SECTOR WATCH PHARMA Fewer new launches and price erosion impact growth FMCG Sales & profit growth rate maintained

OUTPERFORMS SENSEX OUTPERFORMS SENSEX MARKET MARKET 8.19% RETURNS 1.52% RETURNS 

he pharmaceutical sector has made erosion on key products. 29.5 per cent on account of lower ast moving consumer goods (FMCG) for Colgate Palmolive, Godrej Consumers, foods. The net profit increased by 17.6 per Ta subdued start to the financial year. The first quarter net profit grew on ac- research and development and other Fcompanies have maintained growth in and GlaxoSmithKline Consumer. cent due to modest rise in depreciation The net sales growth of the sector was 14 count of decline in net profit for Ranbaxy, administrative costs from Taro. Despite sales on the back of higher volumes and ITC’s net sales increased by 19.6 per provision (p 5 per cent). Colgate Palmo- per cent and net profit at 9.4 per cent. and . Aurobindo Phar- the tax credit, the high depreciation increase in the product prices. cent on account healthy growth in agri- live reported a 15.6 per cent rise in net This was the second consecutive quarter ma reported a net loss of ` 123 crore on charges on account of Taro consolida- The softening of commodity prices culture, paper and paperboards and FM- sales, driven by a strong volume growth of single-digit growth in net profit for the account of a one-off payment for FCCB tion, the net profit decline by 11.2 allowed FMCG firms to maintain CG segments. The net profit growth comes in toothpaste. sector, whereas the net sales growth has redemption while Wockhardt came back per cent. profit growth. from cigarettes, hotels and agri busi- The operating margins fell by over 700 hovered 13-14 per cent for five quar- in the black with net profit of ` 194 crore. Dr Reddy’s Labs reported a strong Operating margins declined by around ness. The operating margins declined by bps due to increase in raw material cost ters in a row. Ranbaxy reported net profit of growth in sales, driven by US formula- 80 basis points as the cost of raw material 24 bps mainly due to higher material costs by 320 bps compared to a year ago level. The lower growth is partially influ- `243 crore, which includes a forex gain tions (up by 47.7 per cent). Despite new rose faster at 28.8 per cent compared to (up 28.24 per cent). Tax outgo increased by 8 per cent due to enced by Ranbaxy’s sales growth of `112 crore. Excluding forex gain and product launches the domestic formula- sales growth of 20.51 per cent. The net prof- reported a 14.8 per cent rise in net sales, rise in tax rate to 27.3 per cent of profit be- (-2.3 per cent), which is not compara- assuming $20 million of generic Aricept tions continued its sluggish performance. it rose 22.41 per cent, driven by ITC, driven by personal products, exports fore tax. As a result, the net profit declined ble given that the base period includes sales under exclusivity, the adjusted net The company’s operating margins how- Britannia and Godrej Consumer. Four com- and process food segments. by 17.7 per cent. one-off income from Valacyclovir. Sun profit was at `1.1 crore. ever decline to eight quarters low due to panies trimmed ad-spends on an absolute Operating margins declined by 8 bps What helped the companies in main- Pharma, Dr Reddy’s Labs and Lupin out- Sun Pharma reported a 19.8 per cent high employee costs (up 26 per cent) and basis, while seven cut it, in terms of per- due to rise in raw material (up 25.65 per taining a robust sales growth is their focus performed the sector, their rise in net sales, largely driven by Taro promotional expenses in Russia. The net centage of sales. cent) compared to net sales growth of 14.81 on the rural markets. HUL, for example, net sales growth rate impacted by lack (31 per cent of the total sales). Operat- profit was up 25.4 per cent on account The margin pressure was seen across per cent. Advertising spends were stepped set up as many rural retail outlets last year of significant US launches and price ing margins on sales remained strong at lower tax rate. all firms, but it was significantly higher up in personal products and packaged as they did in the previous five years.

Quarter ended Sales OP NP Quarter ended RM to sales Emp cost to salesTotal exp to sales Quarter ended Sales OP NP Quarter ended RM to sales Advt cost to sales Total exp to sales (` crore) Jun-11 % Chg Jun-11 % Chg Jun-11 % Chg (In %) Jun-10 Jun-11 Jun-10 Jun-11 Jun-10 Jun-11 (` crore) Jun-11 % Chg Jun-11 % Chg Jun-11 % Chg (In %) Jun-10 Jun-11 Jun-10 Jun-11 Jun-10 Jun-11 Ranbaxy 2,093.12 -2.32 108.12 -2.26 243.24 -25.32 Ranbaxy 35.75 39.02 17.51 20.01 91.59 91.32 ITC 5767.47 19.57 1716.93 18.62 1332.72 24.52 ITC 37.17 39.87 Na Na 66.68 67.34 Sun Pharma 1,635.72 19.83 482.72 -16.16 501.00 -11.22 Sun Pharma 24.59 24.89 9.13 17.03 54.88 66.53 Hind Unilever 5503.89 14.81 616.65 14.04 627.16 17.62 Hind. Unilever 51.04 55.85 15.67 11.50 87.60 87.78 Dr Reddy's Labs 1,978.32 17.54 260.23 6.69 262.74 25.38 Dr Reddy's Labs 29.92 29.47 19.22 20.60 79.71 80.61 Nestle 1763.05 20.20 302.02 17.56 213.83 9.75 Nestle India 49.03 49.45 Na Na 80.41 80.79 Cipla 1,591.42 7.55 299.29 5.73 253.34 -1.58 Cipla 45.29 41.99 9.30 10.76 77.17 76.78 India 1204.58 31.44 149.71 22.25 127.74 19.62 Dabur India 47.40 52.21 16.44 12.58 85.17 86.29 Lupin 1,567.74 17.50 247.22 1.19 210.08 7.02 Lupin 37.74 39.35 13.34 13.99 78.69 81.22 Britannia Inds. 1106.29 21.36 39.51 27.78 41.80 27.32 Britannia Inds. 65.49 65.59 7.50 7.44 95.52 95.43 Aurobindo Ph. 1,076.87 16.77 -201.10 - -122.80 - Aurobindo Ph 49.72 53.24 10.68 11.44 81.38 114.48 Marico 1048.62 33.17 108.22 15.68 85.00 15.27 Marico 42.77 48.66 11.91 9.76 86.59 88.07 Cadila Health. 1,245.69 9.87 263.20 0.60 229.82 15.38 Cadila Health 28.75 29.06 11.48 12.96 74.16 76.08 Godrej Consumer 997.84 39.57 126.89 7.05 239.29 94.24 Godrej Consumer 49.32 49.03 10.36 11.74 82.09 85.69 Wockhardt 1,053.21 14.28 269.07 - 193.96 - Wockhardt 44.24 35.62 14.25 12.44 103.84 70.85 GlaxoSmith C H L 653.38 21.59 87.23 8.89 82.46 14.93 GlaxoSmith C H L 29.34 32.64 13.99 15.31 83.36 84.92

IT Staff cost, tax outflow dent profitability BANK Margin pressure on rising rates

UNDERPERFORMS SENSEX UNDERPERFORMS SENSEX MARKET 22.37% MARKET RETURNS  RETURNS 13.34%

ecent economic events in Europe and became the third largest IT player by beat- due to salary hikes and higher tax outgo. he listed public and private sector banks profit for the entire sector for the first time count. HDFC Bank, the second largest pri- RUS, especially the debt downgrade of ing . But it is not listed in India. The revenue growth gap between Wipro’s Treported a moderate rise in the net in- after several quarters of healthy growth. vate bank in India, reported a 33.7 per cent the latter, have raised concerns for the Among the top four players, operat- and Technologies, TCS and HCL terest income (interest earned + other in- However, if one takes into account SBI’s rise in net profit, supported by other in- Indian IT sector as it earns more than 80 ing margins of TCS fell by 187 bps to 26.2 Technologies continues to be high. The come – interest expended) due to mod- numbers, the net profit of the sector falls come and a decline in provisioning com- per cent of its revenues from these markets. per cent year-on-year, mainly due to in- higher staff cost and increase in tax out- est credit off-take and pressure on mar- to - 2.99 per cent. pared to previous quarters. The NIM re- In the April-June quarter, the sales crease in employee costs which rose by go resulted in marginal rise in net prof- gins led by rising rates. SBI, the largest bank, reported fall in mained unchanged at 4.2 per cent as the growth for the software services compa- 38.95 per cent. TCS’s margins at 26.2 per its. HCL Technologies reported significant The NII growth rate declined by almost net profit for the second consecutive quar- bank was able to pass on the higher cost nies continued to remain strong. On year- cent are now the highest in the IT Services expansion in margins on SG&A leverage 40 per cent – from a healthy 26-28 per cent ter. Its net profit fell 45.66 per cent at of deposits to customers. on-year basis, the top four companies re- industry. The increase in the tax outgo and pricing. Its net profit rose 62 per cent. in the preceding three quarters to 15.43 ` 1,584 crore against ` 2,914 crore year- results were ported sales growth of 25.3 per cent. TCS by 33.7 per cent due to no tax benefits Operating margins will continue to per cent. Though banks have increased on-year. India’s largest private sector strong on the income front, but higher than and HCL Technologies outperformed In- under STPI hurt net profits. The latter grew be under pressure because of high revenues lending rates, the lag effect of rise in fund- lender, ICICI Bank’s, standalone net prof- expected provisioning had an impact on fosys Technologies and Wipro. The net prof- at a slower pace at 26.7 per cent, compared in foreign currencies whereas only two- ing costs and increase in savings deposit it grew at 29.9 due to base year effect the profits which grew marginally by 3.4 it of the top four firms, however, grew at to the previous three quarters. thirds of the total employee costs and rates has impacted operating margins and lower provisioning. The NII increased per cent. The NII increased by 20.3 per a slower pace at 18.3 per cent due to de- Infosys, India's second largest software half of the total costs are billed in rupee by almost 400 basis points. The provisioning by a modest 12.2 per cent due to higher cent, outperforming top two private banks, cline in operating margins by over 150 ba- exporter, reported 20.8 per cent rise in net terms. This will adversely impact margins went up 24 per cent due to higher provi- cost of borrowing and decline in other ICICI Bank (up 10.4 per cent) and HD- sis points. sales and modest 15.7 per cent rise in net when the rupee strengthens. Typically, sions for non-performing assets by public income. The reported NIM declined by 10 FC Bank (up 17 per cent). The bank re- TCS and HCL Technologies’ net prof- profit. The margins took 224 bps slide (291 every one percentage appreciation in ru- sector banks, excluding State Bank of bps due to higher cost of deposits. ported a 7 bps decline in NIM, even as the it growth was higher than Infosys Tech- Q/Q) – the steepest it has ever witnessed pee-dollar impacts operating margins by India (SBI). Employee expenses were on the high- cost of deposits has gone up by 64 bps quar- nologies and Wipro. Cognizant Technology in the past nine years – on the back of nearly 40 bps. There was single-digit growth in net er side due to salary hike and higher head- ter on quarter.

Quarter ended Sales OP NP Quarter ended Emp cost to sales Tax to PBT OPM Quarter ended NII OP NP Quarter ended Int inc to int exp Provision to OP NIM (` crore) Jun-11 % Chg Jun-11 % Chg Jun-11 % Chg (In %) Jun-10 Jun-11 Jun-10 Jun-11 Jun-10 Jun-11 (` crore) Jun-11 % Chg Jun-11 % Chg Jun-11 % Chg (In %) Jun-10 Jun-11 Jun-10 Jun-11 Jun-10 Jun-11 TCS 10797.02 31.39 2824.92 25.68 2414.76 26.69 TCS 36.98 38.95 17.21 21.64 27.35 26.16 SBI 19162.49 13.75 9575.32 17.40 2512.47 -25.34 SBI 60.66 60.72 30.79 51.64 3.18 3.89 Wipro 8564.00 18.35 1495.20 3.17 1334.90 1.24 Wipro 40.64 41.12 15.03 18.77 20.03 17.46 Punjab Natl.Bank 4198.95 20.31 2473.93 17.91 1105.07 3.44 Punjab Natl.Bank 56.49 62.54 25.46 36.12 3.91 3.84 Infosys 7485.00 20.76 1952.00 11.23 1722.00 15.73 Infosys 54.57 56.71 25.38 28.10 28.32 26.08 ICICI Bank 4053.81 10.41 2234.03 2.10 1332.20 29.85 ICICI Bank 65.75 68.35 36.46 20.32 2.50 2.60 HCL Technologies 1949.36 46.50 426.58 78.08 385.59 62.14 HCL Technologies 46.59 42.64 4.76 14.03 18.00 21.88 HDFC Bank 3967.99 17.00 2033.36 16.28 1084.98 33.67 HDFC Bank 45.68 52.36 31.74 21.82 4.30 4.20 Patni Computer 857.52 8.79 -69.82 - -51.52 - Patni Computer 57.58 71.76 12.32 4.65 17.87 -8.14 2938.06 18.70 1818.27 19.01 1032.85 20.22 Bank of Baroda 60.69 65.36 16.45 21.51 2.90 2.87 Oracle Fin.Serv. 581.90 16.22 194.14 25.50 172.63 -0.75 Oracle Fin.Serv. 49.75 50.31 10.27 30.65 30.90 33.36 2891.97 15.01 1558.48 7.48 942.35 27.02 Axis Bank 54.48 64.68 22.96 11.28 3.71 3.28 Glodyne Techno. 598.71 181.04 95.65 110.08 56.04 64.00 Glodyne Techno. 12.24 25.33 22.71 32.80 21.37 15.98 Note:-Market Returns: Return since April 11. % Chg = YoY change in % Source: Capitaline Data, Compiled by BS Research Bureau