MOST eyeing 8-10% profit growth this qtr

Q: A key downgrade for a lot of brokerages this time around is the financials and the fear of what kind of mark-to-market (MTM) loss there will be, particularly for some of the PSU banks? What are your thoughts on that?

A: I think the MTM losses will be the dominating part of their P&L account this quarter. Although we still cannot forecast what it will be for the year, this quarter you will see a meaningful part. But surprisingly our interaction with many bankers suggest that while there would be MTM losses, there are still a lot of moving parts by which they can try to offset this and would still be able to show net profits. In fact, in a few cases, you will be able to see growth in net profits coming from these PSU banks. As far as the private space is concerned, I think there the growth numbers will still look exciting.

Q: You think because of these forex issues, etc, you could actually see net profit growth for the Sensex universe only at about 10% and is the market ready for that number if it is delivered?

A: I think so because these losses are well calculated on the earnings model of almost all analysts.

Q: Give us a quick word on energy and what you are expecting from that whole basket this time around?

A: On oil and gas space, overall our aggregate profits are showing a decline because I think the way Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation (IOC) to be reported they are going to drag down the profits because there is still some level of uncertainty on the unfounded deficit, which is going to come this quarter. As far as Reliance Industries is concerned, while the gross refining margin (GRM) have been stable, I think the petchem cycle will continue to hurt the profits and in case of Oil & Natural Gas Corporation (ONGC), it all depends how much accounting they would be doing for the subsidy sharing. So I think that space is something, which is going to be quite uncertain in terms of the aggregate profits for this quarter and for the year.

Q: What is your sense of what happens between Q1 and Q2? At this point, from the data that you have, can you predict that Q2 will be worse than Q1 or not a done deal yet?

A: I think Q2 would be more challenging than Q1 because of a couple of factors. First is that all the cost hikes that we are seeing across industries will come and start impacting the margins with some lag and secondly the kind of CRR hikes and rate hikes we have seen in the last couple of months will also start making impact on not just the banking sector, but also the overall system per se. So my sense is that Q2 margins and toppline growth is something which maybe more challenging than Q1 right now.

In Q1, one would still be riding from the strong growth that you saw in Q4, but the current quarter really has seen some more deterioration on some of these macros, which is going to have some impact on the Q2 numbers.

Q: The one thing that really sour sentiment when we wrapped up the quarter and the year was what happened with capital goods, Bharat Heavy Electricals Ltd (BHEL), Punj Lloyd, what are you expecting to see from cap goods over the next two quarters?

A: From the capital goods space, we are still averaging around 25% topline, EBITDA, bottomline growth. The good thing is the order book of almost all these companies still remains very strong. So I think this year's numbers are still not at risk, but how the order book gets further filled in during the year is something which will drive their earnings for the next year.

As far as next two to three quarters’ business is concerned, I think they have sufficient orders right now in hand to take care of it. As far as margins are concerned, overall we are expecting flat margins for most of these companies because the large companies would still be able to manage because either they have contracted orders at good margins or they have a back-to-back order arrangement. But I think the margin pressures would be more evident as you go down the radar in the space.

Disclosures:

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.