Q2FY10 Corporate Performance : Below Expectation

The Indian stock market was surging with gradual pace in the last few months shelling out good returns along with other global markets. The global markets soared to heights especially after US releasing its GDP figures, the first rise in a year & the strongest in 2 years. But in the meanwhile, in the Indian sphere, Q2 results tamed the rate at which the market was galloping to new heights. The results triggered a correction after a solid surge in the indices this year. The market surged over 7% in the time line of 5 September to 5 October 2009, till the first major result was declared. However, the market lost its sheen by 4.7% from 5 October to 5 November 2009.

Analyzing the Q2 report cards, net sales of India Inc. saw a scanty growth of 1.8% in sales excluding the companies engaged in oil & gas business and banking. However, PAT growth clocked a better looking 18% growth on year on year basis. The operating margins saw a flattish growth in QoQ perspective but again clocked a healthy 23% growth on YoY basis, helped mainly by the base effect. Interesting to see was the power & fuel expenses that came down by 3.4% on YoY basis. Tax figure came down by 18%. Salaries & wages went up by 14.5% on YoY basis & raw materials prices increased by about 10% on YoY basis. Other income of India Inc saw a decline of 12.8% on QoQ basis. However, the same registered a growth of 18.5% on YoY basis.

Major disappointment came in form of banks reporting poor numbers this quarter. Interest earned grew by just 9.5% & NII by 11% which is much lower when compared to Y-o-Y % growth in June results. Profit after tax registered a 24% YoY growth. However, again, much lower when compared with last quarter’s YoY results which stood at 62%.

The theory that did not work initially has higher chance of working now as global shocks are abating. Asian emerging economies China, India and others are expected to grow by 7%, than European and other nations which are intertwined with American economy which is expected to be flat for forthcoming year. Government activism with monetary and fiscal stimuli has helped this resilience. China, Japan, Singapore, South Korea, Taiwan and Malaysia have all announced fiscal package of more than 4% of GDP for 2009. The market is antiphonal and exhibits positivity to the steps taken by government. The pump-priming should work better in Asia than in America and Europe as they have to suffer with the pain of process of de leveraging for quite some time.

Major disappointment came in form of banks reporting poor numbers this quarter. Interest earned grew by just 9.5% & NII by 11% which is much lower when compared to Y-o-Y % growth in June results. Profit after tax registered a 24% YoY growth. However, again, much lower when compared with last quarter’s YoY results which stood at 62%.

Oil & gas continues to be on a dire run with all parameters including sales, PAT & operating profits degrading. De-growth was registered in all except sales on QoQ basis while only positive number being PAT on YoY basis, courtesy- ‘The base effect’.

Cap wise Earnings Performance Break-up:

Sector wise Earnings Performance Break-up:
Companies constituting the Consumer Discretionary sector performed the best amidst these conditions clocking a solid 18% growth in sales & staggering 115% rise in profits on YoY basis. Consumer staples had a fair run too with a 20% growth in sales & 31% increase in bottom line. Healthcare Index had a stable run & it registered a 7% growth in top line coupled with 23% rise in the bottom line.  The return of Financial Index in the comfort zone was expedited by a 15% increase in sales & 35% rise in profits.

Telecommunication Indices were in red all through as there was just a 3.2% growth in sales. Further, it was degraded by 48% decline in profits on YoY basis. Utilities had a painful run as well registering just 9% increase in sales on YoY basis. QoQ sales saw a 5% de growth. Profits were up by 3.6% but saw a fall of 10% on QoQ comparison.

Market Analysis on the basis of Earnings Growth & Price Movements:

A detailed analysis clearly showed that Consumer discretionary sector performed the best in the lot. The analysis started by selecting only those companies whose sales & PAT growth was above 20% on YoY basis. Stock return for a period ranging from 14 September 2009 to 4 November 2009 was calculated. There were 2 major findings:

1. The mentioned stocks gave a positive average return of 2.9% where as the Sensex for the same period returned -7.7%.
2. Analysis was conducted on a sample of 112 companies in which the largest share in terms of numbers of companies was of Consumer Discretionary sector.
   

This analysis clearly showed that Consumer Discretionary sector performance in the quarter was better among others based on the above parameter.

Summing up the result season, in terms of its effect on the market, it has curbed the rate at which the market was accelerating. Looking at the positive side, the market has again given time for investors to enter at cheaper levels. With the smell of global recovery & revival of the overall Indian economy on cards, the Indian market will definitely see an up-surge, which is just a matter of time & this seems to be a good time for investors to enter the market at these corrected levels. This is especially true for companies which have declared good results but have been thrashed due to falling markets.

However, for the time being, clearly, the numbers declared by the corporate India this quarter were not able to fill more colors to the canvas & now the road ahead is lead by Government policies, Global markets & the news that flows, both from & across the countries.

Nevertheless, by selecting stocks that have performed better & have been consistent among others should be the strategy for investors amidst these situations as they are the ones which are most likely to beat the market in the next upward rally.