July-Sept earnings season eve... Apprehensions loom large

S.Vaidya Nathan

ON THE eve of the earnings announcement for the July-September 2000 quarter, there cannot but be apprehensions about the likely trends. Unlike the previous quarter, there is more negative news about the overall economy now than, say, four months ago.

The previous quarter (April-June 2000) saw some 2,000 companies reporting fairly good earnings growth of 40 per cent, driven by the IT sector.

What is in store: In such a milieu, the likely trends (apart from those relating to media and oil sector which have been indicated subsequently) are:

Growth in revenues and earnings of IT sector companies may be the key driver. Ones to watch: Infosys, Hughes, Wipro, HCL Technologies and Satyam.

Telecom companies may do well though MTNL may be under pressure. Himachal, Global Tele-Systems, Subex Systems, Sterlite, and Finolex Cables, and pure cable players, such as Birla Ericsson, Optel and Finolex Cables, bear a close watch.

The paper sector is likely to show good growth as price trends have been favourable. Companies to track are ITC Bhadrachalam, Ballarpur Industries, Tamil Nadu Newsprint, and West Coast Paper. A higher import cost may, however, cut into the profitability for importers of pulp (TNPL is an exception).

Steel and cement companies and the engineering sector can be expected to face pressures on profitability as prices are generally weak, barring some pockets for cement.

The engineering, automobile (with the exception of two-wheelers) and auto-ancillary sectors may turn in weak numbers.

Exporters and those with high forex earnings, such as companies in the gems and jewellery, may show good growth. The finance sector may see steady growth in line with past trends, with HDFC, LIC Housing Finance, HDFC Bank, Corporation and ICICI Bank the ones to watch for.

Most negative and positive surprises could well come from FMCG and pharmaceutical sectors with Hindustan Lever, Glaxo, Cadbury, Dr. Reddy's and Britannia, meriting a close look.

Overall, the earnings season may have little to lead to a broad-based rally in stocks. It could have a selective bearing as usual. But it is the liquidity factor, the better earnings prospects and the higher certainty equivalents attached to such earnings at aggregate levels compared to other sectors, that may lead to firm trends in the IT/telecom stocks.

Key trends of last quarter: The important aspects that may have to be tracked may relate to the significant pointers that were in evidence in the April-June quarter and the new variables that have emerged in the last three months which could impact corporate performance. These were:

The strong showing of companies in the information technology sector.

Click here for Chart

The growing divergence within the IT sector with contemporary companies showing different levels of earnings and revenue growth. A classic case was that of Infosys Technologies and Satyam Computers. Both showed impressive growth compared to the previous corresponding quarter _ Infosys over 100 per cent and Satyam around 85 per cent. Infosys' quarter-on-quarter (April-June 2000 compared to Jan-March 2000) growth rate exceeded 30 per cent, while for Satyam it was around 16 per cent. Infosys is managing to upscale its operations on a large base more effectively. Similar divergence was evident across the board. If this trend continues, it could lead to a higher degree of discrimination of the IT sector stocks.

The telecom products and services companies had a fairly strong showing with the exception of MTNL. The performance of Global Tele-Systems and Himachal Futuristic may bear a close watch as they are among the most-widely traded stocks now and also figure in most mutual fund portfolios.

As for the media sector, the April-June quarter was a further confirmation that growth rates may not be on a par with the IT sector. To that extent, the steep decline in valuations has not been restored (as with many frontline and second-rung IT stocks) and this could align the prices better with the underlying fundamentals.

The performance of Zee Telefilms and Shri Adhikari Bros may deserve a close watch, given that STAR Plus has cut into the competitive prime slot and walked away with the honours (till now) with Kaun Banega Crorepati. And with the listing of quite a few media companies in the last six months, there are quite a few companies to look at.

As for the Old Economy, the April-June quarter was good for steel and paper companies, which saw higher volumes and better prices. So much for petrochemicals as well, with Reliance turning in good growth rates. But the cement sector continued to be affected by lower prices and volumes compared to the previous year.

It was a lacklustre quarter for the engineering sector with the exception of some companies such as Cummins India.

New variables in recent quarter: The July-September quarter saw a few significant changes in the overall economic scenario, such as:

Slower industrial growth rates.

Depreciation of the rupee vis-a-vis the dollar.

Sharp decline in the offtake levels of cement. But the prices have been mixed, firm in some markets and flat in others.

Prices of steel have also dropped.

The automobile sector, with the exception of the two-wheelers, has seen a contraction in volumes with pronounced drop in the commercial vehicles segment.

As part of its measures to ensure stability in rupee-dollar parity, the RBI has raised interest rates. This was followed by banks and other lenders. But the rise in interest rates may be only partially reflected in the earnings announcements.

There has been a sharp spurt in crude price. With US' inventories at a 24-year low, even OPEC raising production may not have a significant impact on prices. Here, too, the price hike effect may not manifest in the July-September quarter numbers, as the domestic prices are yet to be adjusted to reflect higher global prices. But refining companies such as HPCL, BPCL, Indian Oil and Reliance Petroleum may have problems on profitability. ONGC may not benefit as much, since the price paid to it is capped. The absence of cash flows from the Oil Pool Account could also exaggerate interest costs, affecting profitability.