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Stock markets: Second chance! - Views on News from Equitymaster
 
 
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  • Nov 22, 2004

    Stock markets: Second chance!

    On the back of strong GDP growth in FY04, economist were of the view that India has migrated from the old 'Hindu growth rate' to new growth trajectory from a long-term perspective. This may be true. But it will take its own time. Here, we are attempting to review the first half of the current financial year and trying to find out what lies ahead.

    While the performance of the economy as a whole in the first half of this year was appreciable (growth of 7.9% in IIP (industrial index of production) in the first five months of the current financial year), we asked our audience about their views on the Indian stock markets, post the 1HFY05 results. Here is the survey result!

    A large majority (nearly 81%) of the audience was of the view that the outlook for the stock markets post the 1HFY05 results is positive. However, few of our respondents (13%) were unable to make up their mind and 6% were negative.

    What is our view?
    Looking at the performances of the companies in our coverage, we find that on aggregate basis, the topline of the companies has grown by 17% while the bottomline has shown a growth rate of 20%. The major growth drivers have been the old economy sectors such as metals, engineering, auto and cement. While there are several reasons for the same, demand is the major reason for the growth in the topline and profits of the companies in above-mentioned sectors. Led by firm steel prices in the global markets in light of China led demand, earnings of steel companies continue to grow at a stellar rate. It has been a dream run for auto stocks as well. Fuelled by favorable interest rates and falling prices, capacity utilisation is nearing peak for auto majors. The benefit is clearly reflected in operating margins, despite higher raw material prices.

    While FMCG and consumer durables sector are going through a difficult phase (especially top-rung majors), key telecom and financial institutions registered a decline in topline as well as bottomline. Barring Bharti, other players are in the transition period (VSNL and MTNL).

    While the Indian economy and corporates are benefiting from this economic expansion, the greatest challenge for the Indian companies going forward will be maintaining profitability (i.e. margins). Clearly, corporates are on an expansion mode over the next three-year horizon. Aggregate growth in non-food credit and advances growth of SBI in 2QFY05 suggest that borrowings have increased sharply. There are two implications:

    1. Profitability will be affected, as the new capacities will take time till they are utilized fully. Companies in sectors such as auto, steel, cement and engineering, which have high operating leverage, might face difficulty going forward. Interest and depreciation charges are likely to increase.

    2. The bottomline growth may fail to outpace the topline growth on a broader basis, as increased competition could impact margins. Export realization will also be affected to the extent of rupee appreciation.

    Overall, we believe that investors need to exercise caution at the current valuations level. There is always a second time when it comes to investing in stock markets!

     

     

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