In Q2FY11 India Inc. produced a mix bag of results. Some sectors like FMCG and IT fared well while others like metals and real estate languished. Though sales growth for the broad-based BSE 500 index came in at 23 per cent (on a year-on-year basis), the stress on corporate India’s profitability was apparent. Growth in operating profit stalled. PAT growth crashed by a third (-35 per cent decline y-o-y).
What has gone wrong for corporate India? High operating costs arising out of input-cost inflation and, in some cases, wage-cost inflation, have become the bane of Indian corporates. Furthermore, high borrowing costs have wreaked havoc on bottomlines.
To add to India Inc’s woes, a number of companies were caught on the wrong foot by the unexpected weakening of the rupee. Mark-to-market (MTM) or forex losses booked by corporates were a recurrent feature of Q2FY12 results.
What do the Q2 numbers imply for the rest of the current financial year?
Opinions are divided. According to some, for the moment the momentum in topline growth is expected to sustain. But according to others, if the economic slowdown in India and the troubles in the developed world continue, topline growth could become the casualty over the next few quarters. Ebitda and PAT, though, are likely to remain weak over the next half of the financial year.
The lower-than-expected earnings outlook has led to Sensex earnings for FY12 being pruned from earlier estimates of around Rs 1,250-1,260 to around Rs 1,130-1,150 levels. This implies that earnings would grow by a rather weak 8-10 per cent only in FY12.
The low earnings growth in FY12, however, does have a silver lining. Says Soumendra Nath Lahiri, head of equities, Canara Robeco Asset Management: “If that low growth (8-10 per cent this year) becomes the base, we could see around 18-20 per cent jump in earnings in FY13.”
Despite their high valuations, FMCG stocks still remain top dogs. Positive free cash flow coupled with low leverage of many FMCG companies makes them the stock market’s favourites. Add to that their low market penetration and high returns on capital and fund managers are left wishing there were more stocks like them around — no matter their premium valuations.
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