India Inc.: Sustaining performance... - Views on News from Equitymaster

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India Inc.: Sustaining performance...

Jul 28, 2004

FY04 had gone down as another good year (after a strong FY03) for India Inc. However, 1QFY05 results season is already nearing its end. We decided to delve into our own Quantum Universe of 350 companies and gauge the performance doled out by corporate India in the June quarter over the corresponding period last year.

(Rs m) 1QFY04 1QFY05 % change
Net Sales 560,410 669,474 19.5%
Operating Profit 152,793 177,874 16.4%
OPM (%) 30.9% 29.3%  
Interest 72,388 68,666 -5.1%
Net Profit 57,638 79,383 37.7%
NPM (%) 10.9% 12.6%  
Note: 125 of the 350 Quantum Universe companies that have declared their results

It can be seen in the table above that the topline of the 125 companies (including many Sensex companies) of the Quantum Universe has surged by an impressive 20%, Further, getting into the details of some of the contributors to this topline growth, the companies that have shown an over 25% YoY growth in topline during the June quarter and which have a significant impact on the overall consolidated numbers of the Quantum Universe under consideration include Bharti Tele, Wipro, Tisco, Infosys, IPCL and Hero Honda.

However, while the topline growth has been impressive, at the operating level, this Quantum Universe has witnessed a 160 basis points fall, which could be attributed primarily to the across the board resurgence of global commodity prices, the effect of which was naturally felt in India also. Higher steel, aluminium, coal, cotton, oil, etc., which form as inputs for various sectors like auto, engineering, textiles, cement, etc., all collectively pressurised the operating margins of corporate India. Of course, the big beneficiaries of this were the companies that supply these inputs. However, thanks to the productivity and efficiency improvement exercise underway across industries, the impact of the high costs was mitigated to an extent.

Despite the operating pressure, the net profit of these 125 companies leaped 38% and the net profit margin was higher by 170 basis points, which can be attributed to the continuous debt restructuring and debt reduction exercise being carried out that led to the 5% reduction in interest outgo. Again, if we look at some key contributors to the bottomline growth, which have had a bottomline growth in excess of 25% during the June quarter and the size of their profits does have a significant impact on the overall profitability, some of the names that would come to the fore would be Bharti Tele, Tisco, Wipro, Satyam, Maruti, Infosys, Reliance and ICICI Bank.

Going forward, while the June quarter performance, as yet, is good news for investors, the one concern that has clouded investor sentiments and has prevented the stock markets from cheering India Inc.'s performance has been the monsoon factor. With average seasonal monsoons below than average to date with over 50% meteorogical sub-divisions receiving deficient rainfall, there is a possibility that the consensus forecast of India's GDP growth could be scaled down from the current 6.5%-7%.

After considering all of the above, it must be noted that at the current juncture, the P/E valuation of the benchmark index is at about 14x trailing 12-month earnings and 12x FY05 expected earnings estimates, which despite not being one of the most lucrative, continues to remain fairly attractive. It must be noted that the Indian stock markets have usually commanded an average P/E valuation of about 16x, a fact justified by the CAGR earnings growth of approximately 18% of benchmark index companies over the last 8 years. Of course, while the story of triple digit returns is over, considering the developments in the form of the reforms process currently underway in the country, the environment looks conducive for growth for corporate India and thus we believe that equities would continue to deliver decent returns over the long term. The only caveat here for an investor is the detection of an investment candidate with good management and business model that would reward the investor.

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