June quarter roundup

Tue, 2 Sep Pre-Open

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The dawn of Modi era has sent positive signals across Indian markets. Indian stocks have gathered steam in the past six months. The hopes of economic revival with the new government in place have set the upbeat tone. Retail investors are therefore gung ho about the Indian growth prospects too. Some industries such as automobiles and power are moving towards a growth trajectory. Softening of commodities prices such as crude oil has helped lower material costs. This is expected to help government to tackle the twin problems of inflation and deficit. But all this do not imply that India is out of woods. A meaningful economic recovery is still a distant dream for India. Its key economic indicators are still nothing to write home about.

A closer look at the June quarter corporate earnings corroborates this view further. The healthy industry growth did not reflect in the profitability of most companies. While the Earnings before interest, taxes, depreciation and amortization (EBITDA) of the BSE Sensex companies have risen 31% YoY, this growth was largely driven by three companies. Earnings for most of the companies have grown at a somber pace for the quarter gone by. Let's have a glimpse of few sectors to gauge the earnings performance of the companies for the quarter gone by.

Auto: The BSE auto index has outperformed the BSE Sensex. Few big auto component firms and automakers have reported strong operating margins. The outperformance was largely driven by the higher sales volumes for the auto majors. Demand uptick in the election months has also boosted the sales. However, two-wheeler firms posted a lackluster performance. Higher raw material costs and marketing spend weighed on the profitability of the companies. Moreover, the commercial vehicle segment has not been up to the mark.

Banking: The banking stock's rally post elections fizzled out when the bribery scandals in public sector banks were brought to light. Moreover, poor credit quality continues to haunt the earnings performance of Indian banks. The June quarter earnings lack any improvement in fundamentals for the banking sector. As per the financial daily Livemint, public sector banks have reported 3.4% QoQ jump in bad loans. Private banks on the other hand have reported 12% increase although on a lower base. Operating metrics for the banks lie weakened on account of higher additions to bad loans. Moreover, the sluggish profitability of the banks has also restricted sufficient provisioning putting the asset quality at further risk. What more? Lack of adequate capital and poor loan growth has exasperated the woes for Indian banks.

Capital goods: With post-election euphoria calming down, BSE Capital Goods index rally has abated too. June earnings have given an indication that the recovery is still away. Tepid order inflows and deferment of investment plans have impacted the sector earnings. Moreover, capital goods companies have been victims of stretched financials of clients and fuel shortages. Not surprisingly, one-third of the firms that make up the capital goods index have reported YoY decline in revenue. While the government support is expected to kick-start stalled projects, there are no clear signs of resolution of structural issues in the sector.

Cement: While the stable government promises revival in infrastructure and housing sectors in turn boosting the profitability of cement companies, the June quarter earnings have revealed a different picture altogether. Higher costs and subdued demand have depressed the profitability of the cement companies. Moreover, price realizations have stood weaker. Hence, the operating profits have declined too. Despite the challenging environment, the large cement companies have been trading at expensive valuations.

Metals: Metal stocks too had experienced a robust rally post the election results. But the underlying fundamentals of the companies stay weak. The net sales for the June quarter have declined YoY, and the financials of the metal companies have been looking distressed. The operating metrics have remained under stress on account of increase in employee costs, energy costs and other expenses. While the bigger picture is positive with the hopes of recovery, the demand creation may not happen on expected lines. Moreover, the global situation continues to remain uncertain.

Technology: The June quarter performance turned out to be mixed for IT companies. The picture here is not as rosy as was anticipated by the investor community. While couple of large firms has managed to hold on their growth figures, financial weakness has been observed with many others. Client-specific issues and elongation in sales cycles have marred the profits of few IT companies. Many IT companies have been struggling to grow business at a good pace.

Power: Lower realizations and expenses related to stalled projects have taken a toll on the earnings capability of the power companies during the quarter gone by. Moreover, unfavorable tariff regulations have depressed the profitability too. It's quite certain that the power sector is yet to see the daylight; given the slower pace of regulatory progress and reforms.

Pharma: This is one sector that has ruled the investment portfolios this season. The pharmaceutical companies have reported strong earnings for the June quarter by the virtue of improvement in the domestic pharmaceutical market and continued growth in generic drug sales in the US. While the sales growth has stood healthy, the gross margins for these companies have remained under pressure. But overall the sector performance is expected to remain upbeat with boisterous revenue growth and stable profitability.

It is quite apparent now that the earnings of the Indian corporate for the first quarter of the current fiscal stand elusive given the underlying challenges. There has been enormous hunger for reforms for quite some time now. Hence, speedy recovery only remains a wishful thinking. Against this backdrop, it will be only wise for the investors to exercise caution and focus on fundamentally strong value picks across sectors. And exactly here the Equitymaster Research Team will continue to reach out to you to help build up a resilient portfolio.