This could explain the drop in corporate profits

Jul 27, 2011

In this issue:
» The most reputed hedge fund draws its curtains
» Weapons of mass destruction get more lethal
» Japan's industrial hub in south India
» Is the telecom tariff war nearing its end?
» ...and more!
----------------------------- Mark Your Calendar. Global Crisis Starts August 2nd. -----------------------------

The global economy is in a crisis... And things are only going to get worse.

In fact, this crisis could get really bad on August 2nd and thereafter...

That's the day the US government could run out of money i.e. it will no longer be able to pay its bills.

You can well imagine the fall out of this on the global economy... there will be utter chaos, and stock markets could reflect this sentiment as well.

But how does that affect you?

Well, the chaos that this will trigger in the global economy will not leave India untouched.

And that's why you need to be really sure that your portfolio of stocks is Crash Proof.

How can you do that right away? Just read on to get access to a proven solution to crash proof your portfolio...


They say what is well begun is half done! But the same does not apply to corporate profits. An encouraging first quarter result season is certainly not indicative of good performance for the rest of the year. Nor is a sluggish start indicative of below average earnings growth by the end of the year. For cyclical and seasonal impact of sales and costs do impact the earnings on a quarterly basis. The first 2 quarters (April to September) typically tend to be muted due to monsoon and pre-festival seasons. Most sectors report better earnings growth during the last two quarters. However, cyclicality of commodity and interest costs is again something that does not have seasonal variation. The trend tends to linger for a longer period.

The first quarter of financial year 2011-12 has, however, been unusually sluggish for companies across sectors. Besides the high base effect, high input costs and poor demand had an impact on topline growth. But the pace of rise in borrowing costs is not stuff for the faint hearted. As seen in the following chart, short term borrowing rates have risen at an unusually sharp tick over the past 14 months. So much so that the call money and repo rates are now dangerously close to the 5 year and 10 year borrowing rates. This is indicative of the pain that companies are going through for short term funding needs. The bad news is we do not see the pain subsiding anytime soon! Even if expansion and growth plans are deferred to keep the debt limits conservative, working capital itself can strain companies' cash flows. The prohibitive rates have also hurt retail demand thus impacting the pricing power.

Source: RBI Macroeconomic survey
In such a scenario we cannot blame companies for failing to meet investor expectations of quarterly profit growth. Instead it would be wise to allow the ones with resilient business models to tide over the cost pressure. As long as the long term prospects remain intact, going past the tough phase is a matter of time. Meanwhile investors could keep their growth estimates moderate and valuation estimates with sufficient margin of safety.

Have the first quarter result season so far disappointed you? Share your comments or post them on our Facebook page.

 Chart of the day
These instruments led to a historic financial meltdown in 2008. So much so that they came to be called weapons of mass destruction. But the impact that the credit default swaps can have in the event of sovereign default is mind numbing. These instruments that are basically an insurance against a credit default rely heavily on the debt obligations being met. Today's chart shows the extent of exposure that credit default swaps have to sovereign debt of various developed and developing nations. A sovereign default by Italy or Spain could mean the losses on these papers going into several billion dollars.

Data source: Business Week

Most of us know George Soros as the man who broke the Bank of England. However, we don't think this as his biggest achievement. For us, the fact that he was able to compound money for his investors in the region of 20% for as long as nearly 40 years is perhaps his most significant achievement. Of course, he had Jim Rogers for company for a good part of this period. But there can hardly be any doubt that Soros is quite an astute investor himself. Sadly though, investors in Soros' hedge fund may no longer be able to benefit from his investing acumen. As per reports, the billionaire investor is ending his career as hedge fund manager and will return the money to outside investors. The decision was taken on account of new financial regulations that would have made it necessary for Soros' hedge fund to register with the SEC, the US capital market regulator. Thus, by the end of the year, curtains will come down on what has been one of the most successful investment journeys in recent times. Soros however, will continue to focus on philanthropy and on voicing his opinions on macroeconomic events.

The grim unemployment scenario in the US has prompted the government to restrict immigrants from working in the country. This includes workers from China and India. Its premise being that Americans should have the right to work first. But that is easier said than done. This is because Americans themselves lack certain requisite skills to fill some job vacancies. That is why US business leaders this week urged a Senate panel to implement immigration-law changes that would allow companies to hire more highly skilled workers. At present, grant of limited visas have driven many Indians away from the US. This is even after completing education there and having the requisite scientific and engineering skills. Indeed, US business leaders believe that the US will have more jobs and can be more competitive as a country. Especially if it makes it mandatory for non Americans to possess skills and knowledge that would be required to solve problems and create solutions for the economy. But is the Obama government listening?

India is a land of diversities. Here we have state governments notorious for being harsh even to domestic industrialists. The Singur issue in West Bengal still remains unresolved while the Posco steel project in Orissa is on the verge of being shelved. This is a stark contrast to the state of Tamil Nadu. The state seems to be setting precedent of what investment friendly policies could do for a region. It is well on its way to become an industrial hub for Japan. The state capital Chennai is already home to 30% of Japanese firms operating in India. The interest in pulling investments is tangible as the government officials from various infrastructural segments have outlined the scope of investments. The companies from Japan have shown a fourfold growth in the last five years. The plans are underway to set up an Industrial township in Mahabalipuram - The Omega project; in a span of 10 years. Out of 1,450 acres of land requirement, 70% has already been taken care of. The rest is expected to be finalized soon. The first phase which will come up on 400 acres is expected to be ready in four to five years.

The obvious reasons for the focus on Tamil Nadu are its highly skilled manpower, proximity to South East Asian countries and the fact that it is a gateway to the West Asia, Africa and Europe. But the most crucial qualifier is investment-friendly policies. Hope that the other state governments take a leaf out of this.

Last week, the subscribers of Bharti Airtel, India's largest mobile operators, received a blow. This was in the form of higher tariffs. The company has increased its mobile rates in six of its circles. As a result the question that has popped in everyone's minds is whether this translates to higher mobile tariffs for the country?India has one of the lowest mobile rates in the world. A major factor for this has been the increased competition in the sector which led to slashing of tariffs. However, in recent times, mobile companies have seen their margins getting squeezed. The new operators still continue to bleed. As a result, the companies have indicated indicating that tariffs may have bottomed out. It was just a question of time that tariffs would start to trend upwards. By the looks of it, Bharti has taken the initiative by increasing its rates. However, others would prefer to wait and see how this would impact Bharti's subscriber addition as well as its revenues before going ahead and taking similar steps. It is a well known fact that Indian consumers are very sensitive to prices. Therefore, there are chances that they would not react well to any increase. Particularly when others continue to offer lower rates. However, if all operators follow suit, then looks like the age for low telecom tariffs has come to an end. Indian mobile rates would start to trend upwards. And the consumers would be looking at paying higher mobile bills.

Taking off with the negative sentiments seen after the RBI rate hike yesterday, profit booking in banking, power and capital goods heavyweights, led the benchmark indices in the Indian stock market to languish in the red. At the time of writing, the BSE Sensex was trading lower by 69 points. Other major Asian indices also closed lower. Europe has also opened on a negative note.

 Today's investing mantra
"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond." - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "This could explain the drop in corporate profits". Click here!

1 Responses to "This could explain the drop in corporate profits"


Jul 27, 2011

Hey, it is great to have such an informative material.

Equitymaster requests your view! Post a comment on "This could explain the drop in corporate profits". Click here!