Wednesday’s fall undoubtedly resulted from the uncertainty plaguing the markets about the ramifications—and the extent—of the problems facing finance companies, banks, hedge funds and private equity players in the US, and how they would impact market players all over the world.
That the contagion is spreading is clear: Banks in Australia and Germany seem to have discovered that they too are exposed to the US subprime mess. Also, since so much of the money invested in world markets originate in the US, it is no surprise that markets everywhere are affected. What’s more, the sell-off was made worse by leveraged players, who look to exit after every correction, witness the strength of the yen, an indication that the carry trades are unwinding.
But the consensus so far has been despite problems on the global liquidity front, growth is robust. That view is even more pronounced in India, where consensus revolves around the belief that high economic growth will ensure, in spite of short-term jitters, money will soon flow back. There are many precedents for thinking so—after all, in the last four years, the pattern has been for markets to continue their upward march after a few short weeks of pain. This time, however, the “fundamentals” are rather different from those that prevailed during the correction in May last year.
Corporate earnings growth, for instance, has slowed. Margins are no longer what they used to be. Interest rates are much higher today than a year ago. The rupee appreciation has hurt exporters. And many companies are diluting equity and adding capacity, which will lead to lower returns on equity and assets in future. And in spite of these negatives, the Nifty price-earnings multiple, before the slide started, was around 20.7, slightly higher than what it was before the sell-off in May 2006 and considerably above what it was before the correction in February/March this year.
To be sure, GDP growth continues to be robust, but while that may translate into higher volumes, it need not result in strong growth in earnings. The positive factor is that, even at current estimates of earnings growth, the Indian market is more attractive than most others. But the price at which it will become attractive will depend, not on India’s GDP growth rate, but on how much liquidity returns to the market and how soon.
Jet: still recovering
The shares of Jet Airways (India) Ltd have underperformed the market by 17% since the highs it reached in late June after its impressive March quarter results. The markets, which probably see a dip in performance coming, weren’t off target. Ebitda (Earnings before interest, tax, depreciation and aircraft lease rentals) grew by just 8% last quarter, compared with a jump of nearly 50% in the March quarter.
Worse still, Ebitda at the domestic business fell by 11%, on the back of falling passenger load factors. In fact, but for the international business—which turned from losses in the year-ago June quarter—Jet’s Ebitda would have declined last quarter. As it is, the company’s profit before tax (PBT) from operations has slipped back into the red.
There were some one-off factors which affected the profitability of the international operations, but even after adjusting for this, PBT from operations would be negative. It is important to note that Jet had positive PBT from operations for the first time in four quarters in the January-March period.
The performance in the April-June period shows that the company’s troubles are not over yet. In fact, things have gotten worse going by the performance of the domestic operations. While there are positive signs like improving yields and a lower rate of growth in capacity addition, they’re yet to show in the company’s results.
Also, while international operations bailed Jet out last quarter, at least enabling it to report Ebitda growth, things may soon change on that front, as the company will be introducing new routes this quarter. New operations typically take 12-18 months to break even and would hence drag profitability of the overall international business.
Despite the underperformance in the past month, Jet shares trade at rich valuations of over 50 times estimated FY08 earnings.
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