June quarter results threaten the groupthink of the last few months that the market is undervalued

Indian companies have reported extremely poor profit growth which explains why the market is unable to show any recovery. In fact, there could be further downside due to poor earnings growth. We had suggested in June that analysts and fund managers were too optimistic

For months together, we have been sceptical about the forecasted EPS (earnings per share) of the analysts and fund managers arguing that a slowdown is not being factored into it. The consensus EPS of the Sensex for March 2010 was Rs1,250 (around April). This meant that at a Sensex level of 18,000, the market appeared "reasonably valued" to many people given the historical trend. It was not so obvious to us. (See Market valuation: Is the Sensex undervalued? ). However, the Sensex is now at 16,000. And now we know why. Earnings growth of Corporate India has slowed down to a crawl. As a result, the March 2012 EPS assumption looks grossly optimistic.

So far, 1,245 companies out of 1,300 companies in the Moneylife database have declared their quarterly results. For the first quarter of FY2011-12, revenues have grown by 28% over the previous year but aggregate operating profit and net profit (NP) fell by 10% and 3% respectively. Operating profit margin (OPM) for the companies for the June quarter was just 14%. The June quarter last year had an OPM of 16% and for the previous December and for the March quarter OPM was 17% and 16% respectively. Despite the good sales growth of the 1,245 companies reviewed, the profits of the companies took a beating due to the increase in costs and the rise in interest rates.

The Index of Industrial Production (IIP) growth, for April-June 2010 was 9.7% compared to a significantly lower growth of 6.8% for April to June 2011. This just shows there is a slowdown in the industry.

Out of the 1,245 companies, 975 companies registered a positive revenue growth for the June quarter year-on-year (y-o-y) and 760 companies registered a positive OP (operating profit). There were 68 companies that had a positive OP for the June quarter of 2010, but turned negative in the June 2011 quarter. As many as eleven of these companies are from the textiles sector.

Out of 107 companies that had registered an operating loss in the June 2010 quarter, just 57 of these were able to generate operating profits in the June 2011 quarter.

The 29 major sectors (out of 49) which are tracked by Moneylife in its database of 1,300 companies registered a revenue growth of 27% for the June quarter y-o-y, growth in OP and NP (net profit) was 11% and 3% respectively.

Companies in the lifestyle & leisure sector continued to show good growth for this quarter y-o-y. Sales grew by 43% y-o-y, whereas OP and NP grew by 28% and 21% respectively. Banks and financial services as well showed good growth in sales, showing a quarterly growth 30% y-o-y.

Among the laggards, sales of sugar companies grew by just 2% y-o-y. The revenues of the shipping sector grew marginally by just 3% with the OP and NP growth being in the negative. The telecom services sector registered a sales growth of just 7%.

The June quarter results should have put the analysts and fund managers on the edge. In our June 30th article we had mentioned that the consensus looks like a prime example of 'groupthink'.

We had argued that in FY10-11, a year of robust recovery, the EPS was probably Rs1,013. If the EPS estimate of Rs1,240 for FY11-12 has to be achieved, EPS had to grow by 22%. We had asked "on how many occasions has the Sensex achieved an earnings growth of 22%, especially when the first three months of the year have been a washout? In fact, assumption of such growth is simply absurd. Last year, which was great for earnings growth, EPS expanded by 21% or so. Battling the headwinds of higher interest and rising raw material cost, it is a pipedream to think that EPS growth would be 22%. Actual growth would probably be half of that. What if EPS growth is only about 11%? This is not unlikely, given how badly Sensex companies have done in the March quarter without any plausible reason and warning. And, if the growth is lower at 10% (not impossible), EPS will be Rs1,120-way off the Bloomberg consensus estimates. This would be a shocker for the market."

The shock has come. This explains why the Indian market is simply not able to bounce back after such a hard fall. Conviction has been shaken and groupthink is at a peril.


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Govt asks banks increase tenure of loans, not EMIs

EMIs have gone up by around 15% over the past few months

Worried over the impact of rising interest rates on borrowers, the government has asked all public sector banks to increase the tenure of loans instead of raising EMIs.

"The Finance Ministry has written to all banks to increase tenure in the light of rising interest rates," official sources said. This will help in not increasing the burden of EMIs on borrowers and mitigate the possibility of default, sources said.

Banks have taken actions accordingly.

The nation's largest lender SBI and other public sector lenders like Vijaya Bank said they have already been doing it as they felt that there was a room for possible delinquencies as interest rates started pinching borrowers more and more. They also said that they have received the letter from the Finance Ministry some days ago.

"We have already been doing it, in fact much before the Finance Ministry wrote to us suggesting to increase the tenor of EMI-based loans instead of raising the repayment amount as a prudential measure to avert possible defaults by our borrowers," SBI deputy managing director and chief credit & risk officer AP Verma told PTI on the sidelines of a Ficci-IBA banking summit.

Vijaya Bank chairman and managing director HS Upendra Kamath too concurred saying his bank has already been doing it as a prudential tool to avert any possible defaults. Similarly, United Bank of India chairman and managing director Bhaskar Sen too said he is looking at tweaking the loan period instead of increasing the repayment amount. "There are rising risks to the assets, especially from the SMEs and the retail sector and that we may look at increasing in the tenor of the loan than increasing the EMIs," Sen said.

When asked how long the tenor can be increased will, SBI's Verma said, there is no maximum tenor of a loan as it depends on the age profile of the borrowers. However, it can be noted that there is an unwritten rule at all the banks that caps the repayment period to the working age of the borrower.
Verma also said it is up to the borrower to decide to elongate the tenor or pay more, as increasing the tenor only lessen the burden now and not in the real sense. The 26 public sector banks account for over 70% of the banking market. The government move comes in the wake of banks passing on the interest rate hike by the Reserve Bank to the borrowers.

It can be noted that as core inflation remained highly sticky at much above the comfort level of the central bank, it has in the past 15 months increased its key policy rates (short-term lending rate or repo) by a record 11 times or by 4.25 percentage points to batten down inflation, which stood at 9.22% in June.

It is estimated that EMIs have gone up by around 15% over the past few months, burdening. Though the private sector lenders have not been asked, it has been learn that already the two largest players ICICI Bank and HDFC Bank are already giving this option  to their borrowers, it is learnt.


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