The Sensex has touched 20,000, but the celebrations among retail investors have been rather muted. The predominant feeling is one of being left out of the rally. The reasons: the speed and unexpectedness of the rally, which didn’t allow time for most investors to get in, and the fact that only a few sectors have benefited and, within sectors, only the topline stocks.

The lop-sided nature of the rally is easily seen from the numbers. While the Sensex is up 15.5% in the past one month, the Bombay Stock Exchange (BSE) fastmoving consumer goods (FMCG) index is flat as a pancake, the Information Technology (IT) Index has gone up all of 1%, the Healthcare Index has increased by 3.7% and the Auto Index is up 6%. On the other hand, the BSE Capital Goods Index is up 35.2% and the Metals Index has gone up 23.2%. The BSE mid-cap and small- cap indices went up 8.9% and 6.6% in the past month. In addition, the price to earnings (PE) ratio of the Capital Goods Index is 52.63, compared with the PE of the IT Index at 25.6 or that of the Healthcare Index at 21.6. This rally has certainly not lifted all boats.

Jet’s biggest loss

Jet Airways Ltd’s shares have done extremely well to nearly match the 47% returns delivered by the Nifty this year. While the consolidation in the industry has certainly helped valuations of airline stocks, so did the firm’s March quarter results, which suggested that its woes had ended. But things have gotten terribly worse since. Jet reported its highest ever loss before tax and non-operating income in the September quarter. Last quarter’s reported profit before tax of Rs42.5 crore includes an unusually high non-operating income, excluding which losses stood at Rs393 crore. Some analysts were expecting a loss of less than Rs100 crore. The non-operating income primarily consisted of gains from the sale and leaseback of aircraft, as well as foreign exchange gains.

In the year-ago September quarter, losses stood at Rs279 crore before accounting for tax and non-operating income. Things were supposed to have improved considerably because of lower capacity addition and hence less price competition. But Jet’s results show that ground realities are quite different. Actually, the company had the benefit of lower fuel expenses (down 470 basis points) and decreased lease rentals (down 310 basis points).

It’s incredible that losses were at the highest-ever level despite these savings.

Worse still, the losses were not because international operations dragged down overall performance due to the launch of new routes. Losses in the international business, in fact, came down from 41% of revenues a year ago to 21% last quarter.

Domestic operations were the culprit, reporting a loss of Rs274 crore or 22% of revenues last quarter. In the year-ago period, losses stood at a much lower 13% of revenues. The reason: a sharp drop in average yields, which was hardly compensated by an increase in passenger load factor. The net result was a 5.6% drop in revenue per available seat Km for the domestic business. While performance would improve in the next two quarters, that the peak season for airline companies, the last quarter’s performance indicates that the improvement may not be substantial on a year-on-year basis.

HDFC stays the course

Higher interest rates haven’t made much of a difference to Housing Development Finance Corp. Ltd’s loan growth during the September quarter. Loan approvals were up 29% year-over-year in the first half of the year—the same pace as in the first quarter. Overall growth in disbursements during the first half was at 27% compared with the year-ago period. Incidentally, that was also the exact rate of growth in disbursements during the first half of fiscal 2007. The lender’s loan portfolio was up 24% compared with the year-ago period at the end of September, slightly higher than the 23% rise at the end of June. Moreover, interest spread during the second quarter was 2.27%—a marginal improvement from the 2.2% spread in the June quarter. The result: a 23.9% rise in profits before tax and exceptional items in Q2. Note that the rise was 22.8% during the same quarter in the year-ago period.

A number of factors contributed to keeping the spread high. The money markets were volatile during the quarter, with the Reserve Bank of India cap on repos leading to very low call rates in June. Funding costs were therefore low, while lending rates were stable. While the company raised resources during the period, funds also came in from the Intelenet sale, the outsourcing company the lender jointly held with Barclays Plc.

The surplus from the deployment of cash in mutual funds was 6 crore in Q2, compared with 23.78 crore in the year-ago period. The high spread may, therefore, not be sustainable in the future. In addition, HDFC has recently lowered interest rates on housing loans which, too, will affect spreads. But what is lost in margins is likely to be made up in volumes.

Gross non-performing assets, compounded on a 180-day overdue basis, were at 0.84% at the end of September, compared with 0.9% at the end of June. The quality of HDFC’s loan portfolio certainly looks superior. This factor, along with the value of its holdings in HDFC Bank Ltd and its insurance businesses and the company’s uncanny ability to deliver the same rate of growth every quarter, year after year, justifies HDFC’s rich valuation.

Write to us at