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No guts no glory

Jun 29, 2002

With no compelling reason to enter equities, investors are likely to have remained on the sidelines. Trading sentiment during the week is likely to have received a blow with sudden hospitalisation of Reliance group chairman. Conspiracy theories are already floating. Uncertainty in U.S markets seem to be spilling into domestic bourses.

(Rs m) March '01* March '02* % change
BPCL 1,725 3,731 116.3%
HPCL 3,265 4,249 30.1%
RPL 3,840 4,050 5.5%
L&T 2,504 1,868 -25.4%
ACC 579 525 -9.3%
Hindalco 1,521 1,922 26.4%
Sterlite 322 199 -38%
Tisco 2,092 1,225 -41.4%
Tata Power 674 679 0.7%
BSES 981 319 -67.5%
BHEL 4,967 3,489 -29.8%
RIL 7,590 6,720 -11.5%
SBI 3,416 6,157 80.2%
HDFC Bank 655 902 37.7%
Corporation Bank 453 454 0.2%
Telco (1,470) 162
Hero Honda 561 1,526 172.0%
Bajaj Auto 640 1,485 132.0%
Punjab Tractors 211 180 -14.7%
MTNL 3,603 4,162 15.5%
VSNL 4,473 3,162 -29.3%
Indian Hotels 362 60 -83.4%
Asian Paints 318 306 -3.8%
HLL 3,395 4,285 26.2%
Nestle 396 614 55.1%
Infosys 1,817 2,103 15.7%
Wipro 2,175 2,206 1.4%
Satyam 1,113 744 -33.2%
Dr. Reddy 394 1,012 156.9%
Ranbaxy 557 949 70.4%
Cipla 344 617 79.4%
Glaxo 102 228 123.5%
Total 53,574 60,290 12.5%
*PAT for quarter ended March '02

Results for quarter and year ended March '02 for all, but an handful of companies, have been declared. In fact, markets are headed into 1QFY03 earnings season. The handful still pending to declare full year results, know well, the areas requiring better efficiency. Having said that, March quarter earning season tends to be elongated, as the Companies Act permits a time period of six months for releasing annual results.

Much of the slowdown experienced through FY02 began in the last quarter of FY01. Therefore, many expected the YoY effect to be nullified and growth, to that extent, more comfortable to achieve. A sample of 32 companies from a cross section of industries, identical to samples in our earlier aggregate quarterly performance reports, has registered a growth of 12.5% YoY in post-tax profits for 4QFY02. This indicates a better performance compared to 3QFY02, which recorded a growth of 8% YoY. As mentioned earlier, the YoY effect could have facilitated such performance.

However, turnover growth of the sample, an indicator of business/industry expansion, has shown a marginal slide of 2.9% YoY during the concerned period. The decline is largely due to performance of oil companies. Excluding oil companies from the sample, turnover registers a growth of 5.5%, which in itself is not very exciting. At the operating level, margins of most sample companies have declined. Secular increase in margins was seen only in auto, pharma and FMCG industry. While FMCG companies face challenges in expanding topline, they seem to be enhancing efficiencies and/or getting consumers to uptrade to grow margins. The latter, however, seems unlikely.

The report suggests India Inc. could have augmented bottomline more through higher other income and lower interest expense. With reducing interest rates, several corporates have been refinancing debt while others have preferred to become debt free. The RBI governor has indicated a preference towards softer interest rate regime. SBI, a benchmark for commercial banking interest rates, reportedly, charges a prime lending rate (PLR) of 11%. Interest rates in western countries are estimated at 5%-6% levels, which could indicate the distance Indian debt markets have yet to cover. Leaving aside earnings growth from business expansion, India Inc. still has room to generate higher post-tax profits through improved efficiencies and reduced interest expense. Consequently, companies could disappoint on topline but achieve bottomline expectations.

As a case in point, HLL has been growing earnings over the past two years despite stagnant topline. And we reckon, many investors have burnt their fingers betting that HLL earnings will disappoint the street. The company has squeezed out efficiencies from manufacturing, supply chain, distribution channel and believes more room still exists. HLL has always been amongst the best managed corporates. If HLL could pump out profits, the potential for India Inc. seems huge.

Oil companies have registered dramatic growth in earnings. This, however, is due to payment of dues from the oil pool account. Sectors that have outperformed and driven largely by better sales are auto and pharma. The banking and FMCG industry has benefited largely from reducing interest rates and improved efficiencies respectively. The laggards for March '02 quarter were mainly ferrous metals, oil & gas, petrochemicals, hospitality, telecom and technology. Operating margins in cement came under pressure, as realisations took a dip but volumes registered impressive growth.

As has been reported, Indian investors continue to hold fascination for TMT stocks, which control a large share of trading volumes. This could reflect the inherent speculative nature of Indian investors and reason for high casualty. With gloomy outlook for global tech industry, Indian bourses seem to be reflecting similar feelings. But markets constitute more than just tech and potential in other sectors need to be explored. Indian investors seem to lack conviction and confidence to build an independent rally. Historically, rises are linked more with scams and global investment sentiment. We had mentioned U.S equities are likely to experience difficulty but climate in domestic markets continue to remain conducive.

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