Q2 Results – How the New Economy is likely to fare?

New economy is something hard to define. But we have used some broad highlighters to guide our decision. For starters, sectors that have grown recently will fall under that definition. This includes internet, media, IT and telecom companies. We also include sectors that are catering to niche global segments due to a clear price arbitrage. Pharmaceuticals and to an extent IT fall into this category. Lastly, we have also included companies with a strong intangible franchise which brings in the FMCG stocks also into the new economy mould…

IT remains a big mystery…

If HCL Tech disappointed with its warning, then Infosys and TCS disappointed with a muted guidance for the coming quarters. Of course, TCS prefers to call it a qualitative management commentary but the gist is the same. Cross currency headwinds are likely to wipe out 80 bps while the rupee depreciation will add 80 bps this quarter. The impact is likely to be largely neutralized. The big challenge for IT will be overall growth which is likely to be as low as 3% on an average due to a mix of pricing pressure and weak demand. Digital looks to be the next big challenge for the IT sector and there is some preparation time as digital constitutes a very small component of revenues for India’s top IT companies.

Telecom will be about the big 2…

The telecom story will eventually boil down to the two key listed stocks viz. Bharti Airtel and Idea Cellular. For Bharti, the overhang of its African acquisition continues and weak end-markets. The biggest challenge will be the voice business which is likely to decline this quarter by 3-4%. The stand-out may be Idea Cellular which is likely to grow its voice business in spite of the overall weakness. Also Idea does not have the African worry, unlike Bharti Airtel. It is likely to be a quarter of muted growth overall with net profit margins under pressure.

Pharma could still stand out…

The pharma sector is still driven by the US market and this is likely to be a big boost as the US has showing aggressive growth in the last few months. The big takeaway for the pharma companies will be the EBITDA margins which will continue to be above 25% for most of the tier-1 pharma companies. For example, Lupin and Reddy will have EBITDA margins closer to 25%, while Sun is likely to have EBITDA margins closer to 30%. That will ensure that their rich valuations will sustain. Smaller pharma companies with a larger proportion of non-US business may face a tough quarter.

Media and Internet could be a surprise package…

Let us admit that in terms of influence and market capitalization, this sector is still at its embryonic stage. Unlike IT, Pharma, telecom and FMCG, this sector does not have heavyweights and hence the performance at a sectoral level is likely to be more heterogeneous.  Among the broadcasters, Zee and Sun TV are likely to show strong growth of 27% and 14% this quarter. However, profit margins for both these companies may remain subdued. Both the companies are likely to see a sharp growth in ad revenues. Among the other sectors, PVR is likely to be the outperformer in the multiplex space while the internet space is likely to be dominated by Just Dial. With 29% margins, the stock stand out among the internet stocks as it relies less on eyeballs. The new search engine is likely to boost its fortunes in the next few quarters.

FMCG will be hit by weak rural demand…

This sector has two heavyweights viz. HUL and ITC which can substantially impact the index. HUL already reported a fall in profits and weak top line growth and ITC is also likely to be hit by de-growth in the cigarettes segment. Among the two leading companies, margins will be low due to pricing pressure. In fact, these companies are passing on most of the benefits from lower input costs to the end consumer. The outperformers within this sector could be the niche players like Britannia, Marico and Godrej Consumer, who are likely to sustain higher margins!

Overall, this quarter could take away some of the charm of new economy companies. Probably, pharma may give some room for hope.

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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