Sectorwise Outlook in slowdown economy: Auto and IT

Automobile sector will continue to face challenging times, as the pressures of last financial year (FY08) have only intensified.
According to analysts tracking automobile stocks, higher oil prices and interest rates remain key threats to volume growth while sharp rise in input prices would pose a challenge for margins.
While auto majors have been able to keep up the demand by offering huge dealer-level discounts, another round of price hike is just a matter of time as input costs continue to rise.
With soaring inflationary pressures, there will be a limit to which the market will be able to absorb the hike. Consequently, the bottom line of automobile companies would increasingly be under pressure.
Passenger car sales (of Tata Motors) would continue their declining trend with a 12% Y-o-Y fall in volumes. It is estimated That an EBITDA margin decline of 10 basis points quarter on quarter (Q-o-Q), but flat Y-o-Y to 9%. This would result in the adjusted PAT declining 9.3% YoY.

Interestingly, in the case of Hero Honda, CLSA says margins will see a sequential decline due to higher promotional spend as the company was a sponsor in the Indian Premier League cricket tournament during the first quarter. However, on an Y-o-Y basis, the company is likely to outperform with 38% PAT growth, driven by 11% Y-o-Y volume growth.

Meanwhile, India Infoline feels that Maruti could surprise negatively as it has been the least capable of passing on price hikes, largely on account of competition from Hyundai and GM.

IT sector may not be that bad:
The June quarter might not be as bad for IT sector as many have feared amidst the slowdown in the US economy. Indeed, many analysts expect a slightly better growth rate than that of the previous quarter ended March, 2008. This is expected to be reflected in the bottom line of these companies.
The aggregate net sales of the top five IT companies, as estimated by broking firms, are expected to witness around 30% growth compared with the same quarter last year. This is relatively high compared with the 24% Y-o-Y growth in net sales seen for the quarter ended March, 2008.
Going by estimates, Infosys is expected to surpass its net sales guidance figures for the Q1 of the current financial year. Infosys has given a revenue guidance of Rs 4570 cr-4582 crore for the quarter ended June, 2008.
TCS, however, has been more cautious and has indicated weak growth.
People have built up so much negative perception that if it meets estimates or outperforms, there could be a rally. Apart from TCS, which is expected to grow 1.5% in revenues, others are expected grow 3%-5 % sequentially. Both the TCS and HCL Tech stocks have been beaten down compared to their peers.
HCL Tech has a bigger hedge and is expected to be hit by forex losses. Similarly, Satyam Computer Services also has $1.1 billion in hedges, of which 40% are in forward contracts. This is expected to hurt its bottom line although it will benefit from lower cost of wages because salary hikes for employees are not given out in the first quarter, unlike most other IT firms.
The depreciation of the rupee is a major factor in bringing cheer for the IT companies. The rupee has depreciated against all the three major currencies, US dollar, euro and British pound, the domestic currencies of those countries from where the Indian IT companies get more than 80% of their revenues. —