A period of strong growth

The second quarter of 2010-11 saw few surprises, with growth continuing in sales, order pipelines and earnings in domestic investment and consumption-driven sectors.

Lalit Thakkar        Print Edition: December 2010

The second quarter of 2010-11 saw few surprises, with growth continuing in sales, order pipelines and earnings in domestic investment and consumption-driven sectors.

There was also a strong improvement in revenue growth in export sectors, such as software, but some commodity sectors, such as cement, disappointed.

Banks benefited from higher margins, especially midsized PSU banks. As a result, operating profit before provisioning expenses grew by a robust 35% y-o-y for the PSU space.

However, asset quality was a drag, bringing down overall earnings growth to 16% y-o-y. On the other hand, quality continued to improve rapidly for private banks, driving a 31% y-o-y growth in net profits. I expect earnings growth momentum to be strong for large private banks, followed by that for infrastructure and capital goods firms.

There was a strong improvement in revenue growth in export sectors, but some commodity sectors disappointed
Leading companies in the infrastructure sector have surprised with good results in topline segments. Further, the second half of the fiscal is a strong season for infrastructure players as execution picks up.

In addition, the sector is trading at attractive valuations of 8-10x. In the capital goods space, most companies posted revenue and profit growth along expected lines.

While transmission EPC companies reported a steady rise, power equipment manufacturers delivered strong results backed by quick executions and low base effect.

Companies continue to maintain a robust order backlog, providing revenue for the next six-seven quarters. The domestic auto sector also continued its growth trajectory. Cement followed projections of steep margin pressures and earnings decline, with most players declaring a y-o-y topline decline of 8-24%.

I expect this situation to continue for a few more quarters. Though the steel sector reported high volume growth, the margins were affected due to higher raw material costs and lower steel prices.

While imports are likely to check steel prices, growth in volume is expected to be robust due to domestic demand. Topline growth and future projections for IT companies came in higher than expected, with the former for most tier 1 companies being 9-12% in dollar terms on a q-o-q basis. Moreover, frontline IT companies, such as TCS, continued to benefit from margin levers, such as higher utilisations.

Overall, it was a healthy earnings season. Now, it would be sensible to invest in high-growth sectors, such as banking, infrastructure, capital goods and IT, where several companies are still available at reasonable valuations.

Lalit Thakkar
Managing Director (Institution), Angel Broking

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