India Inc.: The best and the worst... - Views on News from Equitymaster

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India Inc.: The best and the worst...

Feb 11, 2005

During the recently concluded third quarter for FY05, the stock markets witnessed gains of over 16% on a point to point basis on the back of strong support from the Foreign Institutional Investors (FIIs) and good results from India Inc. In this article, we take a look at a few sectors, which have been the leaders and the laggards as far as performance in the quarter is concerned.

  PAT growth
Shipping 177.7%
Hotels 155.6%
Telecom -40.6%
Consumer durables -30.7%

The outperformers...

Shipping: The shipping sector has witnessed a dream run not only during the period under review but over the last one year on the back of robust tonnage demand and short supply of the same. During 3QFY05, crude oil demand has increased from 82.2 million barrels per day to 84.2 million barrels per day, implying a year on year growth of 2.4%. Growing energy needs of the developing nations along with the US and European countries led to a sharp rise in time charter yield for crude carriers. At the same time, China continued with its hunger for minerals and ores, resulting in robust business activity for the dry-bulk segment, further pushing realizations, and therefore, the bottomline.

Rising yields (TCY*/day)
(US$) 3QFY04 3QFY05 Change
Crude carriers 22,600 40,592 79.6%
Product carriers 12,300 17,102 39.0%
Dry bulk carriers 12,900 22,196 72.1%
*Time Charter Yield = US$/day x Number of operating days

Hotels: As per reports, India now stands fifth on the tourist attraction list and the bottomline growth of leading hotels has proved the point. To put things in perspective, the country witnessed a jump of over 26% in international tourist arrivals. In revenue terms, realizations improved by over 39% in dollar terms. Given the high fixed cost nature of the hotels business (as most cost is related to the property), operating margins witnessed a sharp rise thereby boosting the bottomline. A sharp rise in accommodation demand led to a spurt in room rates, thereby helping the companies' bottomline.

...and the underperformers

Telecom: Although the subscriber addition for major players witnessed robust growth during the period, the fact that tariffs have been under pressure due to intense competition has led to a poor performance by the sector as a whole, despite sterling individual performances such as that of Bharti Tele, which witnessed a topline growth of nearly 70% and bottomline showing an impressive growth of nearly 95%. Also adding to the woes for the sector is the fact that the telecom industry is currently in an expansion and consolidation mode leading to high capex and the resultant high depreciation and interest expenditure that has affected the bottomline.

Consumer durables: Large Indian companies from the FMCG sector witnessed major competition from the deep pocket MNC players apart from the regional companies eating into the market share. Given that the country has a huge consumer base, the basic strategy of an MNC such as P&G is more skewed in favour of volumes rather than margin expansion. As a result, penetrative pricing strategy led to lower realizations and a pressure on margins during the quarter. We believe that the sector is likely to continue with this performance in the medium term on the back of lack of any room to increase product prices to earlier levels.

Conclusion

India Inc. continues with its robust performance on the back of industry friendly policies being introduced (at least attempts being made) by the government. Having said that, there have been clear mentions from the North Block that the country needs to further open up the economy. This would help bring in more investments and technology. Investors with a long-term perspective can thus look at select sectors, which have hitherto remained away from the limelight.

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