A Nifty quarter

Aarati Krishnan

THE S&P CNX Nifty (Nifty) fared better than most other indices during the tailspin in equities over the past six months.

Between March-end and now, the erosion in Nifty (around 7 per cent) has been lower than that of the broad market indices such as the BL 250 Index (21 per cent negative return) and the S&P CNX Junior Nifty (27 per cent negative return). The Nifty fared marginally better than the BSE Sensitive Index (erosion of 8 per cent). What kind of financial performance did the Nifty constituents turn in for the April-July quarter? As the July-September quarter earnings season begins, let us look at the important aspects of the performance of major companies.

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In terms of earnings growth, the companies making up the Nifty underperformed both the Sensex constituents and the corporate sector itself. The Nifty constituents managed an aggregate growth of 20.88 per cent in net profits in the March-June quarter, while the Sensex constituents recorded a higher 22.88 per cent. A larger sample of 1,900 companies managed an impressive 39.50 per cent growth.

The topline growth registered by the Nifty companies, at 27 per cent this quarter, was reasonable. However, a sharp rise in interest costs and depreciation charges curtailed post-tax earnings growth. While interest costs for the Nifty universe rose 34.6 per cent in this quarter, depreciation charges went up 30.8 per cent.

The operating profit margin of the Nifty constituents dropped from 12.7 per cent in 1999-2000 first quarter to 12.2 per cent in the June 2000 quarter. The quality of incomes has, however, registered a slight improvement. The contribution of `other income' to total sales fell by around 7 per cent in this period relative to 1999-2000.

However, the aggregate performance camouflages wide divergences within the group of Nifty stocks. In terms of the topline performance, impressive sales growth from the oil and refining companies, the info-tech majors, and banks and financial institutions helped compensate for the sluggish sales performance by companies in the capital goods, automobiles, consumer goods and cement sectors.

The recently consolidated HDFC Bank managed the highest topline growth of 132 per cent, while info-tech majors -- Infosys Technologies (at 109 per cent) and Satyam Computers (93 per cent) -- continued their good showing. Oil major HPCL turned in a sales growth of 72 per cent, while Reliance Industries and IPCL also registered strong topline growth. The industrial recovery, which helped bring about an improvement in the performance of financial institutions and banks, continued to elude players such as BHEL and ABB (which registered a drop of 22 and 24 per cent respectively in sales for the quarter).

The sectoral picture changes quite dramatically when it comes to profit performance. Info-tech (Infosys and Satyam Computers) and banking companies (HDFC Bank) undoubtedly took the laurels for profit growth. Both Infosys and Satyam Computers managed to post a profit growth of over 100 per cent, while HDFC Bank managed a net profit growth of 83 per cent. Banking companies such as HDFC Bank and SBI received fairly large contributions to their bottomline from `other income'. Given the recent hikes in interest rates, it remains to be seen if this performance will be sustained over the coming quarter.

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But helped by a low base of comparison for the corresponding quarter of 1999-2000, a few `Old Economy' companies sprung surprises. Buoyed by the improved offtake, Tata Steel reported a 160 per cent growth in post-tax earnings this quarter, while Hero Honda (57 per cent growth) and Glaxo India (105 per cent growth), also defied overall trends in their respective sectors to post strong growth rates. While Hero Honda's profit performance was driven by strong volume growth in motorcycle sales, Glaxo India's can be partly attributed to the one-time contributions from disposal of brands.

Consumer good companies, struggling with sluggish sales growth for the quarter, recorded a surprisingly good earnings growth in this period. Tata Tea (41 per cent growth in net profits), Smithkline Healthcare (40 per cent), Nestle (33 per cent) and Britannia Industries (30 per cent) represent this trend. Though most of these companies have been grappling with sluggish offtake for their products, their efforts at restructuring operations and streamlining distribution system appears to have paid off in the form of higher operating margins.

Oil refining companies HPCL and Cochin Refineries actually recorded lower net profits despite a healthy topline performance. The interest cost of the two companies had nearly trebled because of mounting dues from the Oil Pool Account.

Understandably, the most disappointing profit performance came from cement and automobile companies in the Nifty universe. Cement major, ACC, registered losses of Rs 9.50 crore for the quarter against profits of Rs 7 crore for the corresponding previous period, despite a 9 per cent growth in sales. Telco, whose net losses tripled to Rs 74 crore, was the other major disappointment. Meanwhile, a number of companies net profits dropped. They were BHEL (87 per cent), L&T (76 per cent), Mahindra & Mahindra (33 per cent) and Castrol (34 per cent). While the cement majors continued to be pressured by sluggish price trends, the profit performance of Telco and Mahindra & Mahindra was impacted by poor offtake of medium and heavy commercial vehicles. These appear set to continue in the July-September quarter.