MUMBAI: Severe margin pressure. That's one statement which will be heard with great frequency in the next three weeks as companies start showing second-quarter hand.

That's because April to September was the period when interest rates, input costs and inflation were at their short-term peaks, the lag effects of which will begin to show from the second quarter onwards.

Corporates haven't admitted to catholic demand destruction, but the headwinds are expected to restrict India Incs profit growth to around 10-12%, consensus estimates show.

And mark-to-market treasury and convertible bond losses, and plainlack of other income promise another flank of pain. The 9.2% depreciation in the rupee between June 1 and September 30 will cut both ways - hurting some, helping others. But the bad news, say analysts, will not be restricted to the second quarter (ended September 30,2008) alone, notwithstanding the guesstimated peakout of inflation and interest rates.

Anup Maheswari, executive vice president amp; head - equities and corporate strategy at DSP Merrill Lynch, said earnings should see a slowdown "from this quarter onwards and continue for the rest of the year." According to him, IT companies should do well because of rupee depreciation but the important thing to watch out for is the guidance given by them. "Capital goods companies would face execution delays. Despite the fact that they have large order books it looks unlikely that the order books will be completed in the given time frame." Consumer goods should be reasonably good. By and large, auto won't be great. Cement companies should be subdued, he said.

The cracks began to widen in the first quarter ended June 30 itself, when profit growth for 430 manufacturing companies in the BSE 500 stood at a paltry 6.8%, the lowest in 8 quarters. (The balance 70 companies in the index are non-manufacturing entities such as banks and non-banking finance companies. They have been excluded so as to not distort the real-economy reading. The 430 companies contribute 80% of India Incs market capitalisation).

The cost pressures were already building up - interest cost in the first quarter had rocketed 111.3% year-on- year, while operating profit was up just 12.8%, the second-lowest in the preceding ten quarters.

Expect this number to be crunched in Q2. The Q1 topline was hefted a high 41.3% mostly due to inflation.

The second-quarter numbers would be a good reflection of the extent of the impact of macro-economic slowdown, according to experts.

Deepak Jasani, head of retail research at HDFC Securities, sees banks, capital goods, fertilisers, telecom, pharma and FMCG doing well. "Auto, cement, real estate won't." His overall profit estimate is "between lower double-digits to mid-double digits". "One factor affecting profitability will be the depreciation of the rupee; it will affect companies which borrowed. That's because interest costs have started to rise, as banks raised their prime lending rate beginning August," Jasani said.

"Pressure on cost will be there because commodity prices started softening only from August," he said.

On the flip side, rupee depreciation will benefit IT, metals, oil amp; gas companies like Gas Authority of India and Reliance Industries. Volume growth is expected to be muted led mainly by decreasing demand. "Despatch numbers from cement companies were not encouraging while metal had an artificial price cap on. Overall revenue growth should be between 20-25%, said Ashok Jainani, vice-president-research and market strategy at Khandwala Securities.

Alok Agarwal, head of research at K R Choksey Shares and Securities, said revenue growth in June 2008 quarter, which was driven by price mostly (higher inflation) and not much because of volumes, will slow down significantly this time.

"Companies that have issued foreign currency convertible bonds (FCCBs) and did not make provisions will suffer in case provisions for the same are made in September," Agarwal said. Most FCCBs were issued hoping that they will be converted to equity. "However, in the current market conditions conversion of FCCBs could be a challenge. Rupee depreciation makes it worse," Agarwal said.

Margins of cement companies would be hit by higher cost of imported coal. The auto industry will be hit by higher interest rates and tightening of credit. Margins for auto companies should also experience some pressure on account of higher steel and rubber costs.

Analysts expect the industry see some relief because of softening aluminium prices. Volumes of two-wheeler companies were better than cars and this should be reflected in the numbers.

 

Source : DNA