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Five Stars of India Inc.

| 2/23/2012 9:30 PM Thursday

December 2011 was an eventful quarter for India Inc. Be it on the global front or on the domestic front, every now and then certain events kept investors busy. On the global front, the European debt crisis and slower-than-expected growth in the US markets kept everyone on their toes. On the domestic side, the sharp depreciation of the rupee (eight per cent) against the US dollar, inflation worries and the worst-ever IIP numbers (negative 5.10 per cent in October 2011) made sure that India Inc. did not get any respite. What added to the woes was the government inefficiency that led to policy paralysis. While these were the major negative factors, the biggest positive news came in when the RBI took a pause on the rate hike front.

All in all, it was a mixed quarter, and the corporate results too were on similar lines. Expectations on the corporate performance front were already low from the December 2011 quarter on account of the negative factors mentioned above, even after considering the higher base of the corresponding quarter (QE December 2010).

If we take a look at the results for the December 2011 quarter, they appear to be neither good nor bad. Rather, they are very much as they were expected to be. We analysed the results of 3706 companies, and at the gross level the outcome suggests that the for QE December 2011, topline growth came in at around 26 per cent while bottomline growth was around 43 per cent as compared to the December 2010 quarter.

India Inc.'s Performance (Excluding Refineries) (Rs. Cr)
ParticularsDec 2011 QuarterDec 2010 Quarter% Change
Sales 1207110 982426 23
Operating Profit 306431 263539 16
Interest 157057 108080 45
Extraordinary Items 1209 778 55
PBT 146173 148946 -2
PAT 94676 101481 -7

The 43 per cent bottomline growth may look surprising to many, particularly because we mentioned right at the outset that the results appear to be neither good nor bad. However, a deeper scrutiny of the data reveals that the profits were skewed due to higher earnings from Oil Marketing Companies and also on account of extraordinary income; aberrations that need to be considered while looking at the growth that came in at the bottomline level.

As a standard practice, we adjusted for both these factors and arrived at the true picture after doing so. This shows a topline growth of 23 per cent and a decline in net profit by around 7.20 per cent as compared to the December 2010 quarter. On a sequential basis, the topline grew by six per cent and there was a marginal increase of 1.50 per cent on the bottomline front.

If we take a look at the results, a few factors emerge straight away. First, the raw material prices remained firm despite many expecting some amount of easing in December 2011. Higher raw material prices that could not be passed on to customers impacted the operating margins, which witnessed a decline of around 150 basis points and stood at 25.40 per cent. We are of the opinion that the high cost inventories that were carried forward might be the reason behind the same, and we may witness some improvement on the margins front in the coming quarters.

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