Here is what analysts are expecting from these sectors

Yesterday (http://www.moneylife.in/article/8/9771.html) we had written on how analysts are expecting the metals, financials, petrochemicals, engineering and retail sectors to come out with good numbers. Sectors like cement, telecom and real estate are most likely to be underperformers.

Fast moving consumer goods (FMCG), capital goods and information technology (IT) sectors are likely to perform in line with the Sensex growth. Between 1st July and 30th September, the index rose 15% to 20,069 points.

We continue our sectoral preview:

ENGINEERING

During the second quarter, the Index of Industrial Production (IIP) witnessed an uptrend. The IIP had an average growth of 13% between August 2009 and September 2010, while for FY10 it was 11%. The IIP growth indicates the demand traction for industrial goods from end-user segments. During the quarter to end-September, the Moneylife Engineering Index rose 8% to 2,263 points from 2,100 points as on 1st July.

Motilal Oswal Securities Ltd, in a research note said, "In Q2FY11 we expect engineering companies under our coverage to post revenue growth of 14% y-o-y, adjusted EBITDA growth of 18% y-o-y and adjusted net profit growth of 17% y-o-y."

Engineering firms are likely to report 16% y-o-y growth led by a pick-up in execution across companies as also the low base effect, which had been impacted sharply due to the slowdown.

During the quarter to end-September, prices of steel and copper increased by more than 50% from their Q1FY11 levels.

"For Q2FY11 we expect revenue growth of 14% y-o-y, given a pick-up in execution in the power and infrastructure segments. Growth is being driven largely by BHEL, Crompton and Thermax. We expect them to post 2QFY11 revenue growth of 17%, 14% and 35% y-o-y respectively," said Motilal Oswal. 

Going forward, as capacity utilisations across key sectors pick up, order-books of capital goods companies are likely to rise sharply, resulting in accelerated revenue and profit growth.

Factors to watch out for the engineering sector are order inflows, execution and operating margins.

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Source: Motilal Oswal Securities Ltd

FMCG

Over the past three-four months, most FMCG companies increased product prices by 5%-10%. However, this has not affected sales or volume growth yet. A normal monsoon and receding inflation would help FMCG companies because of benign agri-input prices and improved pricing power. During the second quarter to end-September, FMCG companies continued to launch new products, particularly in the foods & beverages (F&B), personal care and household care categories. During the quarter to end-September, the Moneylife Consumer Products (FMCG) Index rose 10% to 288 points from 261 points as on 1st July.

"We estimate our FMCG coverage universe will post Q2FY11 sales growth of 18.2% y-o-y, higher than the 16.2% growth posted in 1QFY11. We estimate 16.9% growth in EBITDA compared with 13.8% in the previous quarter. EBITDA margins are expected to decline 20 basis points (bps)
y-o-y as against the 40bps decline in Q1FY11 as selective price increases and lower prices of a few inputs will restrict margin contraction. We estimate PAT growth of 15.3% in Q2FY11 compared with 13.5% growth in the first quarter," said Motilal Oswal.

In the recent past, most FMCG companies have witnessed a sharp rally and are currently trading at peak valuations compared with their historical averages.

Factors to watch out for in the FMCG sector are advertising & sales promotion (ASP) expenses, agri-input prices, raw material costs compared with sales and rural demand.

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Source: IDFC Securities Ltd

Information Technology (IT)

The IT industry continues to witness a surge in volumes due to the sudden spurt in demand for discretionary spend by clients. The trend in spending is broad-based spanning industries as well as service lines. The nature of spend has seen a shift since Q1FY11 with deal discussions relating to change-business initiatives like consulting and package implementation as well as engineering and research & development (R&D) spend gaining strong momentum. During the quarter to end-September, the Moneylife Software and IT Services Index rose 13% to 387 points from 342 points as on 1st July.
Motilal Oswal said, "We expect the top-tier IT companies to continue to grow in Q2FY11, posting 4.7%-6% sequential growth, driven by broad-based demand. We expect Infosys to outperform its peers with 6% q-o-q growth."

During Q2FY11, the dollar depreciated against major currencies like the euro, pound and the Australian dollar by 1.5%, 3.9% and 2.5% q-o-q, respectively. The rupee also depreciated by 1.9% q-o-q against the dollar. This is likely to result in higher rupee revenues as well as aid margins to the tune of 60-70 bps q-o-q, said another brokerage.

Factors to watch in the IT sector are attrition outlook, discretionary traction and performance in the EU.

Going forward, says Motilal Oswal, "We expect IT demand revival in FY11 with 19%-25% volume growth and Q2FY11 results will reinforce this expectation. We prefer playing the sector through companies that gain from pick-up in discretionary demand, better operational scope and greater MNC off-shoring."

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Source: Motilal Oswal Securities Ltd

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).