Some sectors likely to post impressive growth

Some sectors likely to post impressive growth

Overall, we expect a steady third quarter with aggregate trends similar to those in the second quarter of FY11. Real estate, media, oil and gas and technology are likely to be standout performers.

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We expect revenue growth for our universe of companies to be steady for the quarter (relative to the previous one) at 21% year-on-year (y-o-y). We expect strong performance from real estate, media, oil and gas, and technology companies. While we expect banks’ net interest income to be strong, we do anticipate a growth slowdown from the levels seen in the past two quarters. We look at each sector separately.

Banking: Margins and asset quality to be key themes, both largely mirroring the second quarter of FY11. Fee income and treasury gains are expected to remain muted. Final numbers for the second pension option liability will inflate costs. These could result in earnings pressure for some banks.

Cement: Demand for cement continued to remain muted owing to continuing political issues in southern India and unavailability of sand in few parts of western India. Cement companies under our coverage are expected to post around 10% y-o-y revenue growth backed by around 5.5% y-o-y volume growth and around 5% y-o-y realization growth.

Fertilizers: We expect Chambal Fertilisers and Chemicals Ltd to part reverse around Rs1,000 crore of marked to market loss on an interest rate swap accounted in the first half of FY11, which would lead to a sharp improvement in shipping division’s profitability.

FMCG: No large price hikes were taken during the quarter despite the inflationary environment and most of the growth is likely to be driven by volumes in our view. Rural markets could disappoint.

Media: We expect advertising revenues to grow 20% y-o-y and 11% sequentially due to festive season.

Metals: We expect non-ferrous metal companies to do better on the back of improving realizations, a story which will continue into the fourth quarter of FY11. We expect aluminium margins to be better than zinc’s in the third quarter of FY11.

Oil and gas: We believe rising crude prices is a concern for state-owned oil firms. Under-recoveries for oil marketing companies have increased to Rs19,000 crore in the third quarter, led by higher crude prices and inability of the government to raise diesel and liquefied petroleum gas prices.

Pharmaceuticals: There has been 4% and a 13% y-o-y adverse movement in the dollar and the euro, respectively, for the sector. Marked to market of inventory and debtors (adverse movement of 3% sequentially) is also likely to have a negative impact on profitability.

Power: Rising coal prices are positive for Tata Power Co. Ltd due to its exposure in Bumi coal mines, but negative for companies such JSW Energy Ltd that are dependent on international coal.

Real estate: Residential projects launched in the second half of FY10 and the first half of FY11 are expected to contribute to third quarter’s revenue.

We believe volumes will remain low for most of real estate developers in the third quarter of FY11 on account of steep price hikes taken during the quarter.

Infrastructure: We expect strong revenue and PAT growth. Margins are expected to remain healthy sequentially with some degree of operating leverage kicking in.

With new capacity additions across power plants, ports and airports coupled with strong traffic growth, most of the companies in our infrastructure universe are poised for a strong growth in coming quarters as well.

Shipbuilding: We expect the third quarter of FY11 revenue growth of around 37% in our coverage universe mainly led by Pipavav Shipyard Ltd, where the second Goliath crane has become partially operational.

Technology: The top four information technology companies are likely to post 6-7% sequential volume growth. However, revenue growth in rupee terms would be hit by average rupee appreciation of around 3.5% sequentially.

Telecom: We expect telecom firms to post strong 3-6% sequential revenue growth. We believe tariff wars in telecom space have eased significantly for mobile firms.

Edited excerpts from a report by ICICI Securities Ltd. Your comments are welcome at

Graphic by Yogesh Kumar/Mint