Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The pressure is building... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Nov 1, 2004

    The pressure is building...

    Now that the results season is over (not that the market has had enough time to digest the slew of results), it is time to take account of the future course of action. If the performance in the September 2004 is any indication, for some sectors, tough times are ahead.

    As our Results Monitor shows, the topline growth continues to remain encouraging. Though some sectors like FMCG are going through difficult phase, the combined topline of nine automobile companies is up 26% in the September quarter. Barring TVS Motors, most of the top rung companies posted impressive growth in the topline. However, as compared to the topline growth, the net profit growth was slower as compared to June quarter. This was on account of two reasons. One, raw material costs as a percentage of sales was higher, which in turn subdued the expansion in margins. Secondly, since competition is intense, companies were unable to pass on the rise in cost to consumers. Besides these two factors, the cost incurred towards the launch of new model is yet to show at the topline level.

    Net profit grows slower
    (% YoY change) Sales Net profit
    Tyres 13.5% -42.8%
    Financial Institutions -10.0% -40.4%
    Consumer Products 1.5% -29.1%
    Textiles 10.1% -16.0%
    Banks 6.3% -3.4%
    Pharma 10.8% -1.6%
    Energy 15.1% 2.3%
    Fertilisers 26.6% 20.2%
    Aluminium 32.4% 26.7%
    Software 37.4% 35.1%

    The table above lists the sectors that saw a lower growth in net profit as compared to the topline. Textiles, banking and consumer product companies have actually witnessed a decline in net profit in the September quarter. While first half is a lean season for textile companies, there has been a fundamental change in the operating environment for banks. With interest rates increasing (as is reflected from the 10-year benchmark yield), the other income component that typically forms more than 30% of net profit (depends on the bank), witnessed a decline. In the last four years, banks made significant trading profit from treasuries that enabled them to clean up their balance sheets. But this cushion has evaporated. Though the decline in other income will be arrested in the remaining quarter, as banks have shifted their bond portfolio on a long-term holding basis, we believe that the sharp rise in net profits that we have seen over the last five years is unlikely to continue. However, the fact remains that certain banks will outperform others.

    Net profit grows faster
    (% YoY change) Sales Net profit
    Chemicals 16.6% 19.9%
    Energy 10.4% 22.0%
    Auto ancillaries 30.2% 46.0%
    Paints 12.1% 49.7%
    Media 17.0% 58.9%
    Engineering 19.6% 60.4%
    Shipping 18.5% 63.7%
    Cement 15.9% 73.1%
    Telecom 13.4% 117.2%
    Steel 31.7% 181.7%

    The reason for the slower growth in net profit for other sectors (barring software) can be largely attributed to the increase in input cost (raw material including fuel, packaging materials and so on). With crude prices continuing to trade higher in the global markets, manufacturing companies are likely to face pressure in the near-term. In this context, there could be surprises on the downside in the forthcoming quarters. Clearly, the pressure is building on India Inc.

    What to expect?

    1. There will be companies that will outperform the sector trend on a consistent basis. It is important to identify these stocks and build a portfolio around the same.

    2. There are exiting stories in the mid-cap level as well. However, the risk attached to the same is higher. In a portfolio, investors should ideally look at having a mix of large-cap and mid-cap stocks with large-caps acting as pillars to the portfolio.

    3. We believe that the impact of higher crude prices will reflect even more in the coming quarters on the margins. To that extent, one has to exercise caution.

    4. And more importantly, any investment decision in equities at the current juncture needs to be in staggered manner.



      Equitymaster requests your view! Post a comment on "The pressure is building...". Click here!


      More Views on News

      How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

      Jun 10, 2017

      Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

      You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

      Aug 19, 2017

      Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

      Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

      Aug 18, 2017

      Buying the index now will hardly help make money in stocks even in ten years.

      Trump Takes a Beating (Vivek Kaul's Diary)

      Aug 18, 2017

      Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

      How To Read Your Mutual Fund Account Statement Correctly (Outside View)

      Aug 17, 2017

      PersonalFN simplifies the mutual fund account statement for you.

      More Views on News

      Most Popular

      Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

      Aug 7, 2017

      The data tells us quite a different story from the one the government is trying to project.

      A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

      Aug 10, 2017

      Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

      Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

      Aug 8, 2017

      Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

      Signs of Life in the India VIX(Daily Profit Hunter)

      Aug 12, 2017

      The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

      7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

      Aug 7, 2017

      Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

      Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
      Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

      LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

      SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

      Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
      Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)