Pre Earnings Report March 2010

Macro Economic Trend

We expect GDP growth for FY10 at 7-7.5% with the economic recovery continuing to gain momentum, as indicated by the continual uptrend in industrial production (16.7% in January and 17.6% in December) and the sustained increase in bank credit growth at 16.74% for FY10 ahead of RBI estimates. Furthermore, exports grew for the fourth straight month in February. However, inflation remains a key concern in the near term with the 9.9% WPI inflation in February 2010 exceeding the 8.5% baseline projection of the RBI.

Automobiles

The Automobile sector is expected to post a good show in the March 2010 quarter. The sector continued to traverse on its growth trajectory on the back of the success of its new product launches, improved consumer sentiments, and increase in the disposable income. Moreover, as the commodity prices remained stable in this quarter, the margins should replicate the Q3’10 level.

Banking

We foresee an increase in the credit off-take in the Banking sector in the near term, primarily on the back of an increase in the economic activity and an increasing penetration of the country's Banking industry. However, we expect an increase in the banks’ cost of funds in the light of the recent hike in the CRR and repo rates. Further, RBI has mandated a coverage ratio of 70% that is to be met by all banks by September 2010, which will lead to an increase in the provisioning expenses.

Cement

As the construction season is at its peak, the cement industry has been able to pass on the recent hike in excise duty and rising input costs partially to the end-consumers in the form of higher realisations. The prices were hiked by Rs.8-11 per 50 kg bag in March'10, over and above the Rs.4-10 per bag increase in January–February'10. The industry also reported a strong volume growth between January and March'10.

Construction

Backed by robust order books, the Construction sector will return to its growth trajectory in Q4’10. Besides, with the Government reiterating its stand on infrastructure development in Budget 2010- 11, a steady stream of order inflow is expected for the Construction sector. The Government has allotted Rs. 1.73 tn for infrastructure development and increased its allocation for developmental programmes.

FMCG

The FMCG sector is presently experiencing an upsurge in demand from rural as well as urban consumers. Consequently, we foresee a healthy top-line growth in FMCG companies in Q4’10. However, high inflation is a concern with respect to the top-line growth. Despite rising volumes, FMCG companies are foreseen to experience contracting margins during the quarter, owing to high raw material costs and increased advertising expenditure. Nevertheless, the Government has included initiatives in the Union Budget 2010-11 to drive the demand in the near-to-medium term.

Industrial Machinery

The Industrial Machinery sector is expected to show ~10-12% growth for the March 2010 quarter. The capital goods companies continued to witness robust order inflow during the quarter on the back of the Government of India’s (GoI’s) ongoing plans of revamping the Power sector of the country and the continuously recovering industrial activity. The GoI plans to establish an integrated National Power Grid in the country by 2012 with generation capacity of close to 200,000 MW and inter-regional power transfer capacity of 37,700 MW.

Information Technology

The IT industry’s net sales are expected to grow ~8% during the March 2010 quarter due to the increase in business volumes, following the acquisition of new clients primarily driven by improvement in demand outlook especially in the US and the UK. The growth will be driven by volume than pricing gains as post the economic downturn the clients of IT companies have become increasingly cost-conscious. As a result, the IT companies are trying to increase business volumes.

Oil And Gas

Crude oil prices declined more than 9% in January’10 but turned around sharply in the next two months to finish 5.54% up YTD in March’10, averaging nearly USD 76 /barrel for the quarter. The International Energy Agency expects global oil demand to average at 86.3 mb/d in the March’10 quarter, up 0.3 mb/d compared with the previous quarter.

Metals and Mining

The major metal categories, copper, aluminum and steel are undergoing a period of high demand and escalating prices. However, the increasing inventories of these metals restrict a further sharp price appreciation in the near term. The Transportation, Building & Construction and Electrical sectors are on a growth trajectory, bringing forth opportunities for the Metal industry. Moreover, the Government has emphasized on infrastructure development in the Budget 2010-11, which works to augment the revenue in the near-to-medium term.

Pharmaceuticals

Sales in the drugs and pharmaceuticals industry is expected to grow at a healthy pace in Q4’10, driven by a jump in the export volume, despite the appreciating rupee. Additionally, the domestic demand for drugs is expected to aid the top-line growth in the near term. However, we believe that profitability will remain muted owing to an increase in raw material prices and strengthening of rupee against the dollar.

Power

We expect power generation to maintain robust growth of 7-8% in FY11, driven by a healthy growth in nuclear and thermal power generation as fuel supply improves. Coal availability is likely to improve with production in India expected to grow at a healthy pace in FY11, while imports are also expected to rise strongly. Furthermore, Indian public and private entities are acquiring coal mines abroad to ensure an enhanced supply of coal.

Real Estate

Residential real estate sales have picked up in the last six months, especially in the low-cost and mid-income housing categories. Going forward, we expect these segments to continue to drive sales, especially due to market expansion by developers in the Tier-2 and Tier-3 cities. Even though some banks have increased the interest rate on loans by 25-50 bps, demand is still foreseen to head north.

Telecommunications

The Telecommunication sector is undergoing a period of declining revenues and profits as a result of the hyper-competition among the incumbents and new entrants. This scenario is likely to deteriorate in Q4’10 as the adoption rate of the new billing plans, including the pay-per second plan, increases. Besides, the new subscribers are largely rural customers or are those with multiple SIMs, thereby recording low usage. Moreover, we expect the initial spurt in subscriber additions of new entrants witnessed in Q3’10 and even in January’10 to have mellowed down as promotional plans terminate