• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Sowmya Sundar

INVESTMENT in road projects, power sector reforms, outsourcing, firmer international commodity prices and the buoyancy in domestic automobile demand — Corporate India's scorecard for October-December 2003 reflects it all.

For the fourth consecutive quarter, India Inc came out with an impressive earnings performance, albeit with a few dark spots here and there. The performance of bigwigs such as ONGC, Dr Reddy's, Ranbaxy and Grasim came as a disappointment.

The mid-caps, however, stole the show, not only in terms of stock returns but earnings performance too. Equity expansion played spoilsport, muting the impact of profit growth at the per share earnings level.

Sector-wise, commodities, engineering and automobiles were in the forefront, reflecting growth in the manufacturing sector. The banking sector, which was in the limelight in the December 2002 quarter, took the back-seat as interest rates stabilised and treasury incomes declined. Listed below are the broad performance themes.

Firm commodity prices: Sweet and sour

Rising commodity prices swelled the kitties of commodity companies but pressured the margins of user industries. The bottomlines of commodity companies such as Tata Steel, Hindalco and Tata Coffee surged.

Among the user industries, tyre companies were the worst affected. Unable to overcome the pressure of rising rubber prices, companies such as Apollo Tyres, Ceat and MRF suffered an average 20 per cent decline in their bottomlines even with an average 18 per cent growth in revenues.

The engineering industry was, by and large, able to combat the effect of the rise in steel prices for the quarter. Volume growth, better capacity utilisation and rigorous cost-cutting measures negated the effect of the steel price hike. Few, such as Alfa Laval and Elgi Equipment, were also able to pass on the price increases to customers.

For auto component manufacturers, it was a double-edged sword. With original equipment manufacturers constantly bargaining for better prices, the pressure on realisations and costs mounted. Players such as Sundram Fasteners and Sundaram Clayton felt the effect on their bottomlines, with a slowdown in profit growth.

Operating profit margins improve

The aggregate operating profit margins expanded by two basis points to 16 per cent. The margin expansion can be attributed to the higher volume offtake.

The improved cost structure as a result of the restructuring efforts during the slowdown and higher volume offtake enabled them to absorb the higher input costs to a large extent.

EPS growth trails profit growth

The rise in the aggregate per share earnings failed to keep pace with the net profit growth during October-December 2003, because of the equity expansion by way of bonus, rights and public offers. L. G. Balakrishna Brothers, Gujarat NRE Coke, i-flex, Jindal Drilling and IOC, to name a few, declared bonus issues.

Rights issues were made, among others, by IDBI Bank, Cholamandalam Finance and Saint Gobain. A four per cent equity expansion led to a lower per share earnings growth of 36 per cent compared to a net profit growth of 40 per cent.

Mid-caps in limelight

In the October-December 2003 quarter, a number of mid-cap companies performed impressively, even as such bigwigs as Gujarat Ambuja and ONGC lagged.

Take the pharma sector: formulation sales in the US market were under stress due to the expiry of exclusivity on certain molecules, impacting the profitability of Dr Reddy's and Ranbaxy.

On the other hand, mid-rung companies such as Divis, Matrix and Aurobindo Pharma, which operate predominantly in the bulk drugs segment, showed substantial increase in profitability. Be it engineering or construction, starting from the likes of ABB, Thermax and L&T, the action has filtered down to players such as Jyothi Structures, KEC International and IVRCL Infrastructure. The mid-rung companies too are now part of the growth story.

Exports pick up

The outsourcing opportunity across sectors such as pharmaceuticals, auto components, and engineering aided the recovery in the domestic sector.

Outsourcing by MNC parent companies bolstered the prospects of companies such as Alfa Laval, Clariant India, ICI and Colour-Chem.

Companies such as Thermax, KEC International, L&T and Engineers India increased their presence in overseas markets and bagged a number of export orders.

Sector-wise performance

Automobiles, refining and companies catering to the infrastructure segment were the growth drivers over the quarter.

Oil and gas: Refining companies such as HPCL and BPCL continued to show profit growth as refining margins were comfortable. ONGC, on the other hand, took a hit at the net level as it had to share the subsidy burden on kerosene and LPG with refining companies such BPCL, HPCL and IOC.

Banking: The absence of a robust offtake in industrial credit and the lower treasury income have started to tell on the operating profits margins of banks. Private sector banks such as HDFC Bank and ICICI Bank performed better than their public sector peers such as Corporation Bank and IOB.

Advances growth for private sector banks was better than their PSU counterparts, probably due to the aggressive retail push.

The housing boom continued to bolster earnings for housing finance companies such as HDFC and CanFin Homes.

Information technology: It has been primarily a volume game in the IT sector. Earnings of front-rung companies met expectations. BPO continues to be an attractive proposition.

Here, too, such mid-rung companies as Hexaware and Mphasis BFL recorded good growth rates, higher than the top-rung companies.

Auto and auto ancilliary: For the fifth straight quarter, the automobile offtake remained buoyant.

Tractor sales, which lagged behind, perked up in the latest quarter. Punjab Tractors and Mahindra & Mahindra posted impressive earnings numbers as rural demand picked up. Tata Motors continued to bask in the success of Indica and Indigo.

In the two-wheeler segment, TVS Motors saw a slowdown in offtake, especially in the two-stroke model Max 100. Hero Honda, on the other hand, gained market share aided by the success of new models Splendor Plus and Passion Plus.

Helped by a robust demand for the Pulsar model, Bajaj managed to record a healthy increase in performance.

The performance of two-wheeler companies would have been even better but for the aggressive promotion schemes offered by the top three companies. The cost of these promotional offers affected profitability.

Hence, the impact of increased volumes is not fully captured in net profit growth. As for auto component companies, volume growth was buoyant, led by outsourcing opportunities and domestic automobile offtake.

Cement: The performance of top-rung cement companies such as Gujarat Ambuja and Grasim was disappointing due to pricing pressures as these companies are present predominantly in the North.

Madras Cements and Dalmia Cements, which cater to the Tamil Nadu and Kerala markets, did well.

Outlook

The effect of the good monsoon will start showing up in the FMCG and auto sector earnings performace in the January-March quarter.

Given the robust order-book position for the engineering industry, it could comfortably repeat the performance for the next couple of quarters.

A further rise in steel prices is a cause for concern as, this time around, manufacturers might have to bear the burden. This could be reflected in their operating profit margins over the next quarter.

If credit growth does not show signs of a pick-up, the banking sector might show some stress. But given the series of capital expansion plans lined up by Corporate India, there could be scope for optimism on this count, too.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line