Q4FY11 - Better Than Expected

6/6/2011

At 18600 levels, the Sensex is down by 9.5 per cent since the beginning of the year and continues to remain on shaky grounds. The obvious question is: Why is the market so nervous? Is it probably because it has been reacting too strongly to factors such as rampant inflation, rising cost of inputs, hardening interest rates, pricing pressures, etc as also the renewed fears of Europe’s debt concerns? Going by the volatility of the market, it surely looks so. But what is so new about these factors? They have been hogging the limelight for more than a fiscal now. While the market is busy getting concerned about these above factors, it surely seems to be missing out on one important trigger - the March quarter results, which seem to be painting a very contrary to expectations of a no show from India Inc.

With a topline growth of 23.27 per cent and a bottomline growth of 16 per cent, India Inc wouldn’t have scripted a better picture for itself managing to close the fiscal on a very high note. Data of 2,723 companies is with us so far, even as we near the end of the results season. This may not have caught the attention of many, but has truly pointed out two things, first is that the performance it has staged could be an indicator that the market is going a bit overboard with its pessimism and secondly India Inc despite adversities has shown a strong resilience once again, reiterating the old adage that when the going gets tough, the tough get going.

In fact it gets even better when we adjust the extraordinary items, the numbers of PSU oil companies, and the results of State Bank of India in specific (SBI’s profits dipped by 99per cent over higher provisioning for bad loans, pension cost and teaser loans). Adjusting for these the topline growth stays put at 22.40 per cent while the bottomline jumps further to almost 18 per cent. What is even better about these results is the strong sequential performance (i.e. March 2011 over December 2010 quarter) were the topline grew by 13.49 per cent while the bottomline grew by an even stronger 14.25 per cent.   

Now this clearly reiterates the fact that it is indeed a strong performance by India Inc and the March quarter has been by far the best of the last four quarters. Secondly, this growth acquires more significance for the simple fact that the Q4FY11 numbers have come over a very high base of Q4FY10 wherein the topline and bottomline grew by about 26 per cent and 33 per cent respectively. Thirdly, the profit growth came despite the fact that the costs of input and borrowing have only gone up and with the operating margins still being sustained it clearly indicates that India Inc has managed its costs well and improved its efficiencies.

Fourthly, the strong topline growth indicates two things: a) the demand continues to remain strong despite the rising inflation and b) this growth has been driven not only through strong volumes and higher capacity utilisations but also through better pricing as India Inc seems to have been able to pass on some of the costs to its customers. Last but not the least, when we look at the results’ break-up from a public sector and private sector perspective, the PSUs have led from the front for India Inc with strong topline and bottomline growth of over 26 per cent and 29 per cent respectively compared to a fairly subdued private sector growth of 22 per cent in topline and 11 per cent bottomline growth respectively.

Summing up

To sum up there are no two ways of saying this, but the March quarter by far has been the best quarter in FY11. In fact the best part here is that excellent results have come at a time when the valuation froth has come off. Even if we take a conservative market consensus of EPS for the Sensex of Rs 1150-1200 (down from about Rs 1200 earlier), the Sensex is still available at a PE of 15-16x its FY12 profits. This is much inline with its historical aver-age, wherein there are good bargains available across the board. Sectors such as IT, Pharma, textiles amongst others are looking good. In fact one can even look at PSU banking companies if you were to take a con-trarian view.