Mumbai: After over four years of strong growth, a high base is catching up with corporate India. And some experts say this could lead to some correction in the stock markets.
Last quarter, growth in both revenues and operating profit slowed to 17.5% for a universe of 1,428 companies (excluding oil firms and banks). Corporate growth was expected to fall this fiscal owing to a high base; however, the rate of increase for the September quarter is even lower than that in the June quarter, when revenues and operating profit grew 21.6% and 20%, respectively.
Core concerns: The inland container depot in Tughlaqabad, New Delhi. The deceleration in revenue growth is happening faster than expected, pointing to a possible decline in industrial growth.
“The deceleration in revenue growth is happening faster than expected,” says the head of research of a foreign brokerage who did not wish to be identified. This is a worrying sign, since it points to a slowdown in industrial growth.
Also, bereft of the large foreign exchange-related gains seen in the June quarter, net profit growth fell to just 22.9% last quarter from 36.5% in the June quarter. The only positive in the aggregate numbers was that operating profit margins last quarter were maintained at last year’s levels.
In the June quarter, operating margins were under slight pressure. A number of market analysts point out that core earnings growth is expected to be about 18% for the year till March; hence the results aren’t a negative surprise. Sanjay Sinha, chief investment officer at SBI Mutual Fund says: “The results were good overall, and like most results seasons there were some pleasant surprises and some unpleasant ones”.
Raamdeo Agrawal, joint managing director at Motilal Oswal Securities, says: “The results are good, especially keeping in mind last year’s high base. However, the markets have moved ahead of fundamentals thanks to a surge in liquidity. Either corporate fundamentals have to catch up, or markets would have to correct to reflect the current ground reality.” While Agrawal remains bullish on the long term, his near-term expectations are moderate owing to the sharp surge in prices lately.
The Mint study excludes oil companies because results of the largest firms in the sector are influenced by government pricing norms and depend to a great degree on the timing of the compensation (oil bonds) they receive. Profit growth of banks in the second quarter was largely driven by treasury income, a break-up of which is not universally available, making it difficult to arrive at core operating profit.
There is also an increasing polarization in terms of a few sectors and companies driving growth. The top 10 contributors to profit growth accounted for 40% of incremental profit of corporate India. Just three companies, Bharti Airtel Ltd, Reliance Communications Ltd and Larsen & Toubro Ltd, were responsible for 23% of total profit growth.
Earnings surprises were also largely restricted to the capital goods and engineering space. As one analyst puts it: “The positive earnings surprise in sectors dependent on investment demand was what saved the mood on the street.” To be sure, results of companies and sectors dependent on consumption demand were disappointing.
Profit growth at telcos continues to be high, but pressure on average revenue per user and minutes of usage took much of the sheen off their results. Some automobile companies reported better-than-expected profit, but that was on the back of a change in product mix and efficiencies from shifting work to tax havens; not because of an improvement in underlying demand or because of an easing in cost pressures.
Among the worst hit was the FMCG sector, where heavyweights ITC Ltd and Hindustan Unilever Ltd reported disappointing results. Most cement results were a letdown, except those with a high exposure to South India, where price hikes have been more frequent. Other companies reported lower than expected profit as cost of power and fuel rose sharply.
This somewhat ties in with mood on the street lately—capital goods and engineering stocks have led the recent rally, and most consumption-related sectors such as auto and cement have underperformed. But while some of the stocks in these sectors have delivered lower returns compared with the broad market, that doesn’t necessarily mean they are undervalued.
Although earnings growth for most of these companies have slowed down considerably, and the outlook continues to be that of low growth, price-earnings multiples continue to be in high double digits.
Earnings of the much-tracked Sensex companies (excluding oil firms and banks) rose by 19.3% last quarter, higher than the 16.9% growth in the June quarter. However, even here, the top three contributors accounted for 58% of the incremental profit.