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Lacking Strong Winners

The second quarter’s results season was not an ideal one

This article first appeared in the November issue of Wealth Insight magazine that looked at the second quarter performances of Indian corporates.

Corporate India is still benefiting from the Reserve Bank of India dropping interest rates and the government's stimulus packages. While these did result in reviving demand and making India the second-fastest growing economy in the world, yet it does not seem to have had the kind of effect that was expected as aggregate quarterly results attest.

Bereft of positive cues, equity markets crashed, with the Sensex shedding 7.18 per cent for the month of October, even though it gained 18.17 for the second quarter. In other words, the hugely rising market valuations due to the stock boom that started on March, 2009, had to be propped up, or justified, by better-than-expected earnings growth. It pumped up the Sensex to way above its long-term average, at almost 20 times its estimated earnings for fiscal 2010.

While revenue growth has not been anything to talk about, yet the profits announced by companies are mostly due to low commodity prices as well as extreme cost-cutting measures that were imposed to keep out of the red. But better operations management could not combat falling sales and topline growth fell.

An analysis of 1,731 companies indicates that profit increased by 35 per cent, while net sales fell by over 8 per cent. However, most of it was driven by the oil companies which turned positive on the back of a strengthening rupee causing operating costs to fall. If manufacturing and services sector is taken for our purposes, then we can see that the aggregate net profit declined by almost 4 per cent (extraordinary income apart) — we excluded banks, oil cand finance companies.

Checking out the Bombay Stock Exchange (BSE) 500 horizon shows that gains are blurred among the big boys too. If we consider BSE 500 manufacturing companies, then 389 companies' aggregate net sales fell by almost 10 per cent, while their net profit increased by 36 per cent.

The good news was driven by 144 BSE 500 companies in the manufacturing and services spheres in both sales and profit growth, with aggregate profits rising 40 per cent after excluding extraordinary income. More welcome was the news that their sales increased by 20 per cent. The best of the lot was Apollo Tyres with a 1,211 per cent rise in net profits. Educomp Solutions was another fast riser, having logged a 300 per cent increase in net profit and a 92 per cent rise in revenues. Dr Reddy's Laboratories was another exceptional performer with a 177 per cent rise in net profits. In all, there were 24 others that logged an over 100 per cent rise in net profit.

If we look at it sector-wise, then the saving grace came especially from the automobile sector with Maruti Suzuki, Hero Honda, and Bajaj Auto standing out. The infotech sector too managed to do very well for itself, but metal companies like Tata Steel, Hindalco, and Jindal Steel & Power suffered a poor quarter, reporting declining sales as well as profit. Telecom sector was another laggard. Other positive performers are from the defensive pack of pharma, and FMCG, while cement has been doing well too.

Surprisingly, the infrastructure sector underperformed after all the hype that it had been subjected to. However, there were no surprises as to the extent of the fall in the realty companies.

With rising inflation and a tighter credit policy in the offing over the next few quarters, Indian corporates have their task cut out to pull a good quarter out of their collective hat.

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