The market is trying to look beyond the bad patch of December
The latest Moneylife research has revealed that recent quarterly earnings of corporate India have been poor, in relation to last year. While the revenues increased by 25%, operating profit and net profit declined by 2% and 9%, respectively. These are hardly impressive figures and yet the stock market has zoomed up by 14% this year in anticipation of improving profits.
We analysed, in detail, a total of 49 sectors and 1,241 companies. We noticed that out of 49 sectors, 37 sectors reported net losses while only 12 reported marginally higher profits. Despite stronger topline growth in the December quarter over last year’s quarter, mainly supported by a weaker rupee and exports, margins continued to decelerate.
The graph below illustrates how the 49 sectors fared during the December 2012 quarter:
Not surprisingly, the worst hit sectors were the ones which were highly regulated by the government—namely airlines and sugar. Sectors like consumer durables, hotels, pharmaceuticals, telecom and textiles fared badly, as well. Some sectors like banking, software & information technology and refineries fared well in a challenging economic environment.
The airline sector comprised three listed carriers: Jet Airways, Kingfisher Airlines and SpiceJet. Out of these three, Kingfisher reported the worst figures, operating loss of Rs432 crore, out of the loss of Rs488 crore incurred by the industry. Higher operating costs and oil prices were the culprits, apart from sheer mis-management. The other two airlines fared better, but were still in the red.
The sad state of affairs pertaining to sugar companies continued, with three-quarters of our sugar universe of 25 companies reporting losses while 18 of them reported lower sales compared to the December 2010 quarter. The UP government had fixed a State Advised Price of Rs245 per quintal, which is high, considering the input costs of the sugar mills at around Rs350 per quintal.
Consumer durables, one of the indicators of consumer spending, reported a meagre increase in sales of 3%. Higher inventories and overheads led to a decline in profits. The retail sector reported lower sales (4%) and operating profits (4%). Auto companies, representing another area of significant consumer activity, reported a 2% decrease in operating profits and a 13% decline in bottomline.
Funnily, banking seems to have done well despite stagnant credit offtake and worsening asset quality. Revenues and net profits were higher by 31% and 7%, respectively. However higher deposit rates squeezed margins. The second generation (2G scam) is expected to affect banks. According to Moody’s, banks have an exposure of over Rs10,000 crore to the telecom companies which were granted 2G licence in 2008. Dhanalakshmi Bank was the only one to report a loss in our entire banking universe.
The telecom services sector reported marginal increase in sales by 10% while reporting a loss of 74% due to higher interest and depreciation charge pertaining to 3G spectrum fees, while higher sales was due to a tariff hike. Out of the six companies in our universe, only three made profits namely Bharti Airtel, Idea Cellular and Tata Communications. Bharti Airtel contributed to nearly half of the industry’s topline at Rs10,500 crore.
Lower sales, increased construction costs and higher interest cost impacted debt-saddled real estate firms. The sector reported lower sales of 12% and a decline of 40% in net profit. The building materials sector (including items such as tiles), which derives demand from real estate, reported lower quarterly profits (down 30%). The cement sector reported a surprising 83% increase in net profit due to higher offtake. However, the engineering, procurement and construction (EPC) sector reported a marginal decline in net profits of 5% year-on-year.
The software and information technology sector has been largely aided by a weaker rupee. The rupee declined by 7.35% between October and December 2011. The sector reported increased sales (29%), operating profits (25%) and net profits (20%). This was largely because market leaders Tata Consultancy Services and Infosys together increased their net profit by Rs1,710 crore which has helped boost the industry total by 20% to Rs8,399 crore.
Refineries reported a marked increase in sales by 42% year-on-year resulting in an increase in net profit to the tune of 12% year-on-year. The total profit in this universe was Rs8,853 crore despite losses of Rs3,986 crore by Essar Oil. Indian Oil Corporation, Hindustan Petroleum Corporation, Bharat Petroleum Corporation and Reliance Industries collectively contributed to 90% of the industry’s sales.
To summarise the December 2011 quarterly earnings, much of the results weren’t satisfactory but were expected. Much of this can be attributed to challenging economic conditions including global economic turmoil arising from Euro region, high interest rates, persistent inflation which have eroded consumers’ purchasing power and lack of policy initiative by the government. The market is expecting a rebound of 15% in profits in 2012. The market rally can be entirely attributed to this expectation.
"If the margins are above 3.3% in February we will pass the benefit to customers:" Union Bank of India CMD
A day after SBI (State Bank of India) reduced rates on education loans, Union Bank of India said it may cut interest rates on home and education loans next month.
"If NIM (net interest margin) continues to hold strong, we may reduce rates especially on the retail sides like home loan and education loan," Union Bank of India chairman and managing director MV Nair said. At the end of December, the NIM was 3.3%, he said, adding, "if the margins are above 3.3% in February we will pass the benefit to customers."
The Mumbai-based public sector bank will review rates next month. SBI has already reduced interest rates on education loans by up to 1%.
The downward momentum has probably been contained. Watch for a close above 5,450 and 5,350 on the Nifty for short-term direction
The market opened on a positive note but lost its momentum as lower growth for the third quarter resulted in a sell-off in the second half of trade. We mentioned in out market closing report yesterday that Tuesday’s gains were not a sign of a reversal. For a reversal, the Nifty has to end well above the day’s close. The National Stock Exchange (NSE) saw a volume of 97.23 crore shares.
The market witnessed a firm opening on global cues and news that the government would divest 5% stake in state-owned explorer ONGC on Thursday. On the international front, the European Central Bank (ECB) is likely to offer cheap funds to banks in the continent, which are facing liquidity issues. Back home, the Nifty opened at 5,425, up 49 points over its previous close, and the Sensex surged 189 to resume trade at 17,920.
Across-the-board buying by institutional investors helped the market extend its gains and hit the day’s highs in early trade. At the highs, the Nifty touched 5,459 and the Sensex rose to 18,001. However, the indices were under pressure in subsequent trade ahead of the release of the gross domestic product (GDP) numbers for the December quarter.
GDP for the December 2011 quarter coming in at an over two-year low of 6.1% resulted in the benchmarks paring their gains. The market dipped into the red in post-noon trade as selling became intense. The market fell to the day’s lows a little after 1.30pm with the Nifty going down to 5,352 and the Sensex at 17,678.
The market recovered from the lows but was treading water in the last hour in the absence of any triggers. The market closed flat with a positive bias and in the green for the second day. The Nifty added 10 points to settle at 5,385 and the Sensex rose 22 points to finish the session at 17,753.
The advance-decline ratio on the NSE was 968:729.
Among the broader indices, the BSE Mid-cap index advanced 1.10% and the BSE Small-cap index gained 0.62%.
BSE Realty (up 5.91%); BSE Capital Goods (up 4.02%); BSE Bankex (up 3.93%); BSE Power (up 3.57%) and BSE Metal (up 3.43%) were the top sectoral gainers while BSE IT (down 0.56%) and BSE Fast Moving Consumer Goods (down 0.13%) were the losers.
Boosted by the ONGC stake sale news, the BSE Oil & Gas index (up 2.53%) was the top sectoral gainer today. Other gainers were BSE PSU (up 1.51%); BSE Metal (up 1.45%); BSE Realty (up 1.10%) and BSE Consumer Durables (up 0.66%). The losers were BSE Capital Goods (down1.59%); BSE Fast Moving Consumer Goods (down 0.72%) and BSE Bankex (down 0.59%).
ONGC (up 3.46%); Sterlite Industries (up 2.98%); Tata Steel (up 2.90%; Reliance Industries (up 2.84%) and Wipro (up 2.72%) were the best performing stocks on the Sensex. The laggards were led by Larsen & Toubro (down 2.91%); HDFC Bank (up 2.34%); Jindal Steel (down 1.81%); ITC (down 1.35%) and Hero MotoCorp (down 1.07%).
The Nifty toppers were SAIL (up 3.76%); ONGC (up 3.46%); Wipro (up 3.18%); Sesa Goa (up 3.12%) and Tata Power (up 2.99%). The key losers were L&T (down 3.28%); HDFC Bank (down 2.81%); Siemens (down 2.28%); Jindal Steel (down 1.62%) and Reliance Infrastructure (down 1.50%).
Markets in Asia, with the exception of the Chinese benchmark, settled in the positive on hopes that the new fund infusion by the ECB would help ease the liquidity crunch faced by European banks. The Shanghai Composite closed lower after the government reiterated its plan to keep a tab on realty prices.
The Hang Seng gained 0.52%; the Jakarta Composite jumped 2.09%; the KLSE Composite rose 0.83%; the Nikkei 225 added 0.01%, the Straits Times climbed 0.82%; the Seoul Composite advanced 1.33% and the Taiwan Weighted surged 2.04%. On the other hand, the Shanghai Composite declined 0.95%. At the time of writing, two of the three key European indices were in the green while the US stock futures were in the positive.
Back home, foreign institutional investors were net buyers of shares totalling Rs727.59 crore while domestic institutional investors were net sellers of stocks aggregating Rs587.21 crore on Tuesday.
AstraZeneca Pharma India today said it is undertaking voluntary recall of sterile products manufactured at its Bangalore facility. “This recall is a purely voluntary action on the part of the company taken as a measure of extra and abundant caution although there is no patient safety issue related to sterility,” the company said in a filing to the exchanges. The stock jumped 7.26% to close at Rs1,921 on the NSE today.
Sun Pharmaceutical Industries today said it has received approval from the US health regulator for its generic Zyprexa Zydis tablets, used in treating mental disorder, in the American market. The US Food and Drug Administration (USFDA) has granted approval for its abbreviated new drug application (ANDA) for generic version of Zyprexa Zydis, Olanzapine ODT, in strengths of 5 mg, 10 mg, 15 mg and 20 mg, Sun Pharma said in a statement. The stock rose 0.85% to close at Rs551 on the NSE.
Cement major ACC will set up a new clinker production facility of 2.79 million tonnes per annum and allied grinding facility at Jamul in Durg district of Chhattisgarh, phasing out the existing clinkering and grinding lines there. The new plant will help meet the demand for cement in the eastern region. The stock gained 1.42% to close at Rs1,307 on the NSE.