• The rupee
has depreciated from around 67/$ to 74/$ during the quarter and will be the key to growth for the IT
and the pharma
sector. However, there might be cross currency headwinds for the IT
sector. Management commentaries and growth outlook in the digital arena should hold the key for IT
stocks in tier I and tier II names. New launches expected in the complex generic space and cost optimization should enable Pharma
companies to report stable EBITDA margins on a sequential basis.
• Bond yields
have gone above the 8% mark and despite the RBI maintaining status quo in the October policy, the impact of 2 rate hikes will be visible in the performance of rate sensitives like banking, NBFCs, realty, and auto companies. Banks with a retail franchise are expected to better than corporate books.
• Commodity prices
will be the major theme in the quarter. While copper and aluminum prices fell post-June, there has been some recovery post-August. On the oil
front, upstream oil
companies will benefit on higher crude prices but downstream companies like HPCL
are likely to come under pressure. The subsidy is expected to wipe out 50% of the profits of downstream oil
companies. Thus, should, however, play out in the coming quarters. Albeit, the movement of rupee
and crude shall be key monitorables, as they have an impact in terms of sensitivity to earnings.
• The big question mark will be over FMCG
and consumer companies. Rural demand may be visible in the third quarter and a lot will depend on the efficacy of the MSP.
Delayed festive season and Kerala floods to impact the financials of consumer companies. Also, the higher input costs due to higher crude prices will hit most of the FMCG
companies. They may not be able to sustain growth at the robust levels of the previous quarter. However, most of them have taken price hikes. Also, Q1 had a benefit of low base and again management commentaries have hinted to volume growth reverting back to mean levels from this quarter. Consumers discretionary spending in the aftermath of the rising crude prices and the impact on demand is to be observed from results and management outlook from FMCG
/ consumer staple companies.
The first signs of weakness were visible in the monthly numbers of August and September. In fact, September was disappointing across the board as the high base effect played a role. In addition, Kerala floods in August and delayed festive season are likely to dent earnings
of auto companies. However, the second quarter is likely to be stronger for companies in the HCV and the MCV segments. Overall, auto is likely to disappoint on the top line front. In fact, the normally robust passenger vehicle companies are most likely to disappoint. Higher input cost and discounting whether 2 Wheeler or 4 Wheeler might impact margins. However, festive season and demand coming back should ensure volume reverting to normalized levels in the coming few quarters.
Banking and other financial companies
The big story is likely to be the impact of IL&FS
issue on banking
space. While the actual impact could still be one quarter away, it
remains to be seen how many NBFCs
and banks are willing to make a clean breast of the potential losses on IL&FS
in the current quarter itself. With bond yields
well above the 8% mark, higher cost of credit is also expected to compress margins. For most state-run banks, the issue of NPAs is likely to be paramount. Recovering and upgrades hold the key. Of course, credit costs will hit both the PSU banks
and the private banks too. While the impact on NBFCs
will be visible in the third quarter, many of the NBFCs
may look to take a bigger hit in the September quarter to underplay expectations. Provisioning might remain elevated for most PSU’s/ corporate retail banks because of aging-related NPA’s, power related distress and delay in resolution of NCLT cases. NBFCs
might be under pressure for the broader universe.
companies have been correcting sharply in the second quarter on the back of weak cement
price and higher fuel costs. Competition and monsoon seasonality will keep prices subdued. The highlight of the construction
companies could be the road construction
companies to report strong financials due to robust order book. It
remains to be seen as to what will be the impact of the IL&FS
fiasco on the results of road companies since a lot of toll roads have been either funded or structured by IL&FS.
This is the one sector that could disappoint on the top line. Rising crude oil
prices and a depreciating rupee
will dent margins. Volume growth likely to be subdued due to a higher base and also because the demand push really has not come through in this quarter. Margin expansion is likely to be hit by rising crude prices and rupee
plunging. While the growth has been a lot more robust in the rural areas than in urban areas, the full impact of the MSP
is likely to be seen only by next quarter. Also if the actual MSP
realized by the farmers are lower than anticipated then the impact on these stocks could be limited.
These are the two sectors most likely to see positive signals from a weak rupee
and the impact is already visible in the stock prices of these companies. The second quarter could see high-growth digital business and large transformational wins as well as the advantage of a weak rupee
which will aid their dollar earnings.
stocks, the rupee
impact will continue to be positive. However, the June quarter of 2017-18 was marked by GST restocking and that base effect will dent the growth of pharma
sales in this quarter on a YOY basis. Fundamentally, the US generics business faces pricing pressure due to competition.
Upstream and downstream oil
Upstream companies like ONGC and Oil
India will continue to benefit from higher crude prices which are already at $84/bbl ahead of the Iran sanctions. Higher gas consumption and the doubling of LPG prices will help gas companies. And they could see robust numbers this quarter. Refining companies could face pressure on the GRM front but the higher valuation of inventory will bail them out. Oil
marketing companies will face pressure on marketing margins due to crude. In addition, there is the worry of subsidy hitting them in the third quarter.
Disclaimer: The above opinion is that of Mayuresh Joshi (Fund Manager -Angel Broking Ltd)