Bottoms Up: Scars of Slowdown To Show Up in Q3 Bottom Lines

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FINANCIAL CHRONICLE, MONDAY, JANUARY 2, 2012 - PAGES 4

No macro-economic data or historical evidence can ever pinpoint the exact bottom for the stock market. It will be formed when you are least expecting it

BOTTOMS UP
AFP

KUMAR SHANKAR ROY

SECTION of market experts would have us believe that the whipping of the Indian stock market may have ended because the bottom or the low point has already started forming slowly. Is December a bottom in progression, or one of the steps in the journey to the centre of the earth for investors? Having fallen 25 per cent from the recent peak of 21,000, Sensex now trades near 15,600 level at a valuation of 16.5 times its trailing 12-month earnings. Oil prices are a shade below $100 a barrel, while the Reserve Bank of India (RBI) is expected to cut key policy rates from the elevated levels soon. While foreign investors have not started buying, the strong selling has receded to a large extent in the absence of major negative triggers. Domestically, things could not have been worse. Everything that could go wrong has, said David Pezarkar, head of equities at Daiwa Asset Management. There is a chance that some global event may rock the boat further, but Pezarkar feels if one were to go by the saying that a bottom forms when despair is at its peak, the present market has all the ingredients that can create the base going forward. However, Mahesh Nandurkar of CLSA Asia Pacific doesnt see the bottom forming anytime soon. Nandurkar tracks the MSCI India Index instead of Sensex.

Despite the underperformance, MSCI India still trades at 15 per cent premium to MSCI Asia, leaving room for some downside. On the positive side, the Indian market now trades at 10 per cent away from the lowest valuations of March 2009, which should limit any further downside, implying a rangebound market, he said. But a comparison of this situation with three earlier occasions over the past 15 years, when Sensex had formed a bottom in October 1998, September 2001 and March 2009, doesnt suggest an ideal environment for bottom formation. In fact, on each occasion, the underlying conditions were different. Bottom No. 1 (October 1998): Sensex was at around 2,700-2,800. It was when the economic environment mirrored a depression due to political uncertainty amid global sanctions after the nuclear tests and slackness in domestic demand. Problems with Unit Trust of India and the southeast Asian

crisis too emerged as major irritants. The short-term policy rate of RBI (repo rate) stood at around 5 per cent, while oil prices were lower than $12 a barrel. The dollarrupee rate was perched precariously at 42.4. More importantly, the valuation of Sensex stood at around 10 times its 12-month earnings. Over the next 18 months, Sensex crossed the 6,000 mark for the first time in February 2000, thanks to the information technology boom. By then, oil prices had zoomed to $27 a barrel, repo rate rose to around 9 per cent, while valuations touched a high of 24 times their earnings and dollarrupee rate kissed 43.65. Bottom No. 2 (September 2001): Sensex touched its next bottom shortly after September 2001, when terrorists attacked the twin towers in the US. The cracks grew larger from February 2000 and finally pushed Sensex to 2,600 level in 2001 as risk aversion spread everywhere. From the earlier peak, oil

prices corrected 23 per cent to $21 a barrel, the dollar-rupee rate hit 47.73. The market had corrected over 50 per cent, but Sensex valuations fell from 24 to about 15 times. Thereafter, a structural change occurred in the Indian economy and that helped Sensex gallop over the next seven years to reach a peak of 20,800 in January 2008. Like stocks, oil prices also zoomed more than four times to $85 a barrel. The dollar-rupee rate stood at 39 level. Valuations at 25 times of last 12- months earnings had also reached their zenith. Bottom No. 3 (March 2009): The housing crisis in the US, which got transformed into a full-scale global financial crisis, hit home. From near 21,000 level in January 2008, Sensex touched the nadir in little over a year and hit the 8,000 mark in early March 2009. While stocks corrected 60 per cent, oil prices fell 50 per cent to $40 a barrel, but the dollarrupee rate was at an ominous 51.2 level. The only blessing was that valuations were cheap

at 12 times of last 12-month earnings. From utter gloom to unexplained boom, the next peak was reached when Sensex managed to scale 21,000 in November 2010. The repo rate moved up from 5 per cent to 6.25 per cent. In terms of valuations, at 21,000, Sensex was trading at 23 times its earnings. Oil was trading at $76 a barrel. The study indicates that while neither of these situations was similar, asset prices did correct in a big way both in terms of time as well as value before they reach a bottom. Bottoms are formed when a market is least expecting them. Mostly, all the problems affecting the domestic market seem to have been priced in at this moment, but guessing a bottom is still a difficult task, said Alex Mathews, head of research at Geojit BNP Paribas Financial Services.
kumarsroy @mydigitalfc.com

Scars of slowdown to show up in Q3 bottom lines


PRASANNA DESHPANDE
HILE the going has been tough for India Inc in 2011, the OctoberDecember (2011-12) quarterly earnings seem to be no exception. In fact, market experts and analysts fear that results could be even more disappointing compared with previous quarters as declining consumption levels, higher interest rates and sliding currency levels will be the key impediments for the likely dismal show. Even as these challenges have been steadily affecting companies earnings for the past few quarters, their inability to shrug off these hurdles has been hampering earnings growth for quite some time. Advance tax numbers for the October-December quarter were more or less flat, which indicate the slowdown has been impacting the companies bottom lines. Some of the large-cap firms, such as Reliance Industries, State Bank of India, Tata Motors and Mahindra & Mahindra (M&M), made lower advance tax payments, while several fast-moving consumer goods (FMCG) and pharma players paid higher taxes, implying optimism in consumption. Saurabh Mukherjea, head of equities at Ambit Capital, said,

Overall Q3 earnings will be poor and most of the companies will perform badly on the margin front due to rising costs and their inability to pass on the costs to end consumers. With economic growth decelerating and poised to fall below earlier estimates, this will be clearly felt by companies as falling demand will hurt volume growth. In addition to falling volumes, higher input costs, rising interest outgo due to uptick in interest rates and a higher wage bill will eat into profits, thereby, hurting the companies margins. I expect top line growth to be around 12-15 per cent during October-December quarter and PAT (profit after tax) to be in low singledigit level as financials, oil, automobiles and metals will see decline in growth even as IT will benefit from a depreciating rupee, while FMCG will be aided by higher consumption, said Mukherjea. Recently, Crisil Research in its report on the October-December quarterly earnings has indicated year-on-year revenue growth of around 14-15 per cent, compared with a far healthier 22.5 per cent in Q3FY11. However, the report expects earnings before interest, taxes, debts and amortisation (Ebitda) margins to decline by 200 bps in

Burden of debt
Impact of rise in interest outgo is visible on the bottom lines of BSE-listed firms

Year/Quarter Revenue* YOY % change Net profit* YOY % change Raw materials* YOY% change Interest* YOY% change
* Figures in Rs crore

Q2 FY12

Q1 FY12

Q4 FY11

Q3 FY11

1,130,657 1,113,343 1,129137 991,423 21 65,646 38 428,789 28 137,018 48 28 69,896 1.4 427,473 31 124,935 42 23 96,977 9.4 26 110,387 33 19 89,061 19 20 99,150 18
Source: Capitaline

423,685 366,954

Q3FY12 from 19.7 per cent in the corresponding period last year, mainly on account of slower volume growth and high cost of inputs coupled with limited pricing flexibility. Companies with substantial debt on their balance sheet will be further hurt by increased interest costs and marked-to-market losses reported on foreign currency debt and derivatives due to the depreciation of the rupee. Net margins therefore, are likely to decline even more sharply, the Crisil Research report

said. Due to higher interest rates, total interest outgo for India Inc in the July-September quarter sequentially rose nearly 10 per cent to Rs 137,017 crore, according to data compiled by Capitaline. FC Invest has identified companies and sectors that may continue to witness negative growth in the October-December quarter even as some select sectors could end up on a higher note. Automobiles: There could be no

respite for four-wheeler companies from the ongoing slowdown as falling sales on the back of higher interest rates and jump in fuel costs have forced investors to postpone their car purchases. While companies such as Tata Motors and Maruti Suzuki will be hit by moderating passenger car sales, the latter also suffered drop in production due to the strike at its Manesar plant. In addition, with higher input costs, such as steel and rubber prices, most automobile companies will see fall in margins. On the other hand, moderating economic growth has pulled down commercial vehicle sales, affecting companies such as Tata Motors, M&M and Eicher Motors, among others. However, two-wheeler manufacturers will continue to show improved performance on the back of robust two-wheeler volumes. With rural spending on consumer goods still remaining intact, twowheeler sales have continued to remain strong, implying strong yearon-year earnings growth. Financials: Most public sector banking firms will continue to witness falling net interest margins (NIMs) as rising non-performing assets (NPAs) coupled with flat credit growth is likely to weigh on overall

earnings. Banks, such as State Bank of India and other PSU banks, will face margin pressure even as their private banking peers may fare slightly better on this front. Several state-owned banks may see improvement in their treasury earnings, but, that could be offset by lower credit growth, said AK Prabhakar, vice-president of equity research at Anand Rathi Securities. However, private banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank will see year-on-year growth in earnings due to fewer NPAs. Oil & gas: State-owned oil and gas companies, such as Bharat Petroleum, Hindustan Petroleum and Indian Oil would see mounting losses during the quarter as depreciation of the rupee against the dollar led to surge in import costs for these companies. In addition, rising under-recoveries will eat into margins, even as these companies score on the revenue front due to strong volumes. Oil companies will be hurt badly during the quarter as currency depreciation against the dollar has significantly scaled up import costs for these companies, which will hurt their earnings, said Mukherjea of Ambit Capital.
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