October results will be a repeat performance
After a strong rally in September and a slew of positive news, the market is looking forward expectantly to the second quarter results. However, the trend will not be significantly different from the June quarter. That trend was muted sales growth and strong profit growth. “We expect the same story for the September quarter,” says Vetri Subramaniam, chief investment officer, Religare Mutual Fund.
 
There has been a surge in operating profit for some sectors in June quarter which has led to a rerating of stocks but sales or revenues which are the single-most important parameter of a company’s performance have not grown in line with the surging operating profit. For instance, the companies in the Moneylife Auto Sector posted a growth of 70% in operating profit in June quarter over the same period last year but sales grew by just 9% in the same period. Auto component companies posted 26% growth in operating profit but their sales declined by 4%. ML Consumer Products and ML Software & IT Services posted a growth of 28% and 37% in operating profit respectively. But their revenue growth has been not been as high—10% and 8% respectively. Operating profit for the refineries sector soared by 61% while the revenues dived by 32%.
 
All these examples underline that the unbridled investors’ optimism about the economic rebound is misplaced. The rise in profit against the backdrop of low revenue growth owes mainly to the fact that Indian companies tightened their belts and cut costs. Another reason was that raw material prices had softened during this period. This significantly boosted their operating profit. The same phenomenon of higher operating profit will be witnessed in the forthcoming results as well because last year’s September quarter was quite depressed. What the analysts would be keen to see is whether sales growth too remains lacklustre. Given the fact that commodity prices have gone up in the past few months and old lower-priced inventory will be run be down soon, Indian companies may not enjoy successive quarters of higher operating profits beyond the September quarter.
 
 
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