Mumbai: In a clear sign of a dramatic slowdown, the net profit growth for Indian companies that constitute the country’s two equity indices—the Sensex on the Bombay Stock Exchange and the Nifty on the National Stock Exchange—has plunged to its lowest in the past eight quarters.
Collectively, the Sensex companies managed to keep their year-on-year net profit growth at double-digit, 12.89%, in the March quarter but, for the Nifty firms, the profit growth fell to 9.31%, less than one-third of what they had recorded in first quarter of the last fiscal year.
Unitech Ltd was the last Nifty firm to announce its earnings on Friday and Tata Steel Ltd, which announced its results on Thursday, was the last Sensex company to do so.
The Sensex is a basket of 30 firms and the broad-based Nifty represents 50 firms. All Sensex firms, except for Jaiprakash Associates Ltd, are also part of Nifty.
(Graphics by: Ahmed Raza Khan/Mint)
A Mint analysis of Sensex and Nifty firms shows that their net profit growth would have been even worse if oil firms were excluded from the pack.
Ideally, they should be excluded as earnings of oil firms are very volatile and they depend on international crude prices and the subsidy sharing mechanism, determined by the government.
Indeed, if the two oil companies in the Sensex—Reliance Industries Ltd (RIL) and Oil and Natural Gas Corp. Ltd (ONGC), are excluded, then earnings growth during March quarter for the index would have slumped to 11.2%.
The earnings growth for Sensex firms, excluding oil companies, during the quarter ended 31 December 2007, was 15.80%.
The growth in net profits for both the Sensex and Nifty firms has been progressively going down in the last four quarters even though the growth in their operating profits and net sales does not show any definite trend.
For the purpose of this Mint analysis, financials of 28 Sensex firms and 44 Nifty companies that are available for the past eight quarters have been looked into.
The constituents of both the indices do change periodically and hence it is not possible to compare financial data of all firms over a period of eight quarters.
According to analysts and fund managers, who track these indices, signs of growth slowdown are now more clear and the risk associated with Indian companies not meeting earlier market estimates on performance is now more real.
“The Indian market is giving up a lot of rerating it gained over 2003-07,” said Morgan Stanley analysts Ridham Desai and Sheela Rathi, in their India strategy report last week.
The rerating was primarily driven by rising risk appetite across the globe and lower volatility in the growth outlook of Indian firms. However, the near-term earnings as well as further rise in interest rate are concerns, the report said.
Most analysts and fund managers are expecting 16% earnings growth for Sensex companies for the first quarter of fiscal 2009, ending June.
However, “the June quarter could spring positive surprises,” said the equity head of a foreign mutual fund operating in India.
Going by the advance tax payment by companies for their June quarter earnings, their profitability seems to be on track. Indian firms pay income tax on their estimated profits before the end of every quarter.
“Since the rising price of crude oil and other commodities could help some large Sensex companies, it could improve the overall performance of the index constituents,” the foreign mutual fund executive pointed out.
The weightage of the two oil firms, RIL and ONGC, in the Sensex is more than 20%. While RIL, the largest company in the index, has 16.79% weightage, ONGC’s weight is 3.76%.
If commercial banks and financial institutions are also excluded from the Sensex basket, the earnings growth of Sensex companies will be mere 7.24% during the March quarter and that of Nifty firms 5.67%.
Three banks—State Bank of India, ICICI Bank Ltd and HDFC Bank Ltd—apart from India’s oldest mortgage player Housing Development Finance Corp. Ltd, are the four financial services firms in Sensex.
“Banks are unlikely to get affected by the high interest rate cycle in the near term as their credit offtake is still good,” said a senior analyst at a foreign brokerage. But, “autos and real estate, which are highly sensitive to rate cycles will underperform the market,” said Nilesh Shah, chief investment officer of ICICI Prudential Asset Management Co., which manages around Rs33,594 crore worth of equity assets.
Most analysts expect another dismal performance during second quarter of fiscal 2009, even if the first quarter results may meet expectations. “The macroeconomic headwinds will reflect more strongly in Q2 earnings,” said the chief executive of the foreign fund house focused on Indian markets. This could see more flight of capital from Indian markets in the near term, he said.
Foreign institutional investors, or FIIs, the largest set of investors in the domestic markets, have withdrawn about $6.25 billion (Rs26,800 crore) out of Indian stocks this year. These investors had invested $17.36 billion during the year 2007 in Indian stocks.
According to a recent report by knowledge services provider Evalueserve, a number of external and internal factors are likely to create pressure on economic growth, corporate earnings and the Indian stock market.
The Sensex is now trading at 14 times its estimated earnings for fiscal 2009, after witnessing some 32% value erosion this year.
Some analysts have started finding it cheap but, overall, investors may not get excited as yet unless the firms get back the momentum in their net profit growth.