Mumbai: Large-cap companies, which powered the rise in the Sensex and the Nifty in the past four months, have disappointed as far as financial performance goes. In the latest June quarter, their sales grew just 17.8%, down from 24.5% in the March quarter. But the chief disappointment was the fact that operating profit growth halved to 16%.
Mid-caps, interestingly, did much better, posting operating profit growth of 31% on the back of sales growth of 24.2%. They too saw a drop in growth, from 40.3% and 25.8%, respectively, but even then last quarter’s numbers look impressive.
This analysis is based on results of non-oil and non-financial companies sourced from Capitaline. Mint has classified companies with a market capitalization of more than Rs10,000 crore as large-cap firms, and those with a value of between Rs2,500 crore and Rs10,000 crore as mid-caps. This ties in reasonably with market indices published by the National Stock Exchange. Forty- seven of the 50 stocks in the Nifty have a market cap of more than Rs10,000 crore. The mid-caps are captured by Nifty Junior and the CNX Midcap index. At the net profit level, large-cap companies reported an increase of 32.2%, thanks to higher other income, most of which was non-recurring gains due to forex fluctuations. What matters is the growth in core operating earnings, which has disappointed. That’s not all. Even the low-key 16% operating profit growth these companies reported was due to heavy contributions from a few companies such as Bharti Airtel Ltd and Reliance Communications Ltd. Remove the top five performers, and the growth drops to a dismal 8.3%. This is not the case with the mid-caps: Excluding the top five performers among them, and the growth in operating profit is still at a respectable 25.4%. These facts have not escaped the eyes of the markets. Since April, the Nifty Junior (which represents largish mid-caps) has outperformed the Nifty by 8%, and the CNX Midcap index has outperformed the large-cap index by 6%. But what’s surprising is that the markets have still counted the large-caps worthy enough of a 16% rise in market value since April.
Bad loans at banks
Results of banks and housing finance companies (HFCs) for the June quarter show that bad debts have started to rise. Bad debts have risen sharply at some of the biggest banks. For instance, net non-performing assets (NPAs) went up from 1% of advances to 1.3% at ICICI Bank Ltd. In absolute terms, gross advances rose from Rs4,850 crore at March-end to Rs6,043 crore by the end of June at the nation’s second largest lender. A similar pattern can be detected across many banks.
To take a few examples, Punjab National Bank’s net NPAs rose from 0.76% at the end of March to 0.98% by June-end. State Bank of India’s gross NPAs went up from Rs9,998 crore to Rs10,758 crore. Oriental Bank of Commerce saw its gross as well as net NPAs rise compared with the March quarter. Among HFCs, HDFC Bank Ltd (by far the biggest of them all) saw its bad loans rise from 0.92% of advances at the end of March to 1.22% by the end of June. LIC Housing Finance Ltd’s gross NPAs jumped to 4% from 2.6%. Are these NPAs the tip of the iceberg? Will the Indian housing market have its own little version of the subprime problem? That’s very unlikely, say analysts. They point out that NPA levels are still very manageable and many banks have, in fact, lowered their NPAs even in the June quarter. That’s true for UTI Bank, now known as Axis Bank Ltd, and nationalized banks such as Bank of India. Some other banks have seen a very marginal rise in bad loans. Much of the problem, points out Abhishek Agarwal, banking analyst with Religare Securities in Mumbai, lies in the retail lending segment. Nationalized banks are unlikely to be affected much, simply because retail loans make up a small proportion of their overall credit portfolio. The saving grace, says Agarwal, is that the banks have already tightened procedures, and housing loan growth has seen a deceleration. As for personal loans, bankers say that the high yields more than make up for the losses.
As rating agency Crisil has pointed out, the combined effect of rising property prices and higher interest rates has led to an increase in the debt burden for retail borrowers. The saving grace is that higher real estate prices have so far led to higher collateral values for banks. But that could work the other way too, if real estate prices too are hit by the ongoing market turmoil.
Banks are likely to have to make higher provisions for NPAs in the coming quarters. The benign environment for NPAs has ended and banks now need to monitor their loans more closely.
Write to us at email@example.com