Sucheta Dalal :Analysts remain bullish despite lacklustre Q2FY10 performance
Sucheta Dalal

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Analysts remain bullish despite lacklustre Q2FY10 performance  

November 12, 2009


If various analyst reports are to be believed, the Indian economy has definitely taken a turn for the better. Most companies reported numbers in line with analyst expectations for the September quarter, others disappointed on the lower side, while very few managed to beat expectations.
However, core industry segments continued to do well, lending support to the argument of rapid revival in the economy. The robust growth in output for the month of August is indicative of this performance. The index of industrial production (IIP) witnessed a growth of 10.4% over the corresponding month last year. Sharekhan reports in its monthly economic review, “On the domestic front, while there are valid concerns (inflation, lacklustre Q2FY2010 earnings, dip in GDP growth in Q3 etc) the medium- to long-term outlook remains quite robust. Our optimism over medium- to long-term stems from the resilience displayed by the Indian economy as reinforced by continued acceleration in cement sales, auto sales, goods traffic and industrial production. Moreover, the external trade data too has begun to improve with gradual slowdown in the pace of decline.”
IDFC-SSKI reports that strong performance was particularly seen in automobiles, cement, power equipment and IT services, while oil & gas and petrochemicals disappointed. EBITDA margins of automobile and cement companies remained strong aided by lower commodity margins and costs. A clear upturn in consumption has aided economic growth in the first half of the current fiscal, while industrial activity bottomed out in Q4FY09. IDFC-SSKI also believes that this strong industrial recovery would lead to an upward revision in GDP growth estimates. It expects earning growth to remain strong going forward.
Morgan Stanley also believes revenues have bottomed out, while EBITDA margins have grown fastest since June 2008. However, rising capital costs offset the improvement in EBITDA margins, causing net profit growth to lag EBITDA growth. The best performance came from energy and healthcare segments while commodities and telecom segments disappointed. Compared to Morgan Stanley’s expectations, healthcare gave the biggest positive surprise while the negative surprise came from commodities.
Although inflation is expected to inch up towards 6% by March, the current fiscal pressure on the economy is expected to come down. IDFC-SSKI reports that the government is indicating a strong resolve for fiscal consolidation. The government has pegged fiscal deficit for FY2010 at 6.8%. Sharekhan reveals, “Some of the recent reform announcements, especially the renewed vigour towards disinvestment, clearly indicate that the government is quite serious about consolidating its fiscal position as soon as recovery process is sustained. We believe that revival in tax revenues, further uptick in industrial production growth, disinvestment proceeds and lower burden of subsidies and other expenditure should help lower the deficit in the years to follow.”
Meanwhile, RBI has taken a hawkish stance as regards its monetary policy through its second quarter monetary review. Although key rates were kept unchanged, RBI has given a clear indication of withdrawing its previous accommodating stance. The Sharekhan report says, “While the Reserve Bank has paused on key policy rates, other monetary policy announcements (SLR hike, etc) clearly signal the central bank’s desire to reduce the excess liquidity in the system. We continue to expect the central bank to start tightening the policy rates by the end of the current fiscal or the first quarter of the next fiscal.”
While RBI’s signals for tighter interest rate regime and average earnings reported by companies are genuine concerns, some leading indicators far outweigh the negatives. Sharekhan confirms in its report, “Firstly, the leading indicators (cement production, commercial vehicle sales, goods traffic, industrial production, exports etc) continue to report better numbers. Secondly, the outlook for the Q3 and Q4 earnings seasons is much better as in these quarters Indian companies would benefit from the anticipated improvement in the macro environment coupled with a favourable base effect.”
Sanket Dhanorkar [email protected]

-- Sucheta Dalal