The Reserve Bank of India (RBI), for the first time, has released the detailed results of its Professional Forecasters’ Survey. The macro numbers had already been disclosed in its pre-credit policy statement on Macroeconomic and Monetary Developments in 2007-08, but the other data are new.
Interestingly, the median forecast for the Bombay Stock Exchange’s (BSE) Sensex index at the end of the first quarter of 2008-09, i.e., at the end of June 2008, is at 16,907 points, not too far from current levels.
The median forecast for the Sensex is 18,235 at the end of September and 19,431 at end-December. The forecasts range between 16,500 and 18,000 for end-June, 17,000 and 18,500 for end-September and 19,000 and 20,000 for end-December. Very clearly, nobody’s expecting the Sensex to go back to its all-time highs this year, but the good news is that they’re not expecting a drop to the lows of March either.
A slow but steady rise seems to be the consensus.
Surprisingly, in spite of the worries about slowing earnings growth, the estimates for corporate profits assume a rising trajectory. The median forecast for the growth rate of profit after tax for all firms listed on BSE is 21.3% for the June quarter, 22.6% for the September quarter and 23.1% for the December quarter. Since the forecast is 24.7% for the full fiscal year, growth in the March 2009 quarter is assumed to be much higher than for the other quarters. It is this rising tide of profits on which the Sensex is expected to go up.
These microforecasts seem to be correlated with the median forecast for the index of industrial production, which shows steadily rising growth of 8.4%, 8.5% and 8.6% in the June, September and December quarters, respectively. The repo rate is assumed to be unchanged from the current level, which is a relief. Wholesale price inflation is expected to remain almost flat.
Forecasts such as these have proved to be notoriously unreliable in the past—in January, nobody had forecast the Sensex to fall below 15,000 levels. The International Monetary Fund also has to routinely revise its forecasts, sometimes within a couple of months.
But the worst case forecast of 19,000 for the Sensex at the end of December will provide some reassurance.
Commodity price surge dents Apollo Tyres
Apollo Tyres Ltd had been riding smooth for much of the last fiscal year, thanks to steady volume growth, a better product mix and stable raw material costs.
In the nine months till December 2007, consolidated net profit more than trebled to Rs194 crore, from just Rs60.7 crore in the year-ago period.
Taking cue from the impressive results, the company’s shares more than doubled between April 2007 and early January.
But things changed drastically in the January-March period. The prices of both rubber and crude (some of whose derivatives are used by the firm) rose by 26% during the quarter. Profit growth narrowed substantially to just 34%, which evidently disappointed the market, as the shares fell more than 6% on Friday.
Raw materials account for 70% of the selling price of a tyre, and the entire jump in costs would be difficult to pass on to customers. Everything else remaining the same, prices would have to be raised by more than 20% to completely offset the above-mentioned increase in raw material costs and to maintain the operating margin of around 13% achieved in the first nine months of the year.
For raising prices, tyre companies are already facing the ire of their dealers, who have reportedly asked the finance minister to abolish the import duty on tyres. If that happens, competition from Chinese manufacturers will severely dent margins.
What’s more, in its desperate fight against inflation, the government is probing suspected cartel-like behaviour among major tyre makers.
Given these developments, the outlook on profit growth looks bleak. While the company has diversified by entering the South African market through the acquisition of Dunlop Tyres International (Pty) Ltd, the Indian business still accounts for about four-fifths of revenues and profit. Another worry is the slowdown in commercial vehicle sales, which has hit sales to the original equipment manufacturer segment. But like last year, the replacement market (which now accounts for around 70% of revenues) could come to the rescue.
It’s no wonder Apollo Tyres’ shares trade a price-earnings multiple of about 7.5 on trailing earnings, reflecting the commodity-like nature of the business.
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