Forecast is bullish: Fourth-quarter results expected to be robust

MUMBAI: If the weak-kneed markets are looking for support, here's one: Consensus estimates for India Inc's fourth quarter (Q4) results - due in April and May - show that analysts are bullish on most sectors and sector leaders.

A Religare Securities analyst bets, the Q4 results should be better than Q3 for most sectors and companies.

Look at the auto sector first. Good volumes, both domestic and export, are expected to make toplines robust. For instance, the passenger car segment has grown by 24%, medium-heavy commercial vehicles have grown by 35% and light commercial vehicles by 36%. Though the two-wheeler segment seems to be subdued with just 13% growth, motorcycles are growing faster at the rate of 15%. Says Dipesh Sohani, auto analyst with Investsmart Securities: "The indications are that toplines of leaders like Tata Motors, Maruti and Ashok Leyland will be better during Q4."

However, analysts expect operating margins to come under pressure, thanks to sharp rises in input prices, high depreciation and bulging staff costs. Says Sohani: "The two-wheeler segment may see more pressure, which will see a margin impact."

As far as the media sector is concerned, Q4 is expected to be decent for broadcasters. Says Priyank Sinhgal, media analyst for Edelweiss Securities: "With the cricket World Cup on, advertising revenues of industry leaders like Zee Entertainment should perk up." The poor performance of the Indian cricket team may dent that somewhat, but few analysts expect Q4 profits to be dented too much. Adds Ashish Gupta, media analyst with KR Choksey Shares and Securities: "For the media industry, this Q4 is going to be the best part of the season."

Analysts are equally bullish on the FMCG sector. The consensus is that FMCG companies should do well in Q4 since a few festivals fall during this period. Analysts expect FMCG companies to report mid-teen to high-teen growth.

The consensus is equally bullish on the power sector, which is expected to churn out improved figures for Q4. However, Q4 may not be as good as Q3 for the power sector. Consider: bottomlines of power industry leaders jumped up during Q3 because of tax refunds and that will surely not happen in Q4. Says Emkay Share's power analyst Mehul Mukati: "However, Reliance Energy should report higher profits for Q4 because of other income."

The big divide is about banking sector's performance. Though private sector banks are expected to show improved operating margins, public sector banks might come under pressure. That is because of standard asset provisioning. Says an SSKI Securities spokesperson: "With bond yields moving up, there could be some surprises on the negative side as far as public sector banks are concerned."

However, most analysts expect the Q4 growth of pharma companies to be stable at 15%. But, year-on-year growth for major pharma players is expected to be around 25%. Says Manoj Garg, pharma analyst, Emkay Share and Stock Brokers: "Quarter to quarter, major pharma companies will show an average growth of 8-10%." That is because March is a low quarter for pharma companies.

Moving over to infotech sector, analysts expect a sequential growth of 7% for most large IT companies, both in topline and bottomline. Says Krupal Maniar, IT analyst for Emkay Share and Stock Brokers: "The Q4 performance of IT companies will be in line with market expectations." Moreover, IT companies should report quarter to quarter improvement in margins.

Even cement is expected to fare better in Q4, despite the budget hiccups. The consensus here is that Q4 figures should be better than Q3. Says Manish Balwani of Emkay Share & Stock Brokers: "Since demand is higher in Q4, this quarter will naturally be better than the previous quarter." Another reason is that prices have been fairly stable across the country. So, you can expect a volume growth of 8%. Though it sounds good, it is lower than the 17% growth seen during the last quarter.

Even the oil and gas sector should perform better, though upstream companies like ONGC are expected to be slightly subdued because of higher subsidies. Since there was a price cut in November and February, net realisation is expected to be lower.

As far as telecom is concerned, most telecom analysts are bullish, particularly on players like Bharti and Reliance, as their Q4 figures are expected to be better. Says an industry analyst: "Quarter to quarter, I expect all the telecom companies to come out with heartwarming performances."

In capital goods, analysts are gung-ho. With most projects coming on stream as scheduled, the sector is expected to do better. Says Mukul Jain, capital goods sector analyst for Prabhudas Lilladher: "The payback period will be longer for future projects, but growth should continue."

Q4 is generally the best quarter for the capital goods sector. Reason: much of the revenue accrues during this quarter. Moreover, with the costs of inputs beginning to moderate — excise and customs duty have been slashed on steel and copper —there is no reason why Q4 should disappoint.

Finally, hotel industry analysts expect a better Q4. Demand is growing at 8% per annum and new supply is not coming up fast enough. Hotel capacities are not expected to move up at least for another 18 months. Says Pratik Dalal, hotels analyst for Emkay Share and Stock Brokers: "You should particularly expect hotels with diversified properties to do well."

CFA Bill 2007

The Council of Chartered Financial Analysts (CCFA) was established as a not-for-profit society at Hyderabad in 1988 for the development and regulation of the profession of Chartered Financial Analysts (CFAs) who have been examined and certified in various aspects of financial analysis by the Institute of Chartered Financial Analysts of India (Icfai).

During the last 20 years, Icfai has been focusing on the research and educational aspects, whereas CCFA has been focusing on the development of the CFA profession in India. We now have over 4000 CFAs in India and abroad who have completed the CFA Program offered by Icfai.

CFAs are engaged in a number of professional activities relating to the investment industry, banking, insurance and the corporate sector. Most of them are employed by portfolio management companies, asset management companies/mutual funds, investment banks, securities research firms and the corporate sector. Many of our CFAs are also working in similar job profiles abroad.

Icfai & CCFA have been working on nurturing the CFA profession right from its inception and have brought it to the present level. It is now time to take it even further. In this regard, it was proposed to approach the Government of India for an appropriate legislation to establish the CFA profession on statutory lines. As the work of CFAs mainly revolves around the investment industry and millions of investors participate, directly or indirectly, in the capital markets, there is a strong need to establish the CFA profession on statutory lines to protect the investors` interests.

In this connection, CCFA has prepared a draft bill, "The Chartered Financial Analysts Bill, 2007", which has already been submitted to the Ministry of Finance, Govt of India for consideration. Some of the salient features proposed in this bill include :-

• Constitution of the Council of Chartered Financial Analysts by the Central Government, and consequently the CCFA Society will be merged with this new Council.

• This new Council will regulate the profession of Chartered Financial Analysts.

• All members of CCFA shall be entitled to become the CFA members of the new Council as per the Regulations.

• A Board of Governors of the Council shall be constituted for managing the Council, and carrying out the responsibilities as per the various provisions of this Act. In the management structure envisaged in this draft bill, the Central Government will play an important role with six nominees on the Board. It is also proposed to have two nominees from SEBI, one from RBI, one from IRDA and two from stock exchanges (like BSE and NSE). In addition, there will be (a maximum number of) 24 persons elected by the CFA members.
  

Indian Textile : Losing Momentum?

- N Janardhan Rao and Ravi Babu Adusumilli

Dismantling of quota regime which promise to unleash Indian textiles on the world map is, however, yet to deliver. For the first time, after disman- tling quota restrictions in textile exports, the Indian textile industry is facing fierce competition from Asian countries.

Though, in 2005, China and India recorded an impressive growth in textile exports, the growth momentum slowed down considerably in 2006. Other Asian countries such as Indonesia, Pakistan, Bangladesh and Vietnam recorded high growth rates posting a dramatic surge in their exports to the US markets. The import curb on certain categories by the US in January 2006 under a special WTO dispensation was the major reason behind the slackening textile exports from China; whereas, in India's case, it is the lack of competitiveness in the synthetics segment. Growth rate of Indian textile exports to the US apparel market has declined during January-September 2006 to 10.75%, compared to a growth of 30.56% in April-October 2005. Moreover, there has been a substantial dip in unit value realization too.

Currently, India has a share of 5% in both the US and EU textile and garment markets3-4% in synthetics and over 10% in cotton textiles. Despite indirect tax structure in the textile industry for the past three years, a host of other factors are hampering India's international competitiveness. High cost of synthetic raw materials attributable to an effective 15% import tariff, and power and inflexibility in labor management are the principal reasons for India losing out on the competition in western markets. The US and EU markets have been dominated by the synthetics segment, which accounts for 60% of the apparel market in these countries. Due to high raw material prices, Indian exporters have become weak in synthetic and blended textiles and clothing. Besides, the high import duties have been hampering the usage of syntactic and man-made fiber in India. With the high cost of synthetic inputsthey are much cheaper in China and IndonesiaIndia's growth in the US and EU markets gets virtually restricted to the cotton textiles market where it has already got a reasonable market share. According to a status paper prepared by the textiles ministry, exports are estimated to touch Rs. 81,616 cr in 2006-07, up from Rs. 75,621 cr in 2005-06 and Rs. 63,024 cr in 2004-05. Together, the US and the EU account for 62% of India's textile exports.

New horizons

Indian textile companies, across product categories (apparels, denim, home textiles) are today in the process of expansion and deepen their footprint and access global markets. In the process, several Indian companies own textiles units in the US, Europe and central Asia either through Greenfield investments or by acquiring the existing facilities. North India- based Vardhman Group, Ginni Filaments, Abhishek Industries and Spentex Industries are looking to acquire spinning mills in Central Asian countries. Being closer to huge markets is the prime objective behind all these acquisitions; as also, to benefit from better production economy from plants located in the Central Asian and Southeast Asian countries. Global retail giants like Wal-Mart, JC Penney, Gap and branded apparel marketers such as Calvin Klein, Lacoste and Sara Lee have been attracted to India for the resourcing.
In addition to acquisitions abroad, Indian companies are forming alliances and joint ventures with their global counterparts which have strong front end capabilities. The strategic rationale behind these alliances are aimed at accessing global markets, tap technological know-how, design skills and branding and retailing abilities. For instance, Welspun India has taken stake in Christy and Raymond's has partnered with overseas textile houses such as UCO NV, Belgium and Gruppo Zambaiti, Italy. In the retailing side too, Indian companies are increasing the number of outlets. Raymond's is reasonably successful with their brands such as color plus and companies like, Welspun and Himatsingka are taking steps towards branded apparel stores.

Import curbs on China by the US and EU in certain segments has opened up additional trade opportunities for India and is likely to gain market share in categories such as cotton knit shirts, where volumes have doubled. While China has a major edge in attaining economies of scale by virtue of competitive bulk production, India has advantages in terms of flexibility to adopt new designs faster and supply even smaller orders. China has already been supplying machinery to major Indian manufacturers. They have been supplying raw materials to Indian companies. India can offer its design capabilities and finishing skills to create synergies with Chinese manufacturers.

Dampening the growth

Textile sector is the key to both India and China from the overall economic development perspective. While China enjoys technology and pricing edge over India, the gap is expected to narrow as the Indian textile industry is expected to get technologically upgraded in the next couple of years. As most of the units are in the small-scale sector Indian players are unable to compete with China. In order to improve competitiveness of Indian textiles industry, the textile ministry has already approved 26 textile parks under the Scheme for Integrated Textile Parks (SITP). Many of the parks are in various stages of implementation. Besides, the government has recently approved another 24 parks at a cost of Rs. 1,000 cr. The textile ministry also wanted SEZ-like benefits for SITPs and a full SEZ status for four out of the 26 parks. Big companies having direct access to retail stores are trying to get into local tie-ups where non-critical jobs could be outsourced to small and medium entrants in the adjoining areas. This ensures that the big companies remain focused towards customers and their requirements.

Currently, the Indian textile industry has a size of $46 bn. To increase its size to $85 bn by 2010 needs investments of $31 bn and at least $8 bn of this should be FDI to avail themselves of the funding under Technology Upgradation Fund (TUF), which offers loans at 6% subsidy and due to expire in March 2007. Hence, most of the companies have timed their expansion plans after FY2004, which, has led to peaking in capex garments in the textiles sector in the last two years. These benefits will occur FY2008 onwards as the investments in the sector have already been made, or in last leg of completion. Investments are estimated to touch Rs. 33,000 cr in 2006-07, of which Rs. 25,000 cr will be made through the TUF Scheme. Indian companies should upgrade their textile infrastructure to compete globally and the government has to help the industry in rationalizing the tax structures for sourcing textile equipments. It needs to attract aggressive foreign investment in the entire textile value chain from not only the US and EU companies, but also from those of Korea, Taiwan and China.

The major concern for textile companies is slowdown of the home textiles market, for which India is the low-cost producer for the US and European markets. Indian companies have made substantial capital expenditure to increase the capacities, but have failed to realize the volumes in 2005. Competition from Pakistan and Turkey would hamper this segment's prospect. On the other hand, companies have been slow in ramping up the apparel capacities to garner orders from buyers who are diversifying from China. India's inflexible labor laws have been a barrier to investment, besides a drop in denim prices as a result of excess capacity built in 2005. Having a surplus production of cotton may not be sufficient to meet the global demand. Hence, for some time now, prices remain high impacting the operating margins.

Going forward, exports as well as domestic markets are expected to drive future growth in the industry. In the exports front, the large outsourcing orders by retail giants as part of the de-risking strategy and imposition of caps on certain import segments from China by the US and EU have opened up opportunities for India. On the other hand, a growing young population, rising household income levels and organized retail would help in expanding the domestic market.

BASEL II

It's going to be a testing time for the Indian banking sector as it ushers in the new Basel II norms.
-Amit Singh Sisodiya and Sanjoy De

From March 31, 2007, all commercial banks in India have to adhere to the new international capital adequacy norms, thanks to Basel II. This new Accord, which is an advanced version of Basel I, provides a comprehensive measure and minimum standard for capital adequacy. It aims to align the regulatory capital requirements more closely to the underlying risks that banks face. Moreover, these regulations are intended to promote a more scientific approach to capital supervision, and develop the ability to manage risks as well as encourage enhanced market discipline.

Know your risks

Basel II Accord is based on three mutually reinforcing pillars—namely, minimum capital requirements, supervisory review, market discipline—that attempt to achieve comprehensive coverage of risks and enhance risk sensitivity of capital requirements. Pillar I ensures that banks calculate their risks accurately and maintain adequate capital to cover risks. Three types of risks, i.e., credit risk, operational risk and market risk, come within the ambit of Pillar I. The second pillar provides the much-needed regulatory support to Pillar I, re-equipping regulators with much improved "tools" over those available under Basel I. The third pillar is designed to allow the market to gauge the overall risk position of a bank and allows the counterparties of the bank to price and deal appropriately. This new Accord emphasizes on the treatment of credit risk in a more scientific manner and also treats operational risks explicitly. The methods for measuring credit risk have been categorized as: (a) Standardized Approach: The risk weight for sovereign (Government and Central Bank), interbank, corporate and, non-corporate accounts will be based on External Credit Assessment Institution (ECAI) ratings, (b) Internal Rating Based (IRB) approach: The risk weightage and capital charges are determined based on the qualitative inputs provided by the banks themselves.

The Basel II will require banks to provide capital against operational risk for the first time. Also, the capital charge for market risk was not prescribed until recently. From its side, the RBI has issued a policy framework allowing the banks to issue instruments such as innovative perpetual debt (tier I) instruments, perpetual non-cumulative and redeemable cumulative preference shares (tier I) and hybrid debt instruments (tier II) so as to enhance their capital raising capability. According to the RBI Annual Report for 2005-06, leading domestic banks will be the first to implement these revised capital adequacy rules, while the relatively weaker banks will be allowed to continue with the current Basel I guidelines. In fact, it is expected that only 5-6 major Indian banks are financially in a position to initiate the new stringent norms within the stipulated time period.

Pros and cons

In the new financial regime, banks will be more willing to lend to the priority sectors like Small & Medium Enterprises (SMEs), as it will cost less to make provision for such loans. This is because risk weightage for such loans will be clipped to 75%, from the existing 100%. This implies that priority sector bank lending will get the same weightage as the retail lending under the new norms. "Priority sector lending is likely to improve after the implementation of Basel II norms in March 2007. Hitherto perceived as a high risk portfolio, banks are redefining the SME concept. There will be more customized and product-wise approach to the SME lending," according to a PwC source as quoted in The Economic Times.

The higher risk sensitivity of the norms provides little incentive to lend to borrowers with declining credit quality. Generally, during economic recession, corporate profits and ratings tend to aggravate. This can instigate banks to call off lending to the corporates with falling credit ratings at a time when these companies will be in desperate need of credit. Notwithstanding, the Basel II norms are expected to impact the global financial system considerably. Compliance to the Basel II norms will require a vast pool of historical data and adoption of advanced techniques and softwares for estimating risk. This will inevitably translate into huge demand for IT and BPO services. So, in the post-Basel II period, banks will increasingly give attention to Information and Communication Technology (ICT), especially information security, to maintain their standard globally, which will invariably escalate costs of the banks. Small and medium-sized banks will find it really hard to finance such high implementation costs of the norms. If the banking sector regulator ordains a compulsory implementation of these norms, weaker banks will have no other option but to merge with other banks. Therefore, it is expected that banking sector will witness increased consolidation in the form of mergers and acquisitions. The speculation is high that the new financial order may hasten the exit of innumerable small banks and lead to the emergence of a few robust banks.

Further, as per the RBI guidelines, the new Accord is applicable only to scheduled commercial banks. This may have an undesirable effect: Banks under the norms may charge customers a higher price for day-to-day banking activities to compensate for the additional cost of operational risk capital. As a result, customers may move to banks that charge lower rates, since these institutions will not be required to adopt the new RBI capital adequacy norms. This may lead to a situation where the customers have the incentive to opt for riskier banks.
According to a study conducted by Aptiva Consulting, the risk managers in India are charting a lonely course in the implementation of Basel norms. The survey reveals that RBI has maintained a prolonged silence that may have diluted the urgency for banks to ratchet up their compliance levels. More than 65% of banks initiated the implementation mode without a preceding planning exercise. Nearly 50% banks are ill-equipped to assess and report operational risk loss data. Moreover, the survey notes that most of the banks find it hard to make a cost-benefit analysis on how much the implementation will cost and to what extent banks can benefit from the Accord.
Indian banking system consists of 85 commercial banks, which account for about 78% (total assets); over 3,000 cooperative banks, which account for 9%; and 196 Regional Rural Banks, which account for 3% of the entire financial sector. Taking into consideration the size and complexity of operations of these diverse institutions, the capital adequacy norms applicable to these entities have been maintained at varying levels of stringency. Given the differential risk appetite across banks and their business philosophies, it is likely that banks will "self-select" their own approach, which in turn, is likely to provide a stabilizing influence on the system as a whole.

Gearing up

In January 2006, the RBI has permitted banks to raise hybrid capital (tier I and tier II) in domestic currency. Subsequently, in July 2006, the banks were given permission to raise capital in foreign currency too. UTI Bank was the first Indian bank to resort to foreign currency hybrid route to augment capital base. In early August, UTI Bank raised $150 mn of 15-year subordinated upper tier II bonds in the international market. India's second-largest lender ICICI Bank also announced a $340 mn perpetual debt offering, the first of its kind from India, while the state-run Bank of India is looking to raise $200 mn via the 15-year debt. State Bank of India (SBI), the largest bank in the country, plans to raise $200 mn through tier II bonds in the overseas market. HDFC Bank, another major bank in the country, has raised Rs. 200 cr through a hybrid issue. The bank has filed a shelf-prospectus that allows it to mobilize up to Rs. 400 cr. A host of other banks are also looking to raise money from both the domestic and overseas markets. UCO Bank and Indian Overseas Bank are looking forward to raise more than Rs. 2,000 cr via bonds and hybrid issues in the current fiscal year. According to banking experts, a hybrid debt offering is about 7-8% cheaper than an equity stake sale. "The rapid loan growth and the upcoming Basel II norms have obliged banks to shore up their balance sheets and it is cheaper and attractive to issue debt," commented a banking analyst in The Economic Times. Strong economic growth in India, averaging 8% in the past three years, has prompted renowned international rating agencies like Fitch and Moody's to upgrade India's sovereign ratings, thereby, helping the banks to sell debt issues in the international markets.

The Basel II capital norms are basically meant to be implemented by banks with global operations, but it is the discretion of the national banking regulators whether to extend it to the entire banking sector in the country or not. The RBI, however, has not indicated anywhere as to which banks need not implement Basel II norms from March 31, 2007. In reality, the banks in India must have heaved a sigh of relief when the governor of RBI hinted that the implementation date was likely to be reviewed. Thus, it is very much likely that in the post-March 2007 scenario, Basel II, Basel I and non-Basel entities will be operating simultaneously in the Indian banking sector

Is Reliance buying Carrefour or is it...?

RIL is on an aggressive growth strategy to increase its retail business. Towards this end, it was said to be looking out for big-ticket acquisitions globally. According to unconfirmed reports, Mukesh Ambani is getting ready to go shopping with a whopping USD 50 billion - enough to buy Corus eight times over!
The news doing the rounds yesterday indicated that RIL was looking to acquire French retail company Carrefour, or a couple of its many subsidiaries. Carrefour is world's third-largest retailer, which has a chain of 12,000 stores and saw sales of 93 billion euros last year.

However, according to a Dow Jones report, Carrefour SA has denied that it is in talks with India's Reliance Industries Ltd to sell part of its capital or create a joint venture.
Reliance has declined to comment on the matter

Reliance wants a bite of Retail Giant Carrefour

RIL wants a bite of retail giant Carrefour. The company is in preliminary talks to pick up one or two of Carrefour subsidiaries. A deal could be likely by June, reports CNBC-TV18.

It is the season for big-ticket acquisitions and Mukesh Ambani is keen to join the party. RIL is going retail shopping and wants a piece of the world's third-largest retailer Carrefour.

Currently, Carrefour operates across 29 different countries and has a chain of 12,000 stores and saw sales of 93 billion euros last year. So that should explain why RIL couldn’t go after Carrefour itself. What is however possible and likely is RIL picking up one or two of Carrefour’s many subsidiaries.

RIL could look at picking up the supply-chain and commodities trading subsidiaries. Talks are said to be in preliminary stages but a final agreement is likely before June. This move is expected to strengthen RIL's supply-chain management and also help improve its sourcing abilities.That is not all - RIL is also said to be eyeing, an international tier-II retail chain.

Names doing the rounds are UK's Sainsburys and Marks and Spencer’s foods. While the names get bigger, so does the war chest. Unconfirmed reports suggest that Mukesh Ambani is getting ready to go shopping with a whopping USD 50 billion. That is enough to buy Corus eight times over! While the Ambanis are known to think big, this may be more than even they can chew.

CFA Group At Yahoo Joins Finalysts Blog

Yahoo Group Serving CFA (Chartered Financial Analysts) From ICFAI University, Hyderabad has now joined BLOGGERS for generating higher level of activities & to reach masses. This Blog has been named on the same lines (Finalysts=Financial Analysts) Http://Finalysts.Blogspot.com

However, Unlike the CFA YahooGroup (http://finance.groups.yahoo.com/group/CFA-icfai-university) The blog welcomes all other financial experts & analysts also to discuss their views & publish articles & more. This blog welcomes all Mba(finance), CIIA, CFAs, CAs etc for higher level of activity generation. All CFAs or those persuing CFA can join CFA-ICFAI Yahoo group by clicking on the above link or by submitting email address in the box given in right side pane.

To post any message/article on this blog, the same shall be forwarded (fully formatted with justified formatting & reasonable font size) to SumitkGupta08.Incfa@Blogger.com & as soon as the post is approved by the moderator, your post will appear on the homepage of this Blog. Your name will appear as the publisher of the post.