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.[PAGE BREAK]

However, while we don’t want to take away any credit of this excellent show from India Inc, we do foresee some concerns put forth by us initially, which are real and are certainly poised to create discomfort in the coming quarters. The initial indicators are seen in the growth spread of profits in March wherein of the total 2,723 results, the profits of 1,458 companies have gone up, the profits of 1,179 companies have declined and that of 86 companies have remained stagnant. Besides, the June quarter yet again will be on a higher base and posting higher growth rate over this base would be a little difficult, especially on the bottomline front.

Further, with three interest rate hikes already witnessed since January 2011 till date, a lag effect of the same would be seen in the June quarter results, where we expect the interest cost to go up further. While India Inc has not seen much of the impact of the interest rate hikes in Q4FY11, it would be interesting to see how it dodges the lag effect of the hikes expected in the June quarter. Inflation is another factor that continues to dog corporate India. Inflation is now seen spreading to manufactured products and though some of the commodities have corrected, even at their current levels they could create some uneasiness for companies.

To top that we also expect the demand to moderate going forward on the back of rising inflation and borrowing costs and this will impact revenues. We expect volumes to taper too. All this should have an impact on the bottomline growth in the coming quarters, but the good news is that the market seems to be reflecting the same and hence downside looks a bit limited from hereon, hence making it good time for investors to enter from a long term perspective. Given ahead is the detailed sectoral analysis of the March quarterly results.

Automobiles
If we take a look at the results of the automobile sector, with a topline growth of 23.25 per cent and bottom-line growth of 31.44 per cent it seems to be an excellent performance for the quarter. But as we adjust these for the extraordinary items and the other income, the scenario changes significantly with the bottomline showing a marginal increase of just a little more than 5 per cent on a YoY basis. This again is exactly what we had stated in our preceding quarterly results analysis. If we take a look at the sales growth, it is mainly contributed by the volumes and a marginal improvement on the realisation front. For example, Maruti Suzuki witnessed a strong volume growth of 19.50 per cent and the realisations improved marginally by less than 1 per cent. Similarly, in the case of TVS Motors, the volume growth was more than 28 per cent and the realisations improved by 5.70 per cent.

Akin to its peers, Hero Honda also witnessed volume growth of 23 per cent and the realisations improved by 6.50 per cent. Even Bajaj Auto followed the trend and witnessed a volume growth of 17.21 per cent while the realisation increased by 5.41 per cent on a YoY basis. The scenario has been similar on a sequential basis too. So in a nutshell, the growth has been mainly driven by volumes. One noticeable factor is that there was a huge amount of buying that happened ahead of the budget on account of an expected roll-back of the excise duty. Further, while there was a marginal improvement on the realisation front, the higher raw material cost and employee cost took a toll on the automobile manufacturers.

The EBITDA margins for Q4FY11 of Maruti declined to 10.20 per cent from 13.50 per cent in Q4FY10. In the case of Bajaj Auto also, the EBITDA per vehicle for Q4FY11 declined to Rs 9,086 from the Rs 9,607 in Q4FY10. A major impact was seen in the case of Hero Honda where the EBIDTA per vehicle for Q4FY11 declined to Rs 4,538 from the high of Rs 5,998 in Q4FY10. So the margin pressure was witnessed by every single player. As for the next quarter, rising inflation and increasing competition is expected to put pressure on the margin front. The rising interest cost and increasing prices of fuel are expected to impact the volumes. So expect some subdued growth for the automobile sector for Q1FY12.[PAGE BREAK]
Banking
The BSE bank index, Bankex, continued its dismal performance for the second quarter successively and was down by 1 per cent. This was due to the various headwinds that the banking sector has currently been facing, whether in the form of a concern over margins, deterioration in the asset quality or a possible slowdown in the credit growth. However, when we see the topline growth of the banks we do not see any trace of a slowdown. The 39 banks (including public and private) that were anaylsed by us saw their topline increasing by 30 per cent. This was primarily driven by a better credit growth of 21.5 per cent and a strong growth witnessed by some banks in their fee-based income. One of the highest credit growths was witnessed by Yes Bank which stood at 55 per cent.

Nevertheless, when we look at the bottomline of the banks, it reflects the reason why it is underperforming. Overall, the net profits of the banks increased by just 9 per cent on a yearly basis. However, this quarter there was a one-off event that pulled down the overall profit of the banks. SBI, India’s largest lender, saw its profit declining by 99 per cent on a YoY basis due to higher provisions and pension-related costs. If we adjust this, the net profit has increased by 27 per cent. But this masks the difference in performance between the private and the public sector banks. The net profit of 15 private banks has increased by 40 per cent whereas the 24 public sector banks saw their profits decline by 3 percent (after adjusting for SBIs results it is up by 21 per cent).

The reason for such a fall can be attributed to the higher provision towards employee expenses and for an increase in the NPAs of the PSU banks. The employee expenses have increased by 55 per cent on a yearly basis for the public sector banks. Although the private banks saw their asset quality improving, the public sector banks saw it deteriorating with banks like PNB and Corporation Bank leading the pack. Banks with higher restructured accounts in their books saw more slippages.

Coming down to the margins, there were mixed results with the South Indian Bank, Allahabad Bank and Bank of Baroda witnessing a yearly increase in margins while Axis Bank and Yes Bank saw some decline. Going forward we believe that the headwinds for the banking sector will continue for some more time as the RBI has increased the interest rate and might continue to do so for a couple of more times. This will definitely reduce the credit growth and might impact the asset quality of the banks. Hence we believe that the Bankex will not outperform the market till the next quarter.

Cement
It seems like there is light at the end of the tunnel for the cement sector whose Q4FY11 numbers at a cursory glance show a very strong performance. With topline growth of almost 19 per cent and bottomline growth of 32 per cent, there could be nothing better that anyone could have asked for from this sector, which had seen its profits dipping for the last five quarters in a row till Q3FY11. But a more detailed scan shows that barring UltraTech Cements whose profits have jumped by 218 per cent, most of the known names such as ACC, Ambuja, Birla, Heidelberg, JK Lakshmi, etc have seen a dip in their profits. A good look at the UltraTech numbers shows that the Q4FY11 profits include one-off items like sales tax refund, reversal of excess tax provision relating to earlier years and the numbers of amalgamated Samruddhi Cement as well.[PAGE BREAK]

Adjusting these numbers, the over-all sales show a dip by 2 per cent while the bottomline is even worse, having declined by 9 per cent, thus indicating a very gloomy scenario for the sector. In fact one of UltraTech Cement’s announcements said that the 5.3 per cent industry demand growth recorded in FY11 has been the lowest in the last ten years. The lack of increased activity in the infrastructure and real estate sectors on the back of the rising cost of borrowing seems to have taken a toll on the sector. The total cement volumes have dipped sharply by 16.51 per cent in Q4FY11. To top that, the rising input costs have made matters worse. Fly ash, slag and gypsum prices continued to rise while the prices of coal, both imported and domestic, increased by 27 per cent and 30 per cent even as the freight and interest costs created further pressures.

The surprising part was the continuous price hikes that were seen as the companies tried passing on the costs to the customers. Prices on an average increased by about Rs 40 per bag, but even that was not enough. As for the coming quarter, when the construction activity peaks we expect the prices to remain firm or even rise as the companies would continue to pass on the cost. However, we don’t see the volumes going up substantially. Thus sales are bound to remain stunted and considering that the input costs aren’t expected to cool down so soon, the June quarter profits could show a decline.

FMCG
The Reserve Bank of India has the hiked interest rates to fight inflation. The rates that are witnessing a north-bound journey have seen a shift in the mindset of the investors where they are focusing more on the consumption-led story of India. Fast moving consumer goods (FMCG) is one such sector that has since long been considered as a safe haven for investors to park their funds during turbulent times. The fact mentioned above can be justified when we see that on a YTD basis wherein the Sensex has given a negative return of 12 per cent, the FMCG index has been able to remain in green, giving a return of around 2 per cent.

For Q4FY11 the basket of companies in the FMCG sector has witnessed a jump in their raw material prices, which is up by 29 per cent on a YoY basis. The increase in the raw material prices coupled with the rise in competition is taking a toll on the companies in this sector. However, FMCG companies pass on the increase in prices to the consumers and they have done this in the last quarter too. Some companies have increased their product prices or have reduced the weights while keeping the price constant in case of some products. On the topline and bottomline front the sector has witnessed a growth of 18 per cent and 19 per cent on a YoY basis respectively.

As the price increases take effect, growth is being shifted from being primarily volume-driven to a mix of being both price and volume-driven, especially in the commodity-sensitive categories of soaps and detergents. One of the FMCG giants, Hindustan Unilever (HUL), witnessed a growth of 14 per cent which is entirely driven by volumes. On the other hand, Marico has seen a drop in volumes which tanked to 5 per cent from an average of 15 per cent in the last three quarters due to inflationary pressures on the key raw material copra which was up by 45 per cent on a YoY basis in FY11.

The one concern that still remains due to which the margins of the companies may remain under pressure is the increasing raw material prices. The market prices of major raw materials, despite some recent corrections, are still at a high level. Crude, which has gone up by 21 per cent in the March quarter after increasing by 13 per cent in the December quarter, and coffee prices were at their all-time high. FMCG companies have to take measured steps so that they can sustain their margins. We believe that investors will continue to fancy the sector for the next couple of quarters mainly on the back of increased volumes and the consumption-led story of India.[PAGE BREAK]
Infrastructure & Realty
Infrastructure and realty are two worst-hit sectors because of the rising interest rates. This is reflected in the results posted by the companies for the quarter ended March 2011. Although 69 companies (including infra and realty), whose results were analysed, saw their topline increase by 17 per cent, what is worth noting is that almost one-third of these companies (23) have seen their total income decline on a yearly basis. For example, Sobha Developers reported a sale of 2.8 MSF (million sq feet) against a target of 3.0 MSF and saw its topline decline by 14 per cent on a yearly basis. According to PropEquity, a real estate consultancy firm, in the first quarter of 2011, Mumbai has seen a 17 per cent drop in home sales, Bangalore 14 per cent and Hyderabad 15 per cent.

It was not only the real estate companies but infrastructure companies like Vascon Engineers also who witnessed a declining topline. Rising interest rates have definitely dented the demand side. “Moreover, due to political uncertainty the decision making has been slow,” pointed out A M Naik, CMD, L&T. Therefore many orders from the government have got deferred. Even the private sector orders are getting delayed due to the rising interest rates and the commodity prices. The order inflow has been a mixed bag for infra companies in the last quarter, with companies like L&T witnessing a good order inflow whereas companies like HCC saw a moderation in their order inflow. Nonetheless, what is interesting to note is though the RBI has raised the interest rates, the effect is not visible in the overall results of the companies, as this component went up by only 18 per cent on a yearly basis.

The reason for this might be the foreign borrowings that many big players like L&T resort to, keeping the interest cost under control. Moreover, lesser activity also leads to lower working capital requirements. When we look at the bottomline of these companies we find that it has increased by 26 per cent. The reason for this better performance is a 37 per cent increase in the other income on a YoY basis. Rising interest rates might be helping these companies to earn better returns on their cash held. Going forward we believe that there will be a muted demand for at least a couple of quarters for the real estate sector and the capex cycle is likely to pick up only in the second half of CY11. Till then we do not see any significant improvement in the financial performance of these companies.

Information Technology
It is common knowledge that the IT/ITES sector has been on a very slow revival track. But one thing is for sure - there is indeed a revival and it is picking up pace. Don’t believe us? Then better look at the numbers. While the bottomline for the sector started growing at a muted 3.3 per cent in Q1FY11 on a YoY basis, it doubled to 7 per cent in Q2FY11, while in Q3FY11 the rate at which the profit grew increased to 14 per cent. And guess what, the sector even bettered this number further with bottomline growth of over 27 per cent for Q4FY11. The topline during the same period grew at 20 per cent. What is interesting to note here is that the growth is well in line with the expectations even on a sequential basis with topline and bottomline growing at 4 per cent and 6 per cent respectively.

This comes as a relief and we can safely assume that the Indian IT sector is coming out of the woods with an improvement in the scenario of the global markets, especially the US helping its revival. There is good business in the pipeline and this can also been seen from the hiring numbers. TCS in FY11 hired 70,000 compared to its earlier estimate of 50,000. The company has already made 37,000 new offers for FY12 with a total target as of now being pegged at 60,000 people. Infosys hired 43,000 instead of the earlier target of 40,000 and is now looking at 45,000 for FY12. The US companies are coming forward for increasing their IT spends and the IT budget which would be more or less be finalised by the end of the June quarter.[PAGE BREAK]
There is indication that these budgets might be on the higher side. While the volumes continue to improve, the pricing is seen improving too. New contracts/deals are seeing an uptick in the prices. This augurs well and would push revenue growth further. However, the important factor to look at is the salary cost which will eat into the margins as the hiring targets have increased by a good number and secondly the salary hike for the existing employees would be a fairly good one, more of necessity at this point of time to arrest attrition and retain good talent. But on the whole the current results are good and this growth should sustain in the coming quarters as well.

Oil & Gas
Oil and gas remained at the centre of action among all the commodities in the last six months owing to the risk premium that was added to the commodity due to geopolitical reasons. This led to a sharp rise in the oil prices within a short span of time. This was quite evident in the results of the sector which witnessed a rise in sales by 31 per cent and that was primarily supported by the price spurt. For example, Reliance Industries saw its turn-over increasing by 29 per cent out of which 18 per cent has come by way of the price increase. It was not only crude but also the doubling of the APM gas prices by the government which helped some companies to post better numbers.

However, volume increase also played its own part and for HPCL it increased by 10.5 per cent on a YoY basis. As expected, the prices of raw materials saw a substantial increase of 39 per cent and were 66 per cent of sales for Q4FY11 compared to 62 per cent of sales in Q4FY10. Other expenses like employee cost, interest cost, etc went up in line with the increase in sales. When we see the aggregate net profit of these companies, it has increased at a slower pace than sales primarily due to the rising commodity prices. The bottomline has increased by 8 per cent on yearly basis. This would have further deteriorated had companies not posted better gross refinery margins (GRMs). All refineries saw their GRMs improving.

A case in the point is HPCL whose GRM for the quarter increased to USD 8.55 per barrel from USD 3.22 in the corresponding quarter last year. The rise in GRM can be partially attributed to the sharp improvement in middle distillates due to the supply limitation from Japan and the increasing light-heavy differential due to the Libyan crisis and a higher production from OPEC. Going forward we believe that the current situation will prevail for at least one more quarter and the commodity market might see some moderation after the winding up of Quantitative Easing II. Moreover, after increasing the price of petrol the government is expected to increase the prices of diesel and LPG too. That will definitely help the oil marketing companies going forward. Hence we believe that in the coming quarters this sector will see a decent financial performance.

Pharmaceuticals
Companies in the pharma sector have witnessed a muted performance for the quarter ended March 2011. Adjusted for extraordinary items during the corresponding period, the topline witnessed growth of 7.10 per cent and the bottomline witnessed de-growth of 11.18 per cent on a YoY basis. The bottomline de-growth has happened after several quarters mainly because of an increase in raw material cost and employee expenses which went up by 20 per cent and 22 per cent respectively on a YoY basis. The increase in the employee expenses is mainly due to the increase in field forces by a sizeable number of companies in the sector in a bid to increase their rural penetration.[PAGE BREAK]
The companies concentrating on contract research and manufacturing services (CRAMS) have not done well on the profitability front due to reduced outsourcing activities by innovator drug companies.

However, the scenario could improve going forward and an indication of this was seen in the results of Divis Laboratories which has seen an increase in order inflow in the recently concluded quarter. But on the other hand, Jubilant Life Sciences has witnessed a drop in profits due to a decline in key businesses.

Though the sector has witnessed a muted performance, it is quite possible that the pharma sector will revive going forward. Many Indian companies have approvals from the USFDA for launching their products in the regulated markets from day one after the patents expire. Lupin, Dr Reddy’s and Sun Pharmaceuticals, to name a few, are the companies who have a robust product pipeline which can reverse the performance witnessed in the recent quarters.

Another aspect that needs to be highlighted is that with the increasing generic penetration in the developed markets, the Indian pharmaceutical players are likely to witness better growth going forward. Even in the emerging economies these companies are likely to perform better.

Indian pharma companies which cater to niche segments like anti-diabetic, cardiac, gynecology and anti-infective are witnessing strong growth. One should not take the results of Q4FY11 as a parameter to judge the sector. It is advisable to wait and watch the developments that are taking place in this sector and we still remain bullish on the sector as a whole

Steel
The last couple of quarters have been characterised by a rise in the commodity prices and steel has been no exception. Steel prices were raised by all the steel producers in a range of 8 to 20 per cent. For example, SAIL increased its product prices on an average by 8.4 per cent and the realisations for Bhushan Steel improved by 13 per cent on a yearly basis. This price rise helped the 64 companies analysed by us to post a rise in sales of 11 per cent on a yearly basis. But when we look at the volumes’ contribution to the topline growth we find a mixed bag. Companies like Bhushan Steel and SAIL saw their volumes decline whereas JSW’s volume increased on a yearly basis. Productwise, flat products saw a major increase in volume whereas the long products de-grew for most of the companies.

For JSW, the volume in the long products segment declined by 8 per cent while its flat products saw a jump of 44 per cent on a yearly basis. This also somewhat reflects the slowdown in the construction sector where long products get more application. Nevertheless, a rise in the prices did not stop the steel companies from posting a decline in their net earnings which were down by 13 per cent on a yearly basis. A drop in the profit is mainly attributed to the rising raw material prices and interest cost that increased by 31 per cent and 16 per cent respectively. The key raw materials that go in steel making, iron ore and coking coal have seen a substantial rise in their prices in the last one year. Coking coal spot prices have increased by 45 per cent on a yearly basis to USD 313 per tonne against USD 216 per tonne last year whereas the current contract prices are trading at USD 370 per tonne.

Similarly, the iron ore spot price has averaged at USD 183 per tonne against USD 134 per tonne for the quarter Q4FY10 - a rise of 37 per cent. All this led to a rise in the cost of raw material as a percentage of sales from 46 per cent (Q4FY10) to 54 per cent (Q4FY11). We believe that for the next couple of quarters some of the headwinds like the rising raw material prices (coking coal contracts have reached USD 370/tonne) and the interest burden will continue and add to the slowdown in the economy that will keep the performance of the steel companies subdued.[PAGE BREAK]
Textiles
In the December quarter results’ analysis we had categorically said that looking at a sharp rise in the tax outgo in the December quarter, there is a high probability that the March quarter numbers would continue to be robust. This is what has exactly happened in case of the textiles sector. With topline growth of 33.30 per cent and bottomline growth of a massive 68 per cent, the textile sector continues to turn a lot of heads and has certainly come as a surprise for those who had written off the sector couple of years ago. In fact, with the sector ending Q4FY11 with a bang, it would be the eighth quarter in a row wherein it has put up a very strong show both at the bottomline as well as the topline level.

Factors such as a better than expected revival in the global markets, especially the US, leading to a strong demand for Indian textiles and an equally stronger demand for textile products on the domestic front are the two major factors coupled with the low base effect that have led the sector to post such strong numbers. What makes these numbers even more interesting is the fact that the companies have been able to post good profit growth despite the rising costs of inputs such as cotton, yarn, etc. But the main question is: Will this growth be sustained?

Our answer to that is ‘no’ as the low base effect is on its way out and we would see a higher base from June onwards. So posting growth over that will limit the growth rate. Secondly, though cotton prices have corrected from their earlier peak of Rs 60,000 plus per candy to a low of around Rs 45,000 per candy, these prices are still on the higher side and now they are rising again. This will push up the overall input costs. Thus it is highly unlikely that we would see a high profit growth rate for the textile sector in the coming quarters and it should only normalise going forward.