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Belying the market’s expectations, corporate India churned out disappointing numbers for the June quarter
Most of corporate India has by now announced its financial performance for the quarter ended 30 June 2010. Through the last two months of results announcements, the market has climbed 4% to a new 31-month high as foreign investors seemed to be in a great hurry to buy Indian stocks. The general impression is that corporate India is doing very well.
We believe that it is important to put statistics on the table before we come to conclusions. The fact is, the Q1 performance of India's top 100 companies has been a disappointment. While revenues have witnessed a strong 22% aggregate growth, operating profits barely budged an inch, rising by a mere 1%.
This operating 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 BSE 100 index is now trading at a PE multiple of more than 20. 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 companies are reeling under cost pressures. If this profit growth fails to pick up significantly by the next quarter, the markets may lose confidence and head southwards.
Among the companies that have witnessed robust growth in the June quarter are Financial Technologies, Ashok Leyland, Indian Hotels, GMR Infrastructure and Sun Pharmaceutical. Financial Tech's revenues surged 26% while operating profits zoomed 2,170% during Q1FY 2011, over the corresponding period last year. Ashok Leyland's revenues also jumped 156% while profits surged 1,305% during this period. Similarly, Indian Hotels and GMR Infra recorded sales growth of 25% and 339% respectively, with profits surging by 345% and 298% respectively. Sun Pharma also put in a strong performance, with sales growing by 59% and profits jumping by 221% over this period.
Companies that put in a disappointing show during the last quarter include Ranbaxy Laboratories, Adani Enterprises, Reliance Natural Resources, Reliance Capital and India Cements. Ranbaxy witnessed a 2% fall in revenues and a sharp drop in profits. Similarly, RNRL and Reliance Capital's revenues fell 24% and 65% respectively, with profits plummeting by 79% and 73% respectively. While Adani's revenues slid 69%, its profits fell 86%. India Cements' sales also contracted 8%, while profits declined 69% during this period. State-run oil marketing companies BPCL, HPCL and IOC took a huge hit on their operating performance purely on account of net under-recoveries due to inadequate government support (in the form of cash subsidy). Petrol price deregulation, which is expected to bring down under-recoveries, came into force only on 26 June 2010.
The performance of the top 30 companies making up the bellwether index of the BSE Sensex was healthier in comparison, yet below expectations. While revenues have witnessed a strong 23% aggregate growth, operating profits grew only 13%. Among the Sensex companies, Sterlite Industries, DLF, BHEL, Tata Motors and Reliance Industries put up a stellar performance while Reliance Communications, Tata Power, ACC, ONGC, Reliance Infrastructure, ICICI Bank and NTPC disappointed.
The stock market still appears undecided on the correct direction, moving within a narrow range. However, if India Inc continues to put up such indifferent results heading into the second quarter of this fiscal, that may be a strong enough cue for investors to lose confidence and offload for now.