The June quarter corporate results have thrown up a surprise: annual sales growth is the highest in several quarters. It’s a strange thing to happen when everybody agrees that the economy is slowing. But, a closer look shows high inflation is responsible for this odd growth in corporate revenues.
A Mint study of 336 non-bank, non-oil companies — that are part of the Bombay Stock Exchange 500 index and have been so for the last 10 quarters — shows their annual growth in net sales was 27.33% in the quarter to June, the highest rate of growth in the last six quarters.
The last time sales growth was higher was in the December 2006 quarter, when it was 33.58% for these firms. Inflation at end-December 2006 was 5.89%, according to the Wholesale Price Index, or WPI, while it was 11.89% at the end of June.
In real, or inflation-adjusted, terms, therefore, sales growth in the June 2008 quarter was actually much less than that in the December 2006 quarter. Of course, the impact of inflation varies from company to company, but the general point that sales figures should be adjusted for inflation to get a picture of the real growth holds true.
So, while sales growth seems to have jumped for this sample of firms from 14.62% in the December 2007 quarter to 27.33% in the June 2008 quarter, you have to bear in mind that WPI inflation was growing at an annual rate of a mere 3.83% in December 2007. True, sales growth in the June quarter works out to be higher than in the December quarter even after adjusting for inflation, but the difference is now not so much.
What’s true for India is true for Asia-Pacific as well. A Citigroup Inc. research note has this to say about its earnings per share, or EPS, growth forecast for Asia excluding Japan: “With inflation well above historic averages, it pays to deflate forecasts. Do that, and the ’08 EPS growth forecast turns from +4.4% to -3.2%. This is the lowest EPS growth forecast since 2001.”
But, it may not make sense to adjust profits for inflation. While inflation boosts revenues, it also increases input costs. That’s why, in this sample of firms, profit growth in the June quarter was the lowest in the last nine quarters.
At the same time, it’s also true that a rupee of profit in June 2008 is not the same as a rupee of profit a year earlier. So Citigroup’s method of adjusting earnings for inflation also makes a point.
Shares of sugar firms hit a sweet spot
Sugar prices have risen about 30% this year in the spot market, and the markets haven’t missed that fact. Stocks of two of the country’s biggest sugar manufacturers, Bajaj Hindusthan Ltd and Balrampur Chini Mills Ltd, have risen 26% and 35%, respectively, from their lows in July.
These firms’ valuations were also helped by a favourable court order relating to the price sugar mills in Uttar Pradesh must pay to cane growers. The court ruled that the mills need to pay only the statutory minimum price fixed by the Union government, and not the statutory advisory price set by the state government.
The price set by the latter is about 50% higher and had led to losses for sugar mills, which were faced with high costs, on the one hand, and dwindling sugar prices, on the other.
The fact that the favourable ruling comes at a time when sugar prices have started rising essentially means sugar manufacturers are now in a sweet spot. It’s no wonder sugar stocks are back in demand.
But, it must be noted that the state government is expected to challenge the court order, and it may not be the last one hears on the matter. In fact, for some time now investors in sugar stocks have had to live with the uncertainty relating to court rulings on procurement prices.
What’s different now is that sugar prices have started rising, hence lessening the impact of high procurement prices. Cane production is expected to fall substantially this year and be subdued in the near future because of a shift to other, more lucrative crops. It’s this shortfall that has led to the rise in sugar prices. Some analysts worry that policymakers may soon clamp down on sugar prices, especially since the country is close to an election.
But as Credit Suisse Group AG points out in a recent research note, “Negative policy interventions like export bans start only after prices have risen appreciably. Sugar prices, as indicated by the WPI (Wholesale Price Index), are still recovering from the lows of last year and most mills are yet to break even. Many of the positive regulatory interventions introduced when prices were low, such as export subsidies and buffer stock subsidies, are still in place. It is likely that these will first be withdrawn over the next 6-12 months before the government considers more drastic measures such as an export ban or removal of import duties.”
Investors, however, seem to be hedging their bets, going by the fact that valuations are still low. Perhaps, some more favourable court rulings would help change sentiment decisively.
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