Many large companies have recorded a weak top-line growth during the third quarter that ended on 31 December 2009
While the Sensex is trading at a P/E of 20 and has hit a 21-month high, December quarter results should give the bulls a pause to think. In the first week, some 65 companies have declared results and the interesting news is that many of the large companies have recorded a weak top-line growth. While Infosys has declared excellent results, mid-size software company Mastek posted a dismal performance. Its sales in the December quarter were down by 25% over the same period last year. Usha Martin, which is planning to raise Rs500 crore through qualified institutional placements (QIPs) to reduce its debt, has suffered a top-line decline of 14%. Lacklustre performance came from Jindal Saw and also HDFC Bank. Jindal Saw’s revenues were down by 11% while HDFC Bank reported a surprising fall of 10% in revenues for the December quarter over the same period last year. Revenues of another bank, State Bank of Bikaner & Jaipur, also fell 5%. Slow demand on the global and domestic fronts has weighed on the top-line of Rallis India. Its sales declined by 3%. While analysts are gung-ho about the future growth of Infosys, its revenues too were down by 2%. VST Industries and Gruh Finance both posted a 1% decline in sales. Companies like Finolex Industries and Sintex Industries posted a meagre 2% growth in their top-line in the December quarter over the same period last year. Axis Bank’s growth too was not too stellar—just 4%. Infomedia 18 which launched Forbes magazine last year, posted a decline of 38% in sales in the December quarter over the same period last year.
Declining sales are a clear indication of weak demand, which raises doubts about the economic recovery. Across all industries, companies have recorded weak sales—a disturbing fact, indicating that growth in the overall economy is yet to gain momentum.
Magma Fincorp Ltd is planning to enter the general insurance business and has bought stake in a credit information company, Experian. Sanjay Charmia, VC and MD and Dhirendra Kumar Hota, AVP and head for MIS budgeting, speak to Moneylife’s Aaron Rodrigues about the company’s plans
Aaron Rodrigues (ML): What are the prospects and outlook for the company, going forward?
Magma Fincorp (MF): We hope to benefit from a gross domestic product (GDP) growth of 7%-8% which will mean a rise in demand for automobiles, tractors and construction equipment. We also expect to clock higher than industry growth. We expect higher revenues for high-yield products like used commercial vehicles, tractors and loans to small businesses. The general insurance joint venture with HDI Gerling will expand our product offerings. We plan to increase our presence and market share in the western and southern regions.
ML: The company’s net interest margin has grown to 5.1% from 3.6%. How much do you expect it to grow in the next quarter?
MF: We propose to at least maintain (the margin) at more than 5%. We have achieved 5.6% in the third quarter and we would like to maintain (the margin) at more than 5%, by using the contribution of high-yielding products which currently deliver around 13.5% gross margin.
ML: What are your plans in the western and southern regions where you have a low presence?
MF: We plan to increase our presence in the western and southern parts of the country. This year we are adding five branches and next year we propose to add 15 branches.
ML: Magma recently acquired a 7% stake in Experian Credit. How much was it valued at?
MF: We have picked up a 7% stake and this cost us Rs4.20 crore. Experian has an equity base of Rs60 crore. We plan to finance this acquisition through internal sources.
Moneylife (ML): When will your general insurance venture with HDI Gerling become operational?
Magma Fincorp (MF): We filed our first application with IRDA at the end of October. It is in an advanced stage and would be completed in a month or two. We shall then go to the second stage when IRDA will ask for our company’s detailed business plans and policies. Once that is over, the final approval is a mere formality. We expect operations to begin in June this year.
ML: Which business segment of general insurance will Magma focus on and why?
MF: We would be focusing on our captive business, retail health and the fire & engineering business. That’s because that can be an immediate start-up for our insurance business and then of course we can build up through doing independent businesses like building up relationships with dealers, manufacturers and direct customers among small & medium businesses and mid-size corporates.
The captive business is largely the auto sector. As we deal mainly with rural and semi-urban markets, we intend to capitalise on retail health, which is a profitable business, unlike group health. Every month, we have added 100 new clients in the SME loan segment, so we can give them insurance and then we can also look at non-captive business (which is an independent business not related to Magma).
ML: What kind of revenues or market share are you targeting?
MF: It’s quite premature to talk about it now. Once our operations begin—which would be in the first half of the next financial year—then we will be able to make our analysis and talk about it.
The market’s trading band has narrowed. It will not stay that way and will be resolved with a massive move. Will it be up or down?
The Sensex edged higher in early trading on Friday, tracking the rise in Asian stocks. However, it pared off early gains very soon and was mostly flat for the rest of the day. It closed at 17,554 points, 30 points lower than the previous day’s close.
The market’s trading band has narrowed down to an extreme. This usually presages a major move. We can’t say at this moment whether the market will end higher or lower, but a big move is certainly coming.
Through the day, it touched a high of 17,639 and a low of 17,529 points. The Nifty ended the day down 9 points. The bullish sentiment was subdued as inflation in December 2009 touched a one-year high, reinforcing fears that the RBI will be forced to tighten monetary policy. The wholesale price index rose 7.3% in December 2009 from a year earlier, its highest level since November 2008 and accelerating from a 4.8% gain in November 2009. This is largely because of a 20% rise in food prices following a weak monsoon and flooding in parts of the nation.
Reliance Communications gained 4.76% after it got a nod from the market regulator to launch an IPO for its telecom tower unit. Power Grid Corporation of India (up 1.11%) has received its board’s approval for the participation in a joint venture with Nepal Electricity Authority and IL&FS for a 400KV Indo-Nepal transmission project. Tata Consultancy Services (up 1.48%) rose ahead of its quarterly result. Some of the banks have announced their results today. Axis Bank (up 1.52%) posted a growth of 4% and 51% in total income and operating profit in the December quarter over the same period last year. HDFC Bank (up 0.61%) reported a declining income (down 10%). However its operating profit grew by 11% over the same period. IDBI Bank (up 0.72%) posted a growth of 26% and 64% in income and operating profit for the December quarter over the year-ago period.
In the US markets on Thursday, the Dow gained 29.78 points, the broader Standard & Poor's 500 index rose 2.78 points and the Nasdaq Composite Index was up 8.84 points.