Operating profit growth on Street below expectations

The Sensex valuation has factored in a 20% growth in operating profit for the entire fiscal year 2011; but Q1 has been a damper. What if the growth does not resume in the next two quarters?

Till today 26 of the 30 companies that make up the Bombay Stock Exchange (BSE) Sensex have put out their financials for Q1FY2011. While revenues have witnessed a strong 24% aggregate growth, operating profits grew only 12%.

This performance is contrary to the market's expectations, which is anticipating a 20% growth in operating profit for the entire fiscal year 2011. This has also been factored into the current valuations, and the market is now trading at a PE multiple of close to 18. However, the latest quarterly performance may not bode well for the rest of the year. It is obvious that since profit growth is lagging so far behind revenue growth, the Sensex companies are reeling under some cost pressures. If this profit growth fails to pick up significantly by the next quarter, the markets may lose confidence and head southwards.

Companies that have witnessed robust growth in the June quarter include Sterlite Industries, DLF, BHEL, Tata Motors and Reliance Industries. Sterlite's revenues surged 35% while operating profits zoomed 197% during Q1FY 2011, over the corresponding period last year. DLF's revenues also jumped 56% while profits surged 107% during this period. Similarly, BHEL and Tata Motors recorded sales growth of 16% and 63% respectively, with profits surging by 63% and 53% respectively. RIL also put in a strong performance, with sales growing by 87% and profits jumping by 46% over this period.

Companies that put in a disappointing show during the last quarter include ACC, ONGC, Reliance Infrastructure, ICICI Bank and NTPC. ACC witnessed a 3% fall in revenues and 23% drop in profits during Q1FY2011. Similarly, ONGC and Reliance Infrastructure's revenues fell 9% each, with profits contracting by 16% and 15% respectively. While ICICI Bank's revenues slid by 19%, its profits fell 13%. On the other hand, NTPC's sales jumped marginally by 6% while profits declined 10% during this period. 

These companies will have to put in a much superior performance in Q2 to bolster the market's confidence. At this juncture, it seems that the market is poised for a significant move. Unless reported numbers improve considerably over the next quarter, the Sensex may very well go down.



Subrata Das

7 years ago

Exactly. The Indices do not have scope for upward movement.Stay short.

'India fared well during financial crisis'

Washington: India fared comparatively well during the recession that had engulfed the world, mainly due to inherent strength of its economy, reports PTI quoting a Congressional oversight panel report.

"Because the financial crisis originated in domestic housing bubbles, and was transmitted by highly leveraged multinational financial firms, countries that were shielded from those forces fared comparatively well," said the panel in its 162-page report for the month of August.

India fared comparatively well, the report said.

"Brazil, India, China, Australia and Canada, for example, generally avoided the banking crises that plagued US and much of Europe; nonetheless their economies felt many of the after-effects of the global financial crisis."

Brazil, the report said, is one of the countries that has fared best during the global financial crisis.

"Its highly regulated banking sector had limited operations outside India, and therefore very little exposure to subprime lending in the US," the report said, adding that although India did feel the follow-on effects of the crisis, though.

Its export-driven economy suffered when global demand dropped; its financial sector suffered from the global liquidity squeeze, which led to a fall in lending; and its stock market lost roughly 50% of its value between June and December 2008.

"Although the Indian government did not provide capital to Indian banks, it did respond to the crisis with fiscal stimulus equal to about 2% of gross domestic Product (GDP), and it shifted from a tightening monetary policy to an expansionary one," the report said.

The Congressional Oversight Panel said China's financial system also fared relatively well during the crisis, though it should be noted that China's state-owned banks have benefited from repeated government rescues in the recent past.

China maintains capital controls that limit foreign investment by individuals and businesses; these controls had beneficial effects during the crisis, since Chinese investors had little exposure to troubled parts of the US and European financial systems, it said.

Banks in China had invested heavily in US securities, but those investments were generally not in sub-prime securities, but rather in safer Treasury bonds and securities issued by Fannie Mae and Freddie Mac, which the US government stepped in to backstop during the crisis, it said.

"Therefore, the China's financial system, like Brazil's and India's, did not sustain major damage from the crisis.

China's export-driven economy did suffer, though, from the sharp downturn in global demand and the slowdown in foreign investment," the report said.

China's explosive growth slowed during the crisis, but the government countered the effects of the slowdown by increasing bank lending, lowering interest rates, and introducing fiscal stimulus spending that was among the largest in the world as a percentage of GDP.

"Australia also suffered relatively little from the crisis. Its only decline in GDP occurred in the fourth quarter of 2009, meaning that Australia did not enter into a recession," the report said.


Cairn Energy unlikely to exit Indian arm, says official

New Delhi: Cairn India today clarified that its UK-based parent Cairn Energy Plc is unlikely to exit completely from the company, reports PTI.

"To me it looks like they (Cairn Energy Plc) are not exiting completely," Cairn India CEO Rahul Dhir said after a meeting with oil secretary S Sundareshan.

Mr Dhir may have briefed the oil secretary about the transaction as owner change of Cairn India will require the government approval.

Billionaire Anil Agrawal-owned mining firm Vedanta Resources yesterday said it is in talks to buy a stake in Cairn India, the company that owns the nation's largest onland oilfield.

Mr Dhir, however, did not divulge details of the discussion between Cairn Energy Plc and Vedanta Resources.

"I am not aware of that. The discussions are taking place between majority shareholder and Vedanta. I am not part of those discussions."

Cairn Energy holds a 62.37% stake in Cairn India.

Mr Dhir said the company is currently producing 1,25,000 barrels per day of crude oil from Rajasthan fields which have a potential to go up to 2,40,000 barrels per day (bpd).

In addition, the Bhagyam field in the same block has the potential to produce 40,000 bpd and the Aishwariya another 10,000 bpd.

The company owns a 70% stake in the fields, while the rest is held by state-owned Oil and Natural Gas Corporation (ONGC).

It also owns interest in Ravva oil and gas field off the East Coast and Block CB/OS-2 in the Cambay Offshore Basin.


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