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Monsoon dampen earning season

Aug 10, 2002

The past month has been tough for equity investors with the BSE Sensex sliding for the past five consecutive weeks. The NSE Nifty, however, has broken the fall with a marginal rise in the current week. Exit from markets, it seems, is driven by downturn in global equities, confirmation on poor monsoon season with resultant fall outs for the economy and, given lack of participation, an overhang in equities.

(Rs m) June '01* June '02* % change
BPCL 2,229 2,450 9.9%
HPCL 1,620 1,166 -28.0%
RPL 4,560 4,800 5.3%
L&T 651 446 -31.5%
ACC 440 198 -55.0%
Hindalco 1,611 1,402 -13.0%
Sterlite 227 299 31.6%
Tisco 205 659 221.5%
Tata Power 866 837 -3.3%
BSES 889 847 -4.7%
BHEL (1,252) (489)-60.9%
RIL 6,180 7,200 16.5%
SBI 5,798 7,632 31.6%
HDFC Bank 620 824 32.9%
Corporation Bank 780 982 25.9%
Telco (989) 280
Hero Honda 788 1,379 75.0%
Bajaj Auto 1,208 1,218 0.9%
Punjab Tractors 254 140 -44.9%
MTNL 3,773 2,499 -33.8%
VSNL 3,655 2,612 -28.5%
Indian Hotels 67 20 -70.1%
Asian Paints 212 288 35.8%
HLL 4,666 4,473 -4.1%
Nestle 447 583 30.4%
Infosys 1,900 2,169 14.2%
Wipro 2,077 1,665 -19.8%
Satyam 1,215 1,084 -10.8%
Dr. Reddy 535 801 49.7%
Ranbaxy 478 1,384 189.5%
Cipla 444 606 36.5%
Glaxo 450 405 -10.0%
Total 46,603 50,859 9.1%
*PAT for quarter ended June
With all the pessimism, we culled out some statistics to see whether all the gloom was justified. The first quarter earnings season came to an end last fortnight. But with monsoons, or the lack thereof, dominating radar screens, efforts by India Inc. seem to have been largely brushed aside by investors. While markets do tend to look forward -- weak monsoons could dent industrial recovery -- a fact is the industrial slowdown in FY02 has been reversed, which is reflected in the first quarter performance, and should be adequately recognised.

In our aggregate quarterly earnings report for March '02, topline of sample companies grew by only 2.9% YoY while profits were higher by 12.5%. With much of the slowdown taking effect in the last quarter of FY01, the YoY effect was nullified in March '02, and to that extent growth more comfortable to achieve. We reckon, 4QFY02 bottomline performance was driven by lower interest expense and higher other income.

For the quarter ended June '02, topline growth has increased to 7.5%, which does suggest expansion in business. The heavy weights -- energy sources companies -- have reported a turnaround in sales growth, which had been declining over the past four consecutive quarters. Growth in sales of sample auto companies, in light of their weightage, have lifted aggregate growth rates. At the operating profit level, the sample is not likely to have shown much improvement in margins. With 7 of the 32 companies reporting no change in margins, the remaining sample is evenly split.

The study seems to suggest that much of the rise in turnover has found it's way to the bottomline. Also, companies are likely to be benefiting from the benign interest rate environment. Indicating the potential for lower interest rates, we had mentioned in our earlier aggregate quarterly report, that 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.

The banking, auto and pharma sector continue to outperform and have beaten the aggregate sample earnings growth over the past three quarters. The performance is largely driven by improvement in sales and higher operating margins. While sales for FMCG's has proved challenging, the sector has managed higher profits from margin expansion driven largely by improved efficiencies. Ferrous metals has registered a turnaround with improvement in steel realisations. While turnover of cement companies has reported impressive growth, the sector has experienced sharp drop in margins, which has affected bottomline. The laggards continue to be energy sources, non-ferrous metals, hospitality, telecom and information technology. Most of these industries are experiencing pressure on realisations. Going forward, with the slowdown taking grip last fiscal, YoY growth should be more comfortable to achieve.

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