The aggregate results for the quarter ended September show that topline recovery for companies was not as robust as expected. The green shoots of recovery were seen in sectors like auto, metals and cement, mainly driven by the government stimulus in the form of reduction in excise duty and lowering of interest rates.
An analysis of 2,800 non-financial companies show that while net sales year on year have decreased by 9%, net profit increased by about 11%. This indicates that a secular demand growth is still a few quarters away and the current growth is a result of the government?s stimulus packages. But for financial companies, the trend is just the opposite: net sales on a year on year basis increased by about 20% and net profit rose by 56%. The benefit of low-commodity prices, cost-cutting measures and operational efficiency, which companies had undertaken in the last two quarters, continued to play out during the quarter ended September, too.
Sarabjit Kour Nangra, vice-president, research, Angel Broking expects secular demand growth to emerge during the second half of FY 2010. ?While the initial leg of the growth was a result of the stimulus packages, the overall growth is likely to intensify, encompassing more segments of the economy as suggested by improvement in the various economic indicators.?
Taking a broader perspective, Mohan K Swamy, head of equity research at RBS, says that the government stimulus in terms of excise reduction and rural initiatives like NAREGA has fast tracked the recovery. ?The inherent under penetration in India in most sectors and the latent demand potential are also responsible for the recovery. This recovery has to be nurtured more, to make it self-sustaining,? underlines Swamy.
Sector-wise, automobiles reported stellar performance on the back of price hikes, full realisation of lower commodity prices and lower interest rates. An analysis of 18 companies shows profit after tax grew by 64% as compared to the same quarter last year and sequentially too, the sector reported 29% growth. Hero Honda, the market leader in two-wheelers, reported almost 95% increase in net profit and 26.66% increase in net sales.
Interestingly, the current signs of revival in the economy are pointing to an improvement in the movement of freight, which will augur well for sales of commercial vehicles, where sales growth is slow as compared to sales of passenger vehicles. However, going forward, analysts expect that capacity constraints in some companies coupled with increase in input cost would dampen earnings of auto companies.
Capacity constraint, says Pramod Amthe, equity analyst at RBS, is specific to car majors only and hence not a general industry concern. ?Strong demand extends better pricing power in the initial cycle of uptrend, which will compensate for rising raw material costs. Except for duty reversal risk in recent budget, the demand trend is very strong to sustain in the medium-term considering that worst of job fears are behind us,? he says.
The IT sector sprang surprises with a few heavyweights revising upwards their earning guidance, reporting pick up in volume and increase in head count. Going forward, the dampener will be the appreciation of rupee against the dollar, which will affect mid-sized companies as they lack the bargaining power to revise contracts with large clients. Analysts say it is important for these companies to put in place an effective currency hedging strategy.
For banks, the sector was a mixed one because of sluggish credit growth. Since banks have mobilised high-cost deposits, it has led to a contraction of their net income margins. Also, the most worrying fact is the deterioration in asset quality, which declined sharply and few negative surprises came in from public sector banks like State Bank of India and Axis Bank.
An analysis of 21 banks both in the private sector and public sector shows non-performing assets have risen by an average 26% while capital adequacy ratio improved by 1.60 percentage points in the quarter-ended September this year as compared to the same quarter last year. Analysts say the increase in NPA underlines the importance of consolidation of banks as it will bring down their risks and expand their balance sheet size to global standards to take on the challenges in the financial sector.
The possibility of lower treasury gains and muted growth in net interest margins is likely to continue in the next quarter as Gsec yields remain range bound, with an upward bias.
However, on account of downward repricing of high-cost bulk deposits that were contracted immediately after the Lehman-crisis last year, net interest margins are expected to show improvement in the coming quarters, aiding net interest income growth. Nangra of Angel Broking says that with the GDP outlook progressively picking up and with ground-level demand indications by bankers corroborating the same, it is expected that companies will be drawing down on their working capital limits increasingly in the coming quarters.
The cement sector reported stellar performance as demand remained strong with 11% growth year on year. Higher government spending on infrastructure projects and revival of both commercial and residential real estate in metros have helped the industry to operate at full capacity. In the past five years, the real GDP from the construction industry has grown at a high rate prompting many cement companies to go for capacity addition. But the slowdown affected production. It has now started picking up, prompting companies to ramp up their capacity.
Heavy engineering companies reported better-than-expected results backed by lower commodity prices, cost rationalisation and better working capital management by the companies. But given the poor execution of projects by most companies, interest cost as a percentage of revenues was 3.8%, the highest ever in the last four years. This has impacted the overall bottomline of companies. The net profit of 107 companies saw a degrowth of around 60%. With indications of an early capex recovery, the sector?s prospects appear healthy in the coming quarters.
For the telecom sector, the advent of price war has cast a spell on the industry as the results of the quarter ended September show. The average revenue per user of telecom companies dropped sharply by 10% QoQ and around 25% YoY, leading to flat to negative QoQ revenue growth. Analysts say though the quarter ended September has given mixed results, the next few quarters will be important for growth signals from corporate India.
