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Home > Business > Special


For now, the India story remains good

Shobhana Subramanian | February 06, 2006

They may not be as exciting as they were in the first half of FY06, but, numbers for the December quarter are no damp squib. The topline growth (for a sample of 1764 firms) may have slipped a bit - at 17.1 per cent for Q3FY06 compared with 18.1 per cent for the nine months ended December - but that's to be expected with the effect of a high base coming into play.

Besides, disappointing results from Reliance Industries and State Bank of India and a predictably poor performance from the oil firms skewed the picture somewhat. The rise in operating profits - 13.2 per cent yoy for the quarter versus 12 per cent yoy the for nine months ended December 2005 - comes as a pleasant surprise as corporates finally conquer costs.

The bottomline: companies have managed to eke out reasonably good surpluses in a competitive environment though margins may have been slightly dented. The surprises: auto firms which continue to sell good volumes and are finally getting the benefits of scale.

The disappointment: steel firms, which have succumbed to falling prices. And the stars of Q3: without doubt capital goods firms, which have cashed in on the capex binge to earn spectacular revenues and profits.

Says Tridib Pathak, CIO, Chola Mutual Fund, "The results confirm that year-on-year growth is slowing down and we've been seeing that for the last three quarters. But, that's not a cause for worry because the numbers in themselves are healthy."

Adds Paras Adenwala, CIO, Equities at ING Vysya, "The numbers have been quite good in most cases which shows that the business momentum continues to be strong."

Mihir Vora, head equities, ABN Amro AMC, believes that the results have been in line with expectations and that it's a couple of sectors such as steel and telecom that have turned in results below expectations.

As does Rajat Rajgarhia, head of research at Motilal Oswal, who feels that the quarter has thrown up positive surprises across sectors. "There are visible signs of margin expansion and we are upgrading estimates for some sectors such as capital goods and automobiles," says he.

Revenues:
Regaining pricing power

Demand continues to be strong whether its for toothpaste, capital goods, retail loans or television programmes. Riding the capex boom, Siemens notched up a sales growth of 68 per cent yoy while for Colgate it was 21 per cent yoy and for TV 18 a stunning 55 per cent yoy.

Driven by retail credit, both ICICI Bank and HDFC bank saw their assets grow a phenomenal 45 per cent. And led by its foods division, Dabur posted a 26 per cent rise in revenues.

In fact, excluding oil, gas and petrochem firms from the sample, sales have grown higher at 18.1 per cent yoy for the December quarter compared with 17.4 per cent yoy for the nine-months ended December 2005.

Again, if one were to leave out only oil firms, growth rates are comparable at around 16 per cent yoy. Which means there hasn't really been a substantial slowdown in Q3. One reason for this has been the return of pricing power to some sectors. Not only have firms sold better volumes, they have in many cases, sold at better prices.

For example, per unit realisations for car maker Maruti, are up 4. 6 per cent yoy while for motorcycle major Hero Honda, they were up 3.4 per cent yoy. Prism Cement, which turned around in the quarter, managed a 4 per cent higher realisation.

The outsourcing story continues: auto ancillary Bharat Forge grew its consolidated revenues by by 80 per cent yoy. And a huge 88 per cent expansion in retail space saw Pantaloon Retail's sales soaring by 98 per cent.

Inorganic growth also chipped in: United Phosphorus's topline grew 26 per cent after it acquired two US firm. Not all firms flourished: textile player Arvind Mills for instance, was stuck with inventories and saw its sales fall 6 per cent yoy.

Profit Margins:
Gaining from lower costs

With prices of steel and other commodities softening, Indian industry breathed easier. The impact was visible: Bajaj Auto's operating profit jumped 48 per cent pushing up margins a handsome 300 per cent. And lower cotton prices propped up thread and yarn maker Vardhaman Textiles operating margins by a smart 353 basis point: the ratio of raw materials to sales fell a huge 670 basis point.

Companies such as Dabur opted for more in-house production and took advantage of excise sops as a result of which margins improved 150 basis points. Not everyone was as fortunate though.

Soaring ATF prices saw Jet Airway's profits nose-dive 53 per cent yoy. Despite a stunning topline performance, Bharat Forge's EBITDA (Earnings before Interest, Tax and Depreciation) margins shrank by 347 points.

And tractor maker Mahindra & Mahindra was able to grow margins only by a meagre 20 basis points even though raw material costs fell since other expenses mounted.

MTNL, which restated its Q3 numbers, saw its EBITDA fall 13 per cent and the EBITDA margin drop 70 basis points. Surprisingly Pantaloon's EBITDA margins fell 110 basis points due to higher staff costs.

Sector snapshot:
A mixed bag

With product prices down 20 per cent yoy, it was not surprising that steel companies reported a disappointing set of numbers. Rising freight charges cost them dearly and crimped margins even though raw material costs were more or less stable.

Steel major Tata Steel posted a marginal dip in sales and a 12 per cent fall in EBITDA. Cement companies too paid out higher freight but better prices and exports bailed them out: ACC ended the day with a 31 per cent higher EBITDA, while GACL's was an even better 49 per cent.

Shipping firms too weathered tanking tanker freight rates to post decent results: SCI resorted to major cost cutting while GE Shipping made it home thanks to it its long-term contracts.

Forex losses could not put down tech firms as they took on their MNC peers by bagging large orders. The pricing environment, however, remained competitive so that operating profit growth was muted. Wipro turned in a surprisingly good set of numbers with a remarkable improvement in its BPO operations.

The quarter was not partiularly good for drug firms especially the majors - Ranbany's EBITDA plunged 70 per cent though Cipla managed a 31 per cent rise. Adenwala believes that though this quarter may not have seen companies do too well, those firms catering for the domestic market and also for the overseas market in certain segments are likely to be the winners in the future.

The stars this quarter were the engineering firms: Bhel's 71 per cent rise in EBITDA and 78 per cent rise in PAT was outstanding as was Siemen's 76 per cent and 56 per cent respectively.

One sample showed the group posting a 30 per cent yoy topline growth. Equally impressive was the 27 per cent yoy growth notched up by the FMCG lot, evidence of the resurgence of the sector.

Valuations:
Looking for value

Excluding Oil R&M companies, net profit growth for Q3FY06 was 22.7 per cent yoy compared with 28 per cent for nine-months ended December.

Says Adenwala, "The next few quarters should be good. Capital goods firms are sitting on strong orderbooks, which shows business momentum is strong."

Adds Pathak, "Even if it slows down somewhat, it's not likely to be less than 15 per cent. At 9750, the Sensex now trades at 15-16 times estimated FY07 earnings, though the broader markets trades at far higher multiples. Clearly stocks are not cheap any longer but is the market expensive? Vora believes that given the quality of earnings, the market is not overvalued.

"There are sectors that hold opportunities though it will be harder to make money this year," he says.

Observes Rajgarhia, "With interest rates at 7.5 per cent and earnings set to grow at 20 per cent, the market is not expensive, given the good long term fundamentals. True, the economy is in fine fettle and rural demand should be strong given the good agricultural growth expected this year. For now, the India story remains as good as ever.


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