Is the Worst Over?

Rahul Oberoi/Money Today        Print Edition: March 2012

Are stock markets sensing better days ahead for India Inc? Going by the way they greeted third-quarter results by rising 11 per cent in January, it seems they are.

Some number crunching shows companies reported higher sales but got bogged down by high interest and raw material costs. Now, with interest rates and commodity prices expected to fall in the coming months, the tide, say market watchers, may turn for the better.

A look at the numbers of 648 companies that declared their Q3 results till 30 January 2012 reveals a healthy 27.56 per cent growth in net sales as against 20 per cent in the same quarter of the previous year.

A big credit for such a performance goes to Reliance Industries, or RIL, Infosys and Hero MotoCorp. During the quarter ended 31 December 2011, RIL posted net sales of Rs 85,135 crore, up 42.39 per cent from Rs 59,789 crore in the corresponding quarter last year.

Infosys and Hero MotoCorp posted net sales of Rs 8,696 crore (up 33 per cent) and Rs 5,983 (up 17 per cent), respectively. However, net sales of textile and auto companies rose 3.52 per cent and 3.65 per cent, respectively, compared to the corresponding quarter a year ago.

BOTTOM LINE

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The ongoing elections in some large cement consuming states can give direction to the sector.

Priyanka Vasudevan

Research Analyst, Fullerton Securities

The third quarter did not favour either investors or companies. In October-December 2011, the Sensex declined 6 per cent to 15,454. Overall, profit after tax, or PAT, of India Inc fell 1.35 per cent. PAT had jumped 17 per cent in the corresponding quarter last year.

"The overall slowdown and an increase in interest cost was behind the fall in profitability. Infrastructure and capital goods sectors suffered due to policy inaction. High interest rates and commodity inflation also hit bottom lines," says Sudip Bandyopadhyay, chief executive officer and managing director, Destimoney Securities.

SECTOR ANALYSIS
According to our analysis of 648 companies, private sector banks and cement and information technology, or IT, companies posted healthy numbers. Pharmaceutical, real estate and power generation sectors saw a steep fall in PAT. Pharma, construction and power generation sectors saw PAT fall by 30.41 per cent, 34 per cent and 15.53 per cent, respectively.

Quote

You can invest on the basis of robust earnings but first see the company's cash and debt structure.

Siddharth Shankar

Director, Kassa India

Cement
The average net profit of the cement industry surged over 100 per cent during the quarter ended 31 December 2011. Ultratech Cement and Orient Paper and Industries posted profits of Rs 616 crore (up 93.4 per cent) and 42 crore (up 37.2 per cent), respectively, as against Rs 318 crore and Rs 300 crore, respectively, in the quarter ended December 2010.

Shanu Goel, senior research analyst, Bonanza Portfolio, says, "Q3 generally sees rise in construction activity at the end of monsoon."

Outlook: Market experts are bullish on cement stocks. Priyanka Vasudevan, research analyst, Fullerton Securities, says, "The ongoing elections in some big states can give direction to the sector as the ruling parties focus on infrastructure building to meet prior commitments. Elections in several large cement-consuming states, including Maharashtra, Rajasthan, UP and Gujarat, are likely to boost consumption."


Information Technology
The sector expanded bottom line by 28 per cent in October-December 2011 as rupee depreciation magnified gains from decent order inflow from the US and Europe.

The rupee fell 7.77 per cent in the quarter and touched 53.27 per dollar on 31 December 2011. Besides, clients in the US and other geographies continued to outsource work, which helped companies maintain margins. Infosys, TCS, and HCL registered net profits of Rs 2,235 crore (up 36.2 per cent), Rs 3,168.10 crore (up 54.41 per cent) and Rs 493.97 crore (up 36.2 per cent).

In the Dec 2011 quarter, the net profit of India Inc fell over 1% compared to the quarter ended Dec 2010.

Milan Bavishi, head of research, Inventure Growth and Securities, says, "The sector showed strong growth and headroom to scale up utilisation levels."

Outlook: Sanjeev Hota, assistant vice-president, research (IT), Sharekhan, says, "A depreciating rupee pulled the IT sector northwards in the quarter. However, till 5 February, the rupee had risen 9.5 per cent from its all-time low. Therefore, we are cautious on the sector. Any positive news from the US and Europe can give direction. Investors can rely on HCL and TCS."


Banking
Banks posted better profits due to higher interest income as manufacturing picked up. Lower provisioning for bad loans also helped. The sector witnessed 7.7 per cent profit growth with private banks putting up a good show.

ICICI Bank registered a net profit of Rs 1,728 crore, up 20 per cent from Rs 1,437 crore in the corresponding quarter a year ago. Union Bank of India and Canara Bank reported PAT of Rs 197 crore (down 66 per cent) and Rs 875.56 crore (down 20.82 per cent), respectively.

"Banks did well because of the increase in investment yields which helped improve their net interest margins. Their non-performing assets, or NPAs, improved," says Bavishi.

Outlook: For the next two quarters, G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management, is positive on the sector, especially private sector banks. "Due to the expected reversal in the interest rate cycle and expectation of 20-25 per cent growth in manufacturing, chances are high that private sector banks will perform well in the next two quarters. However, PSU banks will remain under pressure due to bad loans and rising NPAs," he says.

Hemant Kanawala, head (equities), Kotak Mahindra Old Mutual Life Insurance, says, "RBI is expected to maintain an easy monetary stance with focus on reviving the economy. Banks and non-banking finance companies are expected to be a big beneficiary of this. Also, the European Central Bank is providing liquidity to European banks, which should augur well for commodities. Hence, incrementally, there will be traction in these two sectors."


Pharmaceuticals
Glenmark Pharma, Lupin and Torrent Pharma posted net profits of Rs 13.14 crore (down 77.32 per cent), Rs 214.61 crore (12.91 per cent) and Rs 61.51 crore (6.73 per cent), respectively, during the quarter. Glenmark and Lupin reported forex losses of Rs 102 crore and Rs 58 crore, respectively.

Outlook: "We continue to be bullish on the sector. A careful bottoms-up approach should be taken for picking stocks as valuations of some companies have reached close to their peaks," says Bandyopadhyay of Destimoney.

A CARE Ratings report says the credit profile of Indian pharmaceutical companies is expected to remain stable over the medium term in the light of bright prospects in both domestic and export markets.

Real Estate
The BSE Realty index tumbled 52 per cent in 2011. The sector faced pressure from rising interest costs and debt. The earning numbers, too, were poor during the third quarter of 2011-12.

Oberoi Realty, Sobha Developers and Indiabulls Real Estate registered net profits of Rs 47.95 crore (down 56 per cent), Rs 40.10 crore (down 18.16 per cent) and Rs 6.68 crore (down 65.81 per cent), respectively, as against the corresponding quarter a year ago. However, Godrej Properties registered a 103 per cent increase in net profit to Rs 26.95 crore.

Outlook: Kaushik Dani, head, equity, Peerless MF, says, "With interest rates likely to decline, housing demand will increase and we can see some upward movement in the next two-three quarters."

Power
Due to rising raw material costs, power generation and distribution companies failed to post good numbers.

Avinash Gupta, vice president (equity research), Globe Capital, says, "The sector failed to do well due to rising fuel prices and falling coal availability."

During the quarter ended December 2011, JSW Energy posted a net loss of Rs 71.61 crore as against a net profit of Rs 122.86 crore in the same quarter last year. PAT of NHPC and NTPC declined 29 per cent and 10 per cent, respectively.

Outlook:
"Government intervention and decline in fuel prices can give direction to the sector," says Gupta.

SMOOTH DRIVE AHEAD
Market experts are positive on March quarter results. Interest rates have peaked and commodity inflation has shown signs of easing. The rupee, too, has stopped falling. Experts say revenue and sales will grow in double digits in the March quarter.

G Chokkalingam of Centrum says, "India Inc will register sales growth of 25 per cent and profit growth of 10 per cent on a year-on-year basis."

If you plan to invest on the basis of results, Siddharth Shankar, director, Kassa India, has an advice for you: "First, see the company's cash position, its debt structure and study the sector it operates in."

TAKING NOTE

Diversified funds may reduce risk
Sandesh Kirkire, CEO, Kotak Mutual Fund
Equities market turned green in January 2012, with Sensex and Nifty, posting monthly gains of 11.25 per cent and 12.43 per cent, respectively. A key factor has been the $2.03 billion FII inflow during the month.

The 10-year gilt performance in the debt market, too, was ecstatic, with annualised one-month performance of around 29.7 per cent. Here, too, net FII inflow was $3.04b.

The peaking of the rate-cycle and the subsequent 50 bps CRR slash, coupled with the palpable change in the RBI's stance towards growth management, buoyed debt market sentiments.

Quite naturally, the 'recency' effect may cause retail investors to rush into the capital markets. However, one should not alter the established investment plan significantly; and if you don't have any, then first have one.

Investors must appreciate that growth continues to moderate on account of faltering industrial production and high capital costs. Consequently, the pause in savings and investment cycle is detectable, leading to the easing of gross capital formation. Hence, the market is expected to remain largely range-bound for most of the year.

However, equity investors with around 'three-year-plus' horizon must appreciate that the economy remains among the top performers among the emerging markets and would continue to attract FIIs. Also, market valuation levels at around 13.6X for FY13, remain pretty attractive for a long-term growth story.

Investors therefore can look to accumulate exposure through diversified funds over one-two year period and further mitigate risk by enforcing SIP discipline.

From the debt market point of view; the slack in credit growth and continued growth in bank deposits may lead to moderation in 10-year benchmark yields. This reduces the urgency for a rate cut, albeit gradual reduction over the year may be possible.

Nonetheless, the bullish undertone continues in the debt market. Debt investors may look to apportion a percentage of their investible corpus in long-duration bond funds to position themselves for possible capital gains.

Other than that, the remaining corpus may be invested in short term bond funds and liquid schemes to benefit from the high-carry and relative safety of the asset class.

SANDESH KIRKIRE
CEO, Kotak Mutual Fund


(This is a sponsored article)

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