• SEPTEMBER 30, 2003

September quarter: A prelude

It's the result season again and investor interest in the same is palpable. In the run up to the September quarter, the markets have behaved volatile in the last 2-3 weeks. They witnessed a minor correction in the same period. While the prospects of India Inc. seem promising, we take a look at the major sectors and see as to what may be in store for them in the September quarter.

Let us first take the core sectors like cement and steel. As far as cement is concerned, the September quarter is usually subdued both on the demand as well as realisations fronts. This is due to the slowdown in construction activity due to monsoons. So, to that effect, sales volumes of major players in the sector may be subdued, while realisations may continue to remain weak, carrying forward the weakness they witnessed in FY03. However, in the forthcoming quarters both demand as well as realisations are expected to firm up and hence one may look forward to a better December quarter. Over the long-term, with construction activity picking up pace both in the road infrastructure and housing sectors, the cement industry seems to be in for better times ahead.

Growth in the steel sector on the other hand has been mainly driven by strong improvement in realisations. Realisations have held their ground, indicating that the September quarter may be another strong period for steel companies. However, in the long-term, we would like investors to realise the fact that steel is a cyclical industry and we do not expect steel prices to sustain this high ground beyond FY04. Thus, investors in this sector need to keep a careful tab on the cyclicalities of the industry. However, we would also like to point out that there might be positive surprises in the future as economic growth of the country speeds up, which will mean further investments in infrastructure in the country. The steel sector will play a crucial role in the same.

Among the new economy sectors, the software sector is likely to show performance similar to the June quarter. While realisations seem to have stabilized, the much expected volume growth is restricted to a few large players in the sector. With better recognition of the Indian offshoring model, MNC have set up shop in the country to fully benefit from the advantages of the same. While this has put pressure on domestic software companies, it was expected that higher volumes would compensate for the fall in margins due to competition. However, the large sized orders are taking more time than they expected. Despite this, in the long-term, optimism is warranted as Indian software companies grow large (both in terms of size and recognition) enough to handle large sized orders that are evading them at present.

The banking sector that has seen considerable interest in the recent past is also likely to see a not too exciting September quarter. For one, while banks are likely to witness strong growth from the retail segment, credit offtake from the corporate segment may however remain subdued (temporarily). However, one may not rule out the possibility of corporate credit picking up shortly as their capacity expansion plans firm up. Due to high liquidity and the RBI's policy of soft interest rates (leading to rapidly falling yields), the net interest margins of banks are likely to be under pressure. Also with gains from G-Sec investments stabilizing we may not see significant improvement at the net level for public sector banks. We may also see improvement in the asset quality of public sector banks as they utilize treasury gains to clean up their books. Private sector banks might witness good performance on their topline as well as bottomline front due to their inherent efficiencies and customer focus. This may also be at the cost of business for larger public sector banks.

Energy sector too may witness more of stability in their September quarter results as the positive effect of the dismantling of APM wears off, i.e., a higher base effect prevails. In the long-term, however, growth in this industry is likely to mirror the economic growth and hence, growth will be predictable to that extent.

While this article has not covered all the sectors, the indications are that India Inc. seems to have certainly entered a higher growth trajectory. This has been aided by the fact that in the last 3-4 years Indian companies have devoted time to improve internal efficiencies and hence they are well poised to capitalize on the growth opportunities that the economy presents in the long-term. However, as a word of caution, individual stocks may always outperform the sector and vice versa. Thus, the need of the hour is to pick and choose carefully.

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