Greater risk with lesser reward

There is some disconnect between the rally in the market and India Inc.’s performance for the December 2011 quarter. While the Sensex has gone up by 19.24 per cent on a year-to-date basis, India Inc.’s report card for the quarter ended December 2011 does not paint a healthy picture, with the bottomline growing negatively. So, why this disconnect? Since the stock indices are the leading indicators, are they suggesting that all the bad news is now behind us and that the future is bright and shining? Well, when we scan through the economic data and the political scenario, there is nothing that clearly suggests that the bad news flows are indeed history.

We understand that the global economy is limping back to normalcy, and there are pockets indicating that the scenario is not that bad. Certain leading economies like the US are doing well. The Greek bailout package is also a good sign, and has helped in reducing anxiety on the Euro zone front. The Dow crossing 13000 (intra-day) after many years and the Japanese Nikkei witnessing a surge are indications that equity as an asset class is back in demand. India is also attracting good FII inflows, suggesting that the economy is back on the growth path.

However, India still needs to grapple with the problem of fiscal deficit and the lack of reforms. The political situation continues to remain fragile, and the result of the elections in UP would give some sense of political stability or instability at the centre. The way the government handled the latest NCTC issue gives a clear indication that it has not learnt any lessons from its past mistakes.

We are of the opinion that the Union Budget 2012 needs to take some hard steps to keep the economy rolling, and one of the big decisions would be to keep subsidies under control. Also, the economy needs some push, as the momentum that was built is not there anymore. Our sense is that the domestic scenario would continue to hamper the sentiment for the time being, and the market cannot afford to miss that for long. Crude prices surging would take the inflation numbers on the higher side. We strongly believe that the risk versus reward ratio is not in favour of reward. Hence, we suggest that our readers should take some profits off the table.

Our cover story for this issue has finely analysed the December 2011 quarter performance of India Inc. Our Core Research Unit has analysed the results of 3704 companies, where India Inc. has shown a growth of 23 per cent in sales but the net profit has declined by 7.2 per cent. In fact, while analysing the September 2011 quarter numbers, DSIJ had predicted (correctly, once again) that the net profit number for the December 2011 quarter would be lower than that in the corresponding period last year. This time too, our cover story has analysed 12 critical sectors with clear cut guidance on how each of them would fare in the next quarter.

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