The market rally since September last has been fuelled by cyclical stocks, amidst expectations that these beaten-down sectors will turn around with the economy. As the Sensex gained 35 per cent since then, the BSE Capital Goods Index doubled in value, while the auto and banking indices moved up 40–60 per cent.

While there are some green shoots, the initial June quarter results show that the turnaround may take more time for most cyclical companies.

An analysis of 300 companies that have announced their results so far suggests waning momentum for India Inc in the April-June quarter. Net sales and net profits for these companies grew 11.3 per cent and 10.7 per cent, respectively, over the June 2013 quarter. This is lower than the 16 per cent growth in topline and bottomline recorded in the March quarter.

Auto sector leads While sectors such as auto and auto ancillaries have picked up, others such as banks, capital goods and cement reported sluggish growth.

Sales for auto and auto-part makers grew 11 per cent in the April-June quarter, over the same period last year. This builds on the 3.5 per cent growth in the March quarter and is a turnaround from the 8 per cent shrinkage in sales in the December 2013 quarter. Net profits too expanded 10 per cent, turning around from the 2 per cent fall in March 2014 (over March 2013) and the 5 per cent fall in December 2013. Along with higher sales volumes, cost-cutting efforts and relief on interest costs have aided profit growth or, in some cases, helped narrow down losses.

Take Ashok Leyland, for instance. After many quarters of falling truck and bus sales, the company sold about 950 vehicles more in the June quarter compared with the same quarter a year ago. Apart from cost control, better volumes helped the company improve its operating margins to 4.6 per cent from the miniscule 1 per cent in the previous year. The company’s losses narrowed down to ₹48 crore from ₹135 crore, a first in the last four quarters.

In the case of Bajaj Auto, while its domestic demand did not show much improvement, higher exports helped net sales grow 7 per cent year-on-year, the highest in the last four quarters.

Auto component makers fared even better with replacement demand growing quite well, even as new vehicle sales improved. Battery maker Exide Industries’ profits grew by a healthy 17 per cent, after a lull in the last three quarters.

But there was no such luck for banks, which have seen revenue growth stagnate at 10-12 per cent in the last three quarters. Net profit growth remained at 10-11 per cent in the June quarter, same as in March.

Higher NPAs Overall, with higher non-performing assets being reported even by private sector banks such as HDFC Bank, Axis Bank and ING Vysya Bank this quarter, concerns for the sector remain.

Capital goods companies didn’t show any cyclical improvement either. Net sales of companies, inched up 0.5 per cent, same as in March 2014 (over March 2013). Net profits dropped 22 per cent compared to last year.

Although many measures have been announced for revival of industrial growth, these are yet to translate into higher order flows for engineering and power equipment companies. The profits of Thermax, for instance, dropped by about 18 per cent to ₹41 crore in June, and the company continues to suffer from slow execution and cost escalations in its energy division, which brings in three-fourths of its revenues.

Companies in the other highly fancied sector, cement, were helped by a low base in the same quarter last year, a delayed onset of monsoon this year and higher prices (realisations). Hence, net sales for companies such as Ambuja, ACC, JK Lakshmi and UltraTech grew 13.6 per cent in June. But cost pressures saw net profit growth come down to 3.9 per cent, much lower than the 10.3 per cent clocked in March (over March 2013). Despatches of cement are yet to pick up.

But these are early days of the results season, and the picture could change once all the results are out.

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