The stock market has moved up sharply in the last four trading sessions, but opinion is divided on how much of the move is due to the market believing the government will survive the trust vote and how much of it is due to lower crude oil prices.
One way of finding that out is to check whether India has outperformed other markets during the recent rally. Markets of most countries, with the exception of commodity and oil producers such as Russia, Brazil and West Asia, have been affected by the rise in oil prices. As a result, most markets have moved higher in the past four trading sessions when oil declined.
For instance, the Shanghai Composite index is up 5% over the period, as is the Taiwan stock market index. South Korea’s Seoul Composite index is up 4%, while Hong Kong’s Hang Seng index is up 6%. The US markets, which first started the uptrend, saw the Dow Jones Industrial Average moving up 5% between 15 and 21 July.
The benchmark Sensitive index of the Bombay Stock Exchanges, or BSE, however, is up 12% in the same four sessions. It’s not unreasonable to say that at least part of the over 6 percentage points outperformance of the Indian market is because the market perception is that the government will win the trust vote.
That’s not to say there are no other explanations. India is one of the worst affected by rising oil prices and its markets had consequently been sold off the most. So any fall in oil prices should lead to a higher bounce. But note that the Chinese market, which has fallen even more than India’s, saw a much lower bounce. On Tuesday, with oil prices holding firm, most of the Asian markets except Japan were in the red, in marked contrast to the Sensex.
How much of this bounce is due to the belief that the government will push through reforms if it survives? The talk is all about banking, insurance and pension reforms and the BSE Bankex has benefited the most in the past four trading sessions, moving up a whopping 22.7%. It’s followed by realty, capital goods, power and FMCG indices, all up around 14%.
That gives the impression the market is inclined to give some weight to the reform talk, although it’s true that banking, capital goods and realty were the most beaten-down sectors and hence, were ripe for a rebound. The hope that lower oil prices would cool inflation and not lead to further monetary tightening must also have contributed to the rally in bank stocks.
Operating profits rise smartly at Voltas
Air conditioning and engineering services firm Voltas Ltd’s results disappointed the markets for the second straight quarter. The company’s shares have fallen 3.5% since the results were announced, although the markets have risen nearly 3% during the same period. The markets seem to be miffed that much of the rise in profit has come from a jump in other income. Excluding other income, operating profit rose just 5.6% on a year-on-year (y-o-y) basis.
But according to the company management, some non-operating revenues such as rental income should be included while calculating operating profit, since there are commensurate costs recorded in operating expenses. Besides, last year’s June quarter results included a refund of Rs7 crore pertaining to a previous accounting period, which lowered other expenditure artificially. Adjusted for this and after adding back rental income, operating profit rose by 29% y-o-y, on the back of a 23% increase in revenues and improvement in profit margin.
After the adjustments, the results look decent. The mainstay electro-mechanical projects and services business saw profit rising by 36% y-o-y after adjusting for the exceptional refund income last year. The profit of this segment had grown just 2.4% in the March quarter because the company hadn’t achieved milestone levels (10%) for five large projects. So, while the firm booked expenses on these projects, it wasn’t able to book revenues, thereby depressing profit growth.
According to the company, revenues from these projects will flow in large proportion during the second half of this year. The division’s order book position has risen further to Rs5,700 crore, from Rs4,600 crore in the quarter to March. Orders worth Rs1,500 crore were booked during the June quarter. The significance of these numbers can be fully fathomed when seen in comparison with the order book position a year ago, which was merely Rs1,900 crore. The order book stands at around 3.5 times annual revenues.
According to chief financial officer M.M. Miyajiwala, there are early signs of execution delays on the part of customers. So it’s imprudent to get too excited about the huge orders. The firm’s engineering products and services business has taken a hit due to a slowdown in textile industry orders and a drop in margins of the material handling segment.
The cooling-products business was the star last quarter, accounting for nearly three-fourths of the incremental profit before interest and tax. Although sales were impacted due to early monsoons in some parts of the country and import costs soared because of the depreciation in the rupee, margins improved by 250 basis points and profit jumped by 64%. Hundred basis points make 1 percentage point.
But if profit growth at the key projects division slows because of execution or other problems, it’s unlikely that the cooling-products division will make up the loss. These are the concerns that have caused the company’s valuation to drop from 44 times past earnings in January to under 20 times currently.
Bharat Heavy Electricals’ June quarter results worth a cheer
Power equipment maker Bharat Heavy Electricals Ltd’s (Bhel) stock underperformed the Bombay stock Exchange’s Capital Goods index in the the quarter to March on concerns about its ability to execute projects, pressure on margins and increasing competition. Its June quarter results, however, are worth a cheer.
The worries about margin pressures were not misplaced. Bhel’s Ebitda (earnings before interest, taxes, depreciation and amortization) margin has fallen to 8.6% from 9.6% in the same quarter last year. Operating margins in the dominant power segment—that accounts for 73% of revenues and 78% of profits—were lower than in the year-ago period, although margins in the industry segment improved.
Raw materials consumed as a percentage of net sales was 58.2% in the June quarter, compared with a much lower 51.9% in the March quarter. Much had been made of the rise in staff costs in the March quarter, when the year-on-year (y-o-y) increase was 29%, but that rate of growth was an even higher 48% in the June quarter.
And yet Ebitda increased by 20.3% y-o-y in the June quarter, compared with a negative growth rate of 14% in the March quarter. The secret of success: the 33.9% y-o-y growth in net sales in the June quarter. Net sales had risen by a mere 4% in the March quarter. That seems to indicate that execution was not a problem in the quarter.
Nor have the worst fears of a slowdown in order intake been realized. Bhel booked orders worth Rs14,500 crore in the first quarter of this fiscal year, compared with Rs11,000 crore in the same period last year. The order inflow momentum was up 32% y-o-y, compared with 41% at the end of March. The order backlog was Rs95,000 crore at the end of 8 June, compared with Rs62,400 crore a year ago, a yearly growth rate of 52%. At the end of March, the order backlog was up 56%.
However, headwinds remain. A recent research note by Enam Securities Pvt. Ltd points out that the company continues to face execution challenges due to shortages of critical components and inadequate contractor capacity; that only about 50% of Bhel’s order book has price variation clause but the price increase is capped at 20%; and that Bhel recently lost a super-critical turbine order to Larsen and Toubro Ltd-Mitsubishi Heavy Industries Ltd, where the price difference was as high as 25%.
It will take more than one good quarter to dispel all the concerns about the firm. But on Tuesday, the stock was up 6%, on its way to correct its earlier underperformance.
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