. The average raw material cost on an aggregate basis stood at 33 per cent for Q3FY14 as against 35 per cent reported during the same quarter corresponding fiscal.

The gross margins for most of the companies expanded on a YoY basis in Q3FY14 and stood at an aggregate average of 13.15 per cent. Companies have hiked product price and reduced consumer promotion costs in select products where the impact of the INR depreciation is high. The price hike that the companies had taken in Q2FY14 has started showing results in Q3FY14 and is likely to continue going forward too. The spending on the advertisement has seen some softening which is likely to continue going forward too. This is likely to augur well for the companies in the sector going forward. 

Going forward, we continue to maintain our bullish stance in the sector in Q4FY14 too. Companies in this sector are likely to keep up with their better performance and volume growth. This is likely to impact the margins in a positive way. We continue to remain bullish on the sector and feel that companies like Godrej Consumer Products, Dabur India and Britannia are likely to remain in the limelight.

Infrastructure: Q3FY14 Review

It is a known fact that infrastructure progress is the way to a growing economy. With the UPA Government not being able to keep the progress of reforms and momentum alive in the public infrastructure projects, the GDP growth has been contracting for the past few quarters. However, with the general elections coming near, the government actually wanted to put some projects on fast track and hence a good round of performance was expected from the infrastructure companies. But if we take a look at the fi nancial performance of the infrastructure companies, the performance of the projects do not seem to be flowing into the books of the companies.

The topline of the leading companies has only increased by less than 1 per cent on sequential basis, but witnessed a marginal decline on the YoY basis. However one noticeable factor is, with some improvement in the operating margins, the PBIT for the quarter has witnessed a good increase on sequential as well as on YoY basis. Just to put the figures in perspective, the PBIT margins for the December 2013 quarter stood at 13.71 per cent as against 11.83 per cent in September 2013 and 12.11 per cent in December 2012. The interest cost has increased on the YoY basis but remained almost at similar levels on sequential basis. However, the interest cost for few companies climbed on account of increased working capital requirement. Infrastructure companies like GMR Infrastructure, GVK and IVRCL still remained under the burden of high debts. In this backdrop, many of them tried selling a few non-core assets in the December quarter also. One important factor is that the depreciation cost has remained at lower levels, which indicate that capex has remained low.

Going ahead, with the government trying to focus on fast tracking some of the infrastructure projects, the fortunes of the sector may start reversing. As regards to the order book position, the major companies have witnessed some improvement. What remains to be seen, however, is how the companies manage to maintain the order infl ows along with sustainable margins. Hence, in the March 2013 quarter, though the topline is expected to improve, the bottomline is likely to remain stagnant.
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IT & ITES: Q3FY14 Review

Good economic recovery in US and European economies and rise in spending in these markets have given considerable boost to Indian IT and ITes industry. The Indian IT companies have started focussing on European markets apart from its traditional US market. The continuing lower rupee price and lower operational expenses were the biggest drivers for the industry to expand its margin by almost 250 basis points sequentially. 

Q3FY14 remained softer than expectation on sequential basis for the overall IT sector on revenue front. The revenue for the industry grew marginally by 1.55 per cent on sequential basis during the quarter. However, management of most of the IT firms are optimistic on the industry's outlook backed by improved demand for IT services and greater off shoring opportunities in European market.

The industry PBIT showed a good 8.64 per cent growth on sequential basis during the quarter despite flattish revenue growth. The increase in profitability during this period was due to lower personal and other operational expenses. The personal expenses for the industry showed a contraction by 0.54 per cent on sequential basis. Net profit of the industry showed a handsome growth of 21.53 per cent sequentially, whereas it is lower than the 27 per cent sequential growth in September quarter. However, the net profit margin for the industry stood at 15.13 per cent for Q3FY14 and expanded by 250 basis points.

The combined revenue of top 5 companies in this sector showed muted revenue growth with just 2 per cent improvement on sequential basis. On revenue front, IT major TCS showed just 1.5 per cent sequential growth in the quarter, while Wipro and Tech Mahindra reported a growth of 3 and 2.7 per cent in the same period respectively. Infosys the only IT company within this pack showed a marginal negative growth of 0.2 per cent on sequential basis. However, the combined net profit of these 5 companies grew 15.79 per cent quarter-on-quarter (QoQ). The growth in net profit is lower than the overall industry's growth, which represents that other smaller companies grew at a better rate in December quarter. Interestingly, the net profit margin stands at around 21 per cent with margin expansion of 260 basis points during the quarter. 

We continue to remain bullish on Indian IT and ITes industry considering good revival in US and European markets. The hiring in various companies continued to be on rising spree, indicating that the companies are initiating new projects. Further, we are not expecting rupee to appreciate in near future soon, benefitting this export oriented service industry over next couple of quarters.

Oil & Gas: Q3FY14 Review

Oil and gas sector has continued its dismal show during the third quarter at all parameters. Subsidy burden continued to remain the biggest spoiler for both upstream and downstream companies and ate the crucial chunk of their profits. Interestingly, almost all companies have seen a spurt in the topline despite decline in the volume owing to decline in the rupee against the dollar. 

The worst hit was downstream companies as they haven’t received the full payment from the government on account of subsidy burden. IOC shelled out Rs 20698 crore of subsidy on diesel and LPG while it received Rs 8261 crore from the upstream companies as subsidy discount and just Rs 5173 crore from the government. As a result, company net profit nosedived to Rs 961 crore. In the same way BPCL and HPCL profitability also got a hit. Companies are hopeful that current reform would continue and complete deregulation would happen from next fiscal as planned. Interestingly OMCs during Q3 has improved their performance in terms of interest out go, while they also gained on the foreign exchange front. 

The state of upstream companies is also the same. ONGC earned Rs 7126 crore Profit After Tax (PAT) in Q3 as against Rs 5563 crore in Q3FY13. This increase is mainly due to an increase in other income and rupee depreciation viz-a-viz last year. The company has given under recovery discount of Rs 13764 crore while it was at Rs 12433 crore during corresponding quarter last year. Oil India’s PAT also declined by 4 per cent to Rs 903 crore as against Rs 940 crore earned during corresponding quarter last year. During this period, the company has shouldered Rs 2173.5 crore of subsidy while it was at Rs 1949 crore last year, an increase of 11.5 per cent. 

Refining Major RIL also experienced sluggishness in topline and bottomline owing to decline in Gross Refinery Margins (GRM). The GRM has declined to USD 7.6/ bl as against USD 7.7/bl. In fact, nonoperational income of the company has saved the day as it grew by more than 32 per cent to Rs 2305 crore during Q3. On the gas output front, performance remained lukewarm as production again declined by around 10 per cent during the quarter from KG D6 block. Companies profit stagnated at Rs 5511 crore, just a marginal increase of 0.16 per cent. The situation for the oil and gas sector can’t improve till complete deregulation takes place, though we are heading in that direction. Gas price increase that is slated to take place from April 1, 2014 could be a game changer for the sector, but with the ever-changing political scenario, we have to keep our fingers crossed.
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Pharma: Q3FY14 Review

In the Q2FY14 result review we had clearly stated that there is still steam left in the sector. This has indeed come true as the pharmaceutical sector has again emerged as one of the sectors that have posted better earnings during the quarter ended December 2013. The sector, once considered a safe haven, has to some extent take the front seat in terms of returns generated by the companies in the sector. 

Twenty companies that we have analysed in the sector posted better numbers during the recently concluded quarter. On an aggregate basis these companies posted a topline growth of 20 per cent on YoY basis for Q3FY14. The bottomline on an aggregate basis stood at Rs 3979 crore for Q3FY14 as against Rs 2468 crore, a growth of 61 per cent during the same quarter last fiscal. 

The US markets remained the main growth driver for the companies in the sector. Apart from the US, other markets like CIS and Latin America also witnessed better growth numbers. What is also encouraging is that in spite of the drug pricing policy the companies have done well in the domestic markets, also posting a gain of around 8 per cent during the quarter on YoY basis. On the operating front, the sector on an aggregate basis posted a growth of 58 per cent on YoY basis and on the EBITDA levels posted an average EBITDA margin of 49.89 per cent during the quarter. This is one of the highest ever numbers posted by the sector in recent terms. 

Sun Pharma for the second quarter in a row has revised the guidance for FY14. The revenue growth guidance is revised from 25 per cent to 29 per cent. The revised guidance takes into account the performance achieved in 9MFY14, higher base of Q4FY13 on consolidation of acquisitions as well as the risks associated with increase in competition for some products. 

With a robust pipeline of ANDAs and FTFs, we believe that the good run is not yet over for the Indian pharma companies. In fact, the companies look poised for another quarter of robust earnings in Q3FY14. Our top picks for the sector remain Sun Pharmaceutical, Lupin, IPCA Laboratories and Dr Reddy’s Laboratories.

Power: Q3FY14 Review

The woes of power sector continued in the third quarter as industrial demand for power remained sluggish owing to subdued GDP growth. In the first six months, as GDP grew at around 5 per cent, demand for power too remained around that level which clearly is a cause of concern for the sector. At the same time, supply of power has surpassed demand as it grew by more than 8 per cent during the last 9 months. 

In addition, this sector is also reeling under huge interest burden as companies have taken huge debts for setting up of power plants and interest burden on these companies is increasing with each passing day. At the same time, companies are also struggling with supply of fuels like coal and gas that prove to be a double whammy for the power companies. Due to subdued demand, Plant Load Factor (PLF) has come down drastically to around 65 per cent in the last 9 months as against around 70 per cent during the corresponding period last year.

On the positive side, PSU major NTPC has posted impressive numbers in terms of topline and bottomline due to the incentive it had received on the basis of increased Plant Availability Factor (PAF). Th e company’s PAT spurted by 10.19 per cent to Rs 2861.28 crore in Q3 as against Rs 2596.76 crore earned during corresponding period last year, while its topline also jumped by 18.22 per cent. At the same time, transmission major Powergrid’s PAT dropped by 8 per cent to Rs 1042 crore owing to increased cost and foreign exchange fluctuations. 

For other companies, especially private peers, the interest cost that kept on increasing during Q3 remained the biggest dampener.Interest cost for power generation companies like Torrent Power, NHPC, Reliance Power, Jai Prakash Power Ventures and Adani Power jacked up by 68 per cent, 52 per cent, 60 per cent, 25 per cent and 19 per cent respectively. 

Due to interest burden, companies like Jai Prakash Power Ventures, Adani Power and Torrent Power posted net loss in Q3. These three companies have interest cost of Rs 360 crore, Rs 628 crore and Rs 188 crore respectively. The profitability of the companies got a huge beating owing to slump in demand and an increase in interest and input costs. Almost all major power generation companies, barring NTPC and Tata Power, have experienced a drop in profitability or have posted loss. 

Overall, the situation for the power sector remained grim due to the slow growth of the economy. With gas price slated to be doubled from April 1, 2014, the worries of this sector are far from over. And with general elections around the corner, the next 2 quarters would also remain sluggish as far as performance of the power sector is concerned. The onus will be on the new government at the centre to push for reforms and pull the sector from the blue.
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Steel: Q3FY14 Review

Steel companies continued with their good show in the third quarter of FY14. Aggregate topline of the 15 steel companies analysed increased by 19 per cent on yearly basis. Rise in the topline was aided by increase in both volume as well as realisations. For example, SAIL witnessed its volume increase by around 7 per cent to 2.94 mt for Q3FY14. Similarly, Tata Steel India saw its deliveries increase by almost 10 per cent to 2.07 mt for December 2013 ending quarter. It is the flat products that have witnessed good growth in volumes. The blended realisations on an average have increased by around 0.5-2 per cent on yearly basis, as companies have taken price hike during the start of the quarter (September-December). 

The cost of raw materials has increased in line with sales increase and is up by 19 per cent on a yearly basis and has remained at 41 per cent of the total sales. Prices of key raw materials like coking coal and iron ore have not exhibited much volatility on yearly basis and remained at comfortable level. Th e EBITDA per tonne has increased for most of the larger steel companies. JSW Steel and Tata Steel saw their EBITDA per tonne increase by around 5 per cent on sequential basis. However, SAIL saw it declining by 7 per cent to Rs 3850 per tonne due to a sharp rise in other expenses. Interest expenses of the companies analysed witnessed a continuous rise and has increased by 27.6 per cent on yearly basis. In terms of percentage of total sales, they have increased from 3.87 per cent of sales at the end of Q3FY13 to 4.16 per cent for the recently concluded quarter. The aggregate net profit of the steel companies has increased by eight times on yearly basis due to better consolidated performance by Tata Steel. It has posted profit of Rs 503 crore during Q3FY14 against a huge loss of Rs 763 crore in Q3FY13. If we exclude Tata Steel data from overall profit analysis, net profit has increased by decent 36.11 per cent. 

Going forward, we expect steel companies to report good numbers as global and domestic economy is turning corner and steel demand is expected to rise. Moreover, steel companies have raised prices in the month of January 2014 that will get reflected in the fourth quarter results.

Telecom Sector: Q3FY14 Review

The telecom sector after facing a number of challenges earlier has been posting better results for the past few quarters now. This saga continued in December quarter too. The topline of the four service providers on an aggregate basis has moved up by 9.39 per cent for Q3FY14 on YoY basis to stand at Rs 38726 crore. The bottomline during the same period has moved up to Rs 1272 crore for Q3FY14 as against Rs 419.35 crore reported during the same quarter last fiscal. On the operating front too, EBITDA on YoY basis and aggregate basis has gone up by 19 per cent for the quarter ended December 2013 to stand at Rs 11834 crore. 

The better performance of the sector is on the back of better realisations. The Average Revenue Per User (ARPU) has gone up significantly from USD 3.06 during Q3FY13 to USD 4.10 during the recently concluded quarter. In this quarter, the Minutes of Usage (MOUs) too has gained traction along with ARPUs.

Going forward, however, we feel that apart from voice revenue, the revenues generated from the data services will also play an important role in the entire revenues. The 3G service for all incumbents have started to spell out results and this is likely to augur well for the sector going forward.

However, there is a catch to it. The recently concluded auction of the 900 MHz and 1800 MHz are a cause of concern. This is because of the highly leveraged status of the balance sheet of the companies like Bharti Airtel, Idea Cellular and Reliance Communications. A large part of the spectrum won by incumbent players in recent auctions is aimed at protecting their current revenues as against grabbing new revenues. It can be said that the increased financial pressure on these companies would lead to increase in voice base rates for the telecom industry going forward. Bharti Airtel, Vodafone and Idea bought 1800MHz spectrum in few circles where they did not face a renewal situation. This is mainly due to buying spectrum if renewal prices go beyond comfort levels in future. To use 1800MHz, rolling out FD-LTE networks is likely to act as filler in their 3G spectrum footprint. 

Therefore, despite posting good financial performance, we maintain a cautious approach on the sector till the picture on funding the win in auction gets clear.
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Textile: Q3FY14 Review

The textile sector witnessed a good amount of traction in the preceding quarter and the market participants were also quick to reckon the same. It was no surprise that in the past few months, some of the textile counters were trading at yearly high levels. Keeping the momentum alive the textile companies have managed to put in another round of good performance backed by factors like improvement in the developed markets (a major market for exports), stabilised INR and last but not the least declining raw material prices.

If we take a look at the performance of textile sector as a whole, the topline on Y-o-Y basis has increased by more than 9 per cent where as with significant savings on the interest cost front, the bottomline has almost doubled on Y-o-Y basis. 
If investors could recollect in the preceding quarter we had categorically stated that poor performance at the bottomline level in the September 2013 quarter was mainly on account of higher interest outgo. The interest cost for the September quarter had increased by over 18 per cent on a Y-o-Y basis. However here in December quarter the Interest cost has actually declined by more than 8 per cent on Y-o-Y basis. 

Here we would like to take some credit for what we had predicted in the preceding quarterly analysis of textile sector. We had stated that, “We expect the textiles sector to witness a good amount of traction going ahead”. The strong performance of the textile sector as a whole also vindicates the same. 

While on the domestic front the fall in cotton prices made the Indian manufacturers competitive, on the global front the improvement on the macroeconomic front in the European and US markets has also added to the positivity. According to figures released by the RBI, textile exports reached nearly USD 14.9 billion in the first half of the current financial year 2013-2014. Ready-made garment exports accounted for almost half of that figure, at USD 7.1 billion. Apparel exports experienced sustained growth of 15 per cent over the last nine months from April to December 2013. Cumulative export data for the same period reveal an increase of 16.3 per cent over the same period in the previous financial year, reaching USD 10.56 billion. 

We had mentioned about the factors like a combination of improving textile and apparel demand from large markets. Benefits accruing from a depreciating rupee and structural changes in competing markets like China and Bangladesh have resulted in the improved performance and stronger order book visibility for Indian exporters.  The factors still hold true for the Indian textile players. 

With the US and European economies witnessing a good amount of improvement the sales growth is likely to continue in the March quarter as well. With the factors like improved cash flows, improving debt levels and competitiveness with other textile exporting countries, we expect another round of strong performance for Textile sector in March 2014.