Macro Economic Trend
Ahead of market expectations, the economy grew by a robust 7.9% in the September quarter, propelled by increased Government spending and a surge in the manufacturing sector. Consequently, the Government has raised its expected GDP for FY10 up to 7.75%. Additionally, the GDP growth is likely to revive and get close to 9% in the next couple of years with further thrust coming from the export markets.
We expect the auto sector to continue witness robust growth in the near-to-medium term led by a healthy volume growth due to new product launches, improved consumer sentiments, and significant planned investments in the sector. However, with the recovery in the commodity prices, we expect margins to come under pressure in the near term.
We expect the Banking sector to witness improved credit off-take on the back of increase in corporate activities and growing demand for housing and automobiles. However, the RBI mandated to increase the provisioning coverage ratio (PCR) to 70% by Sep’10 will exert pressure on the Bank’s bottom line.
Although the demand in the cement sector continues to remain healthy, supported by an improved demand scenario in the northern and eastern parts of the country, the industry continues to witness pricing pressure.
We believe the Construction sector is likely to be a major beneficiary of the marked improvement in economic activity in the coming quarters. Increased construction activity during the last quarter propped up October’s industrial growth to 10.3%, while the core infrastructure industries grew 5.3% in November 2009.
The FMCG sector is undergoing a period of soaring revenues on the back of robust consumer demand from both the urban and rural markets. Moreover, companies have augmented demand further through price cuts, promotional offers, and new launches. Though we expect this sector's revenue to head north in Q3’10, we foresee a contraction in the margins of the FMCG companies on account of rising raw material costs.
In the coming quarters, the capital goods sector is expected to witness robust growth. The sector continued to receive orders during October-December 2009 on account of Government of India’s (GoI’s) ambitious plans of revamping the power sector of the country and also due to a revival in industrial activity.
The IT sectors, the worst hit by the recession, are back on the growth track, on account of the steady revival in economic activities across the globe, especially in Europe and the US . In India , we expect IT companies to maintain their healthy margins in the near term, despite an appreciation of the rupee against the dollar.
Oil & Gas
According to the International Energy Agency (IEA), global oil demand is expected to increase from 84.8 mb/d in 2009 to 86.2 mb/d in 2010, with the decline in demand from the OECD markets slowing and demand in non-OECD countries remaining strong, the latter due to the emerging markets including China, India, and the Middle East.
Metals & Mining
The upward trend in commodity prices and the demand in key markets such as India and China have been encouraging. However, the higher input costs and increasing capacities remain a concern. The outlook for the sector remains cautiously positive in both the short term and long term.
We expect the pharma sector to witness firm growth in the near term on the back of an increase in the volume of generic drugs and a rise in exports. Besides, under-penetrated CRAMs (contract research and manufacturing services) also hold a good opportunity for the Indian pharma companies.
Power generation in the country is likely to increase by ~6% in FY10, driven by a healthy growth in thermal and nuclear output. Power output is expected to go up on the back of greater supply of gas from the KG-basin and the improved availability of uranium.
The real estate sector has witnessed extreme volatility in Q3’10, with a spurt in demand for affordable housing in the residential segment and turbulence in the commercial property space
The telecommunication sector has undergone extreme turbulence in the third quarter of FY10 due to the roll-out of services by new operators and the introduction of the per-second billing plan that is likely to lead to a sharp decline in revenues of telecom companies.