Q3FY14 - WHAT TO EXPECT?
By Ruma Dubey
The countdown has begun to the Q3FY13 numbers. And this time around, like in Q2, it is Infosys and Indusind Bank which will kick off the results for the third quarter in the big ticket category. And like always, IIP data will also come in at 5.30, making it an action-packed day for the markets!
Q2 numbers took everyone by surprise. While all were expecting very dismal numbers, the earnings actually came in good. Call it scaled down expectations or whatever, but Q2 left a good taste in the mouth. Unfortunately, that has raised expectations for Q3. Now the market expects this third quarter to be much better than Q2, so will it better these expectations or are we heading for a disappointment?
CRISIL has put out its report and it is apparently very bullish. It expects a 7 to 9% (YoY) growth in topline and 17% growth in EBITDA and expects growth to be wide spread, not concentrated on specific sectors like in Q2. It is bullish on IT, pharma, tractors, textiles, FMCH, retail and media, most of them bouncing back on buoyant rural demand due to a good monsoon. It expects investment-linked sectors to remain weak and this would include capital goods, infrastructure and cement.
No surprises here. Most of the brokerage houses are bullish on the Q3 earnings and on an average, they expect a 18 month high of 16% growth in topline of 30 Sensex companies, with profits expected to grow 22%. Merrill Lynch, Kotak Securities, Motilal Oswal and more… all expect good earnings from IT, pharma and metals. They are banking big on five companies – Tata Steel, expected to turnaround, Tata Motors to show robust numbers on the back of JLR’s sales, much getter profits from TCS on account of its increased discretionary spending and strong exports to give boost to Sun Pharma’s earnings. On the other hand, companies which are not expected to do so well are BHEL, Tata Power, Coal India, Sesa Sterlite and SBI.
For IT companies, Q3 is usually a lean period due to the holiday season but the over 14% rupee depreciation during Q3 could come to the rescue. But more importantly, the outlook ahead is good with US economy showing signs of recovery. So tomorrow, more than the Q3 numbers, pay attention to the guidance; it is expected to be upped. TCS could continue to show better margins and so will HCL Tech, given its stronger order book and signing more deals.
On the other hand, performance from sectors like pharma, FMCGs and hospitals are expected to remain good. Aviation companies, thanks to the ongoing trouble at KFA could once again post very good numbers. Oil and gas growth could remain muted. Even the financial sectors, especially NBFCs could surprise us with good numbers. Private sector banks are expected to do well while PSU banks will be a mixed bag. Capital goods sector could continue to remain weighed down by interest burden and realty companies could in trouble with BHEL, Thermax and ABB not looking too good while L&T remains the best bet with VA Tech Wabag and Siemens. Tea prices were up during Q3 and hence companies like HUL and Tata Global which procure tea from open markets could see a spike up in their raw material costs. For soap makers like Marico, Godrej Consumers and HUL, copra and palm oil prices have been high sequentially during Q3 and this could mean lower gross margins but most companies might show a cut in their advertising and promotion expenses, which could help shore the margins.
Automobile companies will do well, mainly on account of rupee depreciation but overall most have reported muted monthly sales. So volumes will be low and Ashok Leyland could continue with its downward spiral. Companies to watch in this sector would be M&M, Hero, Escorts and Eicher Motors. TVS Motors is also expected to report good numbers though growth in Bajaj Auto’s profit margins could be muted. Cement does not look good now but it could see better growth from Q4 and prices, QoQ remain higher. So despite lower demand, we could see higher margins.
Construction companies like JP Associates and NCC could continue to be impacted by higher interest burden though this sector has been reporting increase in order books.
Media companies are expected to report better earnings due to the assembly elections in four states which would have increased viewership’s and ad revenues. NDTV, TV18, ENIL, Zee Ent are expected to post good numbers. Though there is a lot of bullishness on metals, given the lower demand, falling prices, one cannot help but wonder how these companies will report good numbers for Q3.
Thus Q3 will be a mixed bag of sorts. But we should probably look ahead, beyond Q3 and expect things to only get better. The overall sentiments have improved and some reforms have got the go-ahead. RBI rate hikes might act as a dampener but its best to hope that Q3 will show us the green shoots we all so desperately want to see.