India Inc.: Slowing down? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

India Inc.: Slowing down?

Aug 24, 2005

India Inc. is on a roll and the domestic equity markets, which have been rather buoyant and have been scaling new heights consistently over the last few months, are good barometer of the performance of Indian corporates. Of course, the 2003 and 2004 stock market performance should not be forgotten here. Strong corporate deliverance led by improved consumer spending in wake of higher disposable incomes aided by historically low interest rates has helped companies post spectacular quarterly results over the last several quarters now. In this article, we look at the June 2005 quarter performance of India Inc. and check whether Indian companies have lived up to expectations. After all, it is their performance that would dictate the fate of the stock markets going forward.

Fiscal 2004-05 ended on a strong note for India Inc. Just to put things in perspective, data compiled for 250 companies under our Quantum Universe showed that while the topline growth was at 18% YoY, bottomline outpaced topline by positing a 25% YoY growth. However, when we considered the performance of over 150 companies from the Quantum Universe for the quarter ending June 2005, the results were a little surprising. This is because, after 4 consecutive quarters of strong growth, there seems some kind of a slowdown in corporate profitability. To put things in perspective, the consolidated numbers of these 150+ companies revealed a robust topline growth of 21% YoY. However, the bottomline growth slumped to a mere 12% YoY. While the higher base effect of 1QFY05 would have certainly affected the growth numbers, the extent has been somewhat surprising.

One seemingly possible reason for this is the pressure on operating margins for many sectors. Continued strong global commodity prices, like those of steel, aluminium, coal, oil, etc., which form inputs for various sectors like auto, engineering, textiles, cement, etc., all collectively pressurised the operating margins of corporate India. Further, there have been some reduction witnessed in other income, seemingly owing to the fact that Indian corporates had resorted to profit booking in FY05 on their investment portfolios, which has slowed down in the current fiscal.

However, thanks to the productivity and efficiency improvement exercises underway across sectors, the impact of the high costs was mitigated to an extent. Another important factor that helped save the grace for India Inc. in 1QFY06 is the continuous debt restructuring exercise having been carried out apart from the sustained low interest rate scenario in the country. Going forward, while factors like low interest rate regime, thanks to ample money supply, would keep the consumer demand higher, normal monsoons should also help the cause.

However, investors must bear in mind that the current inflation rates have been artificially kept low, thanks to government subsidies that have prevented the impact of record high international crude prices from being felt on domestic consumers. However, it is only a matter of time that petroleum product prices are raised as PSU oil companies are already facing the risk of turning sick owing to the burden being borne by them of not passing the higher oil prices to consumers. Once this happens, inflation would raise its head and the fear of a rise in interest rates would once again loom large.

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 16 times trailing 12-month earnings, which is not exactly attractive. However, while the index is fairly valued, most of its constituents are trading at valuations higher than they deserve, thanks to the strong liquidity inflows.

Thus, from hereon, we believe that investors should expect not more than realistic returns i.e. in the region of 10% to 15% per year. 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.


Equitymaster requests your view! Post a comment on "India Inc.: Slowing down?". Click here!

  

More Views on News

An Important Hurricane Update for Energy Traders (Fast Profits Daily)

Sep 22, 2020

In this video, I'll show you how the extended hurricane season in the US will affect traders in crude oil and natural gas.

Mutual Fund Investors Will Now Be Allotted Units Based on NAV of the Day AMCs Receive Funds (Outside View)

Sep 22, 2020

PersonalFN explains how SEBI's new circular on mutual funds impact investors.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

How Much Money Should an Investor Set Aside for Trading? (Fast Profits Daily)

Sep 21, 2020

In this video, I'll give you a simple equation which you can use to decide how much money you can set aside for trading.

Kotak Standard Multicap Fund: Strategizing Growth with Focused Approach (Outside View)

Sep 21, 2020

PersonalFN's analysis on the features and performance of Kotak Standard Multicap Fund.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 22, 2020 (Close)

MARKET STATS