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From MarketWatch, online at:
EARNINGS CONTINUE WITH FOCUS ON AUTO STOCKS
By John Satish Kumar
7:25 PM ET Jan 16, 2011
MUMBAI (MarketWatch) � Dalal Street, where Asia�s oldest stock market � the Bombay
Stock Exchange � is located, an unforgiving mood has settled of late.
The likes of technology bellwether Infosys Technologies � and India�s largest
mortgage lender, Housing Development Finance Corp. �, will vouch for the recent
testiness of investors, after their respective stocks got hammered despite decent
third-quarter earnings numbers last week.
This week, several key companies are scheduled to declare their numbers, and the
most anticipated of these is index heavyweight Reliance Industries Ltd. �. Others
that will also be watched closely are engineering-and-construction giant Larsen &
Toubro Ltd. � , consumer-oriented ITC Ltd. �, and the country�s largest lender, State
Bank of India �.
http://www.marketwatch.com/tvradio/player.asp?guid={3A190DB8-2852-484D-901F-B3675AEED1DB}&clip=&type=videoTogether,
these four companies have a 29.1% weighting on the Bombay Stock Exchange�s benchmark
Sensex �.
While Reliance�s and ITC�s numbers are due Friday, Larsen will declare its earnings
Monday. State Bank of India will be in the spotlight Saturday.
Going in Reliance Industries� favor is the fact that gross refining margins, the
earnings on converting a barrel of crude oil into fuel products, have been on the
rise. The regional benchmark Reuters Singapore gross refining margins are up 31%
quarter-on-quarter and up 90% year-on-year for the October-December period at
$5.50/barrel.
The company, both the country�s largest private-sector refiner by capacity and its
largest natural-gas producer, will also benefit from a 14% sequential rise in crude
prices during the quarter.
Indian engineering and construction firms are expected to ride a spending boom in
power, highways and housing by state-run and private companies. Larsen�s management
has guided for 20% revenue growth and 25% intake growth in the fiscal year to March
2011, whereas order intake for the quarter is expected to be in over 200 billion
rupees ($4.4 billion), around the same level as the previous quarter.
ITC, which produces cigarettes, packaged foods and also runs luxury hotels, is
likely to see a robust quarter despite rising input costs due to a slight rise in
cigarette volumes, where it can maintain its pricing power due to its stranglehold of
the market.
Despite the central bank tightening policy rates six times in 2010, bank loans for
the third quarter rose 24% from a year earlier and 400 basis points above than the
Reserve Bank of India�s estimate of 20%, as a rebound in the world�s second-fastest
growing major economy boosted demand for retail and corporate loans.
Bank stocks, however, have taken a beating in recent times in the face of runaway
food inflation, on fears that the central bank will tighten its screws on the economy
by raising rates to cool high prices. Despite robust numbers over the past few
quarters, State Bank of India has seen its expenses rise, mainly on staff costs and
provisioning for bad loans.
A continuation of this trend could see more pressure on State Bank of India�s
shares, which have lost 11% since the start of the year.
Autos in driver�s seat
-----------------------------------------------------------------------
While these companies are perennially on the watch for their size and importance,
which could point to other macroeconomic trends, automobile stocks will be in special
focus this quarter.
Coming off a year that saw record number of cars and two-wheelers being sold,
investors will be waiting to harvest the yields. In 2010, local car sales rose 31% to
1.87 million, motorcycles grew 27% to 8.66 million while those of scooters jumped 51%
to 1.96 million. Truck and bus sales grew 45% to 652,692 vehicles, according to the
Society of Indian Automobile Manufacturers.
Two-wheeler makers Bajaj Auto Ltd. � and TVS Motor Co. � kickstart earnings for
the sector this week.
One factor that investors will be watching closely is the impact of higher costs of
raw materials on margins, especially with insufficient price hikes to cover rising
costs.
Local brokerage Motilal Oswal estimates that, on average, earnings before interest,
taxes, depreciation, and amortization margins will decline 10 basis points
quarter-on-quarter, and about 300 basis points year-on-year, to 12.5% on the impact
of higher raw-material costs.
Recent price increases by auto makers should dilute the impact of the higher costs
and ensure some stability in operating margins in the next quarter.
Auto stocks have outperformed the benchmark Sensex over the past year due to
recovery in volumes and margin expansion as the economy bounced back from the global
financial crisis. The BSE Auto Index has gained 24.4% over the past 12 months, while
the Sensex has lagged with 7.4% gains.
Faced with the headwinds of hardening interest rates, steeper fuel prices and rising
raw-material costs, the Auto Index has underperformed of late, losing 9.5% since the
start of the year.
Risk-averse investors, already prone to profit booking amid weak markets, will
probably give these stocks the same treatment that was reserved for Infosys
Technologies and Housing Development Finance Corp. post-earnings. Unless, a bolt from
the blue brings the smiles back on their faces.
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