The quarter ended December 2008 was a tumultuous one for corporate India as the global slowdown and liquidity crunch hit most sectors. As the results pour in, sectors like auto, real estate, steel and cement are likely to lose momentum and show decline in profits. The banking sector is expected to display good results for the December quarter buoyed by sustained credit growth rates and treasury profits. Even telecom and pharma are expected to outperform the others.

The effect of the global financial crises was witnessed at home and the quarter saw a steep drop in the benchmark 30-share Sensex. In line with the global peers, the Indian stock markets witnessed a massive exodus of capital in October as investors continued their shift away from riskier asset classes.

The quarter too saw extreme volatility. The BSE Sensex fell by 23.8% in October, further fell 7.2% in November and recovered around 6% in December. In fact, the index has now seen four consecutive quarters of losses. It has happened for the first time after the 2001-02 dotcom bust when globally governments and companies drastically reduced their IT budgets.

The FII net sales during the quarter in Indian equities was Rs 15,750 crore and domestic mutual funds, which bought stocks worth nearly Rs 11,000 crore till September 2008, bought only Rs 660 crore in the December quarter. Even foreign direct investment played truant as there was a sharp slowdown in FDI inflows into India from June last year onwards.

The quarter also saw a series of rate cuts by banks after the government announced the first part of the stimulus package. Though the CENVAT relief provided by the government has been passed onto consumers in terms of reduction in prices, its impact will be only in terms of cushioning the slowdown rather than boosting demand. Analysts are optimistic that RBI measures in terms of lowering interest rates could improve the scenario for the economy two to three quarters down the line.

Lalit Thakkar, director of research at Angel Broking, expects about a 4% year-on-year (YoY) increase in revenues for the Sensex companies for the quarter ending December. However, he cautions that a 140 basis points contraction in margins on the YoY basis would lead to a 3% decline in earnings for Sensex companies in 3QFY2009. ?While the slowdown in economic activity and demand for products and services can be attributed to the muted topline growth, higher input costs on YoY basis coupled with the pressure on revenues will lead to the bottomline de-growth. Higher interest costs and depreciation charges would also contribute to lower profits,? he says.

The quarter results are likely to be a mixed bag with sectors like telecom, pharma and banks likely to remain unaffected. Says Kaushal Sampat, CEO, Dun & Bradstreet India, ?Market leaders, with visibility in earnings and strong order book positions, will post good numbers. However, for the mid and small-sized companies, the order book position was not strong enough to warrant strong results. As private capital expenditure slows down, those companies with larger exposure to this segment will face greater pressure.?

Software

The $52-billion Indian IT and back-office outsourcing sector has been reporting good growth for the past few years, but with the global slowdown, IT companies are expected to show sluggish growth for the quarter ending December. A weak rupee, which depreciated by around 10% in the last quarter, will give some solace to the entire IT sector. But the depreciating rupee will also put pressure on the forex hedging. However, analysts expect a 15% increase in revenue, which would more than compensate the loss of most of the IT companies. The BFSI domain has been under pressure for most large Indian IT companies and domains like retail and manufacturing will come under pressure in the next few quarters. Defying the global slowdown, IT bellwether Infosys Technologies posted a 33.5% increase in net profit, which was much above the market expectations. Interestingly, despite the slowdown in the US, the company?s revenue from North America market increased 2.2 percentage points from 62.3% in December 2007.

As in the past, the company has benchmarked cautious earnings per share for the year to March at $2.23, down from $2.24 projected in October. This would indeed be a remarkable feat to achieve given the current market dynamics and also the fact that they added 30 new clients in the quarter ended December 2008 as compared to 47 in the same quarter in 2007. The company became a trendsetter by giving a detailed account of where its Rs 9,686 crore worth of cash and equivalents are parked.

The global slowdown took a toll on Tata Consultancy Services, which posted a 7.2% rise in net profit and 4.7% revenue growth quarter-on quarter. The profit growth was aided by higher revenue mix from cost-effective offshore centres and global delivery locations.

The surprising part was the more-than-expected forex losses during the quarter. The company had a forex loss of Rs 250 crore, of which Rs 45 crore were mark-to-market losses and the rest hedging losses. The company, unlike Infosys Technologies, has been able to maintain pricing discipline.

The outlook for the sector for the next four to six quarters would remain uncertain. A recent Forrester Research report says that global business and government spending on computer, software and communications products is expected to decline by 3% this year.

But the silver lining, says the report, is that tech spending would rise by about 9% next year as companies abroad will look for efficient software solutions. This would mean new business for Indian IT companies and they need to now move up the value chain to stay ahead of competition.

Banking

Analysts expect banking sector to be the star performer for the quarter ended December given the strong bond market rally throughout the quarter and also substantial treasury gains. The credit growth has moderated from the levels of 28-30% last year to near 24% in December 2008, which is still quite robust. This is expected to manifest in the growth in net interest income of banks. Moreover, the steep fall in reserve requirements (CRR fell 400 bps between August 2008 and January 2009) also aided the banks in maintaining comfortable liquidity and protecting their margins.

Some early results from Axis Bank and HDFC show that private sector banks are reporting encouraging results despite the sequential margin pressure because of flight of deposits to PSU banks. HDFC Bank?s net profit grew by 45% as against the same quarter in 2007 and Axis Bank reported 63% increase in net profit.

The dampener though would be the expected rise in non performing assets (NPAs) of banks as was evident from Axis Bank and HDFC Bank where it has increased. Lalit Thakkar of Angel Broking does not rule out an increase in NPAs but underlines that an increase in NPAs will not materially impact the book values of banks.

Though the quarter would show positive results, pressure on margins would become more visible from the subsequent quarters due to re-pricing of successive PLR cuts and higher deposit costs.

Going forward, Sampat of Dun & Bradstreet feels that the falling rate scenario might take a stronger hit on the net interest margins of banks, as repricing of deposits might be slower than expected. ?Asset quality remains a concern, especially on retail assets. Changes in asset classification norms on restructuring have the potential to camouflage asset quality in bank books. Banks are under increasing pressure to direct credit towards needy sectors, which might overplay delinquency concerns,? he says.

Automobiles

The sector reported a continued decline in sales, rising inventories and shrinking export orders throughout the quarter. After reporting 12.1% yoy growth, the sector?s volume declined 9.3% yoy in October and further 10.4% in November 2008. The sector is expected to deliver muted earnings performance in for the quarter ended December due to slowdown in overall auto demand.

Sales of commercial vehicles were worst hit with Tata Motors reporting a 57% decline in yoy sales and Ashok Leyland reporting 58% decline in sales in M&HCV segment. Even the two-wheeler segment is not spared as Hero Honda reported a decline of 4.0% and Bajaj Auto reporting 34.7% decline in sales. Huge dispatches in the month of September and October last year led to an inventory build-up at dealer?s end.

Despite the interest rate cuts and cut in fuel price, consumer sentiments is still not upbeat which is why the macro-economic factors surrounding the industry are not showing any signs of recovery. But with companies planning new launches, it might give some fillip to the volume numbers in the months to come.

Rise of commodity prices especially steel impacted margins of auto companies during the first half of last year, but with cost of raw materials coming down, which accounts for about 70% of all cost for auto companies, margins would regain and companies will have to address the piling inventory.

Oil and Gas

The drop in crude price was a mixed blessing. While oil marketing companies benefited, the performance of upstream companies was affected as their refining margins came under pressure which fell the most in November. The drop in retail prices has also attracted private players like Reliance Industries and Essar Oil to look into the business once again.

Softening of gross refining margins and inventory losses due to declining crude prices is likely to impact the margins of Reliance Industries and Essar Oil. In fact, RIL?s refining margins dropped to $13.4 per barrel in the quarter ending September from $15.7 per barrel in the quarter ending June last year. It is expected that Gas Authority of India Limited will show an impressive sales growth because of higher transmission volume. ONGC?s gross average realisation during Q3FY09 is expected to be US$59.0/bbl, while the net realisation is expected to be $44/bbl after offering discount to the OMCs, according to a report from brokerage house Prabhudas Lilladher. ?If the crude prices continue to remain below $40/bbl, ONGC?s margins will come under pressure,? the report adds.

Telecom

Defying the slowdown, telecom sector is seeing growth with a record 21 million new subscribers being added in the three months ending December quarter. Aggressive marketing strategy, lifetime plans and greater geographic coverage added the magic figure. Even on the BSE, the basket of telecom stocks outperformed which dropped 21% as compared to 25% drop of the Sensex. And with a significant number of global players willing to bid for 3G spectrum, the sector will see growth prospects ahead.

Going forward, the next few quarters would be even more challenging for corporate India and the actual impact of the slowdown will be felt more. A recent Dun & Bradstreet Composite Business Optimism Index (BOI) for the first quarter of the next financial year says it has declined by as much as 31.1%, which is the lowest since the index was developed seven years ago. On a YoY basis, the BOI recorded its largest ever decrease of 43%. The survey has six optimism indices ? volume of sales, net profits, new orders, inventory levels, selling prices and employee levels, all of which have declined compared to the previous quarter, giving cues about the things to come.