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S. Vaidya Nathan

TO GET a feel of who is dominating the earnings season, take a casual look at the advertisements splashed in newspapers. Yes, it is the public sector banks, with private sector banks close behind,that are making waves.

The prices of banking companies too have been dancing to the beat of perky numbers. Coming off six months of steady rise, banking scrips just completed one more rally, led by Punjab National Bank.

Engineering, steel and oil companies across the board, select auto companies and a host of mid-cap companies, including Premier Instruments, Sundaram Clayton, Divi's Labs, Lakshmi Auto Components and MICO, have also made a splash.

But things have, by no means, been hunky-dory for India Inc as a whole. IT companies were at the forefront of those taking a hard knock. The infographic shows the key aggregate numbers for the January-March 2003 quarter.

Revenues and profits have are up 21.3 per cent and 43.8 per cent respectively.

Fairy-tale for banks...

Banks have never had it as good as in the last two to three quarters. Both cogs of the earnings wheel — treasury incomes and credit offtake — worked in tandem to boost bank bottomlines. Treasury income has been a fairly consistent earnings driver in the last three years due to the steady fall in interest rates.

It has boosted bond prices and left banks with huge gains in their investment portfolio. All PSU banks have more than the mandatory level of investments in government securities. Banks collectively hold about 43 per cent in G-secs, against the requirement of 25 per cent.

As a result, most PSU banks are sitting on a pile of unrealised gains — a part of which at least will flow in over the next two to three years. A few banks, such as ICICI Bank, booked most of the gains on the portfolio. In the January-March quarter, too, the decline in interest rates and rise in bond prices led to a spurt in earnings.

But the treasury income story may not have much steam left, except for the unrealised gains, which could be significant for the likes of SBI and PNB. What is important is the credit offtake-linked growth in revenues and earnings. For two quarters in a row now, banks have found this a strong peg for growth.

Going by the industrial trends in April and May, credit offtake is bound to be fairly good in this quarter as well. The possibility of a better-than-last-year and closer-to-normal monsoon might also lend a helping hand in the next two quarters.

The squeeze in spreads, however, may cap the kind of growth in profits from enhanced credit offtake.

Market action: It has been a party time for banking sector stocks, with the exception of ICICI Bank and HDFC Bank. The spurt in valuation is driven by a combination of structural factors such as debt-buyback and return of capital and liquidity — with funds chasing stocks from this sector.

But investors should contemplate profit-booking in banks such as Federal Bank, Karur Vysya Bank and Punjab National Bank. Exposure to Bank of Baroda, Bank of India, Canara Bank, Andhra Bank can be held pending possible further improvement in valuation.

... and for engineering

One sector that is equally well-powered is engineering. Aided by infrastructure and power-sector related investments, a swathe of engineering companies have had a good quarter.

ABB, Siemens, Thermax, Alfa Laval have turned in impressive earnings numbers, while BHEL has reported a modest 9 per cent rise in profits.

Engineering stocks, too, attracted liquidity. A sharp spurt in valuation levels has been in evidence in the last two months, with BHEL and Thermax leading the way. Investors can stay with most of these stocks and use any further uptrend to book profits.

The turnaround story in steel continues, with SAIL actually posting a profit in the fourth quarter. That its stock price is above Rs 11 and that of Essar Steel close to Rs 10 (these used to trade at even less than Rs 5) captures the effect of a strong showing by steel sector companies. Along with Jindal Vijayanagar, these two companies have been deep in the red. The debt restructuring has also helped. Tata Steel, of course, has been enjoying the benefits of a jump in steel prices. Going forward, the growth rates may taper with steel prices showing signs of weakness.

The slowdown in the durables sector in the US and the SARS problem in China could cast a shadow on metal prices.

Mixed bag elsewhere

Cut across other sectors and the picture that emerges is of only select companies doing well. Stress on profitability, increasingly limited leeway in cost-cutting, and big-ticket benefits from lower interest rates are facets that run through most earnings cards.

Cement: The 10 per cent volume growth has not really helped boost earnings.

The only exceptions are Gujarat Ambuja Cements, due to its higher operating efficiencies, and Dalmia Cements, due to the share price spurt in Tamil Nadu.

Two-wheelers: A flat quarter for Bajaj Auto and Hero Honda and one more peppy quarter for TVS Motors, on the back of Victor, make for a considerable contrast. LML's fortunes too looked up due to the initial success of Freedom.

Paper: Firm trends in paper prices, at levels higher than those of 2002, helped companies such as West Coast Paper and Tamil Nadu Newsprint turn in impressive earnings numbers. Ballarpur Industries' appears to have missed out with only modest growth rates.

Pharma: Confusion over introduction of Value Added Tax from April 1 (now postponed to July and probably beyond) led to a decline in volumes as stocks were not picked up by distributors. As a result, barring Aventis and Glaxo, most other pharma companies have witnessed a decline in revenues and earnings.

Oil: This has been one smooth roll for the oil majors. Aided by firm crude prices, better refining margins and frequent domestic price revision in line with international trends, BPCL and Bongaigaon Refinery struck black gold yet again.

Strain on FMCGs' bottomlines

Companies in the fast moving consumer goods (FMCG) business had a harrowing time. Over the past two years, one has become accustomed to flat or, at best, modest top-line growth. Earnings growth used to outpace revenue growth comfortably due to restructuring and cost control.

But in January-March 2003, the picture became grim. Unusually, margins came under strain. Earnings growth too took a knock. At the fore was the behemoth, Hindustan Lever. The unsustainability of earnings growth outpacing revenue growth clearly caught up with FMCG companies.

Intense competition, a binge of freebies, downgrading by consumers and emergence of strong regional competition have started impact profitability. For this trend to get reversed, strong revenue growth would be a pre-requisite.

Without such a kicker, FMCG companies may have little leeway to grow their earnings. But the near-term stock price trends may be driven more by how the monsoon fares than by any other factor.

If there are indications that the rains will be better than last year's level, that may trigger an uptrend.

To some extent, this process is already underway, with Hindustan Lever moving up about 16 per cent in the last month.

But whether a better monsoon would necessarily pep up both revenues and earnings significantly will remain a big `if' given the long-drawn-out problems on the rural purchasing power front. Investors can thus use an uptrend to book profits in most FMCG stocks.

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