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.