June 2013 Quarter Results: A Weak-Kneed Performance?

Lowering interest rates and rupee depreciation were some key factors that were expected to impact Corporate India’s performance in the quarter gone by. Some banking and IT companies have announced their numbers, while the results of the manufacturing firms are still to come in. Prasanna Bidkar gives you a sneak peek into the scorecard as it stands

The quarterly results of India Inc. have always been an important trigger for the Indian equity markets and are hence, naturally followed by the investor fraternity. This time the curiosity was higher as a quarter ago many broking houses had predicted that India Inc. would start showing signs of recovery in the first quarter of FY14.

However, a few factors have thrown in some confusion this time around. Slower GDP growth in the country and the sharp depreciation of the rupee in the June 2013 quarter are some of these. In simple terms, while the decelerated GDP growth would impact sales growth, the depreciating rupee would take some sheen off the profit numbers. A combination of these two factors looked set to keep India Inc.’s topline as well as bottom- line grounded.

Sure enough, the initial corporate results announced by India Inc. indi- cate that this is exactly how the performance has been. At the time of going to press, around 171 companies (considering only frequently traded companies accounting for a majority of the market cap, i.e. Groups A&B) have announced their results, showing topline growth of just 3.52 per cent but a healthy bottomline growth of 13 per cent on a YoY basis (adjusted for Extraordinary Income).

While the bottomline number may come as a surprise, one needs to understand that most of it is on account of the companies’ Other Income. Data shows that the recurring other income has increased 22.14 per cent on a YoY basis. If not for this, the average bottomline would have been much lower.

The operating profit growth would have been at Rs 7.81 per cent on a yearly basis, and growth would come in at a mere 4.66 per cent if adjusted for the recurring other income.

Another fact that needs to be taken into account is that growth has been slower despite the low base provided by the poor set of June 2012 quarter results. The sequential performance too has only worsened, with the topline showing a decline of around two per cent and bottomline numbers dropping by over 8.28 per cent.

Trendspotting

If we take a deeper look at the results for the June 2013 quarter, a few things emerge clearly. For one, it appears that Banking and IT companies are driving growth. While in the IT space, the depreciating rupee has helped the companies register a better performance, banking companies have managed to put in better performance aided by sustained net interest margins and strong growth advances.

One worrying factor in the banking industry, though, has been the deteriorating asset quality. In the June quarter, the impact has been seen even on a player like HDFC Bank, which has been historically known for its better asset quality.

Further on the negative surprises front, the Capital Goods segment seems to have taken a hit. Exemplifying this is the sorely disappointing numbers posted by India’s largest engineering company L&T, with its bottomline declining by more than 12 per cent on a yearly basis.

Lower Interest Rates Set Off By Rupee Weakness

Rising interest costs have always remained a concern for India Inc. With the RBI having softened the repo rate twice this year already, India Inc. had expected to get some respite. However, the depreciating rupee has made a dent here. The interest cost for June 2013 has increased by one per cent on a yearly basis. On a sequential basis, the increase has been much more at seven per cent. It needs to be understood here that a depreciating rupee impacts companies that have higher foreign currency borrowings. In our previous story on rupee depreciation (‘What’s In Store For The Markets?’, Dalal Street Investment Journal, Vol. 28, Issue # 15), we had spoken of the expected impact of the depreciating currency on corporates.

Another noticeable factor is that higher depreciation costs, which usually point at increased capex, have actually gone down in the quarter. While the depreciation charges have declined by 2.37 per cent YoY, they have also gone down by 1.55 per cent on a sequential basis. The view on the slower rate of capex was also echoed by L&T’s management, who stated that some of their capacities are being underutilised.

Speed Breaker Ahead?

Are these results indicative of the overall quarterly results scenario? Not entirely, we believe. The initial num- bers are dominated by the IT and Banking sectors, and hence, are not necessarily representative of India Inc. as a whole. In the days to come, more manufacturing companies are expected to announce their results, and with the kind of IIP data we have seen in the past one quarter, the manufacturing sector’s results are not expected to be particularly encouraging. We expect the average growth to witness a further decline.