The Hindu Business Line : <I>Ginger start, confident strides post-earnings </I>

It was in the homestretch to the earnings season that stock prices perked up gingerly, lifted by market expectations. After eight straight quarters of robust earnings growth, including the first quarter of 2006-07, trepidation had been building up about the underlying pace and strength of India Inc's growth story.

However, the earnings scorecard of the index heavyweights across sectors (with the exception of two-wheelers) presents a flattering picture, eliminating any lingering doubts on this score. And the market has given a thumbs-up to this performance; the Sensex soared past 13,000 and the Nifty touched a new all-time high, reflecting the upbeat sentiment.

Examining the large-cap returns picture for October and comparing it with the earnings performance announced on different dates of the month confirms this trend.

At one end of the spectrum are stocks from sectors such as software (Infosys Technologies, Tata Consultancy Services), telecom services (Bharti Airtel and Reliance Communications), metals (Hindalco), banking (ICICI Bank) and capital goods (ABB or Larsen and Toubro), that exceeded market expectations in most cases and enjoyed a run-up over the past month.

In contrast was the market disenchantment with automobile stocks. Margin pressures were faced by two-wheeler stocks such as Bajaj Auto or Hero Honda, and there are fears that the growth of Tata Motors may start slowing down. This is reflected to a large extent in their stock price movements.

Beyond the bellwether

Leaving aside the index heavyweights, the market rally has been narrow. The stock price action and earnings performance for the top 400 stocks (outside the Sensex and Nifty) under different market-cap categories shows that a significant chunk of the action has come after the earnings announcement, though, as always, with a few exceptions.

Across different sectors, some interesting candidates that were either lapped up or shunned by the market, depending upon the results, were:

Capital goods: In capital goods, stocks such as Lakshmi Machine Works (LMW), Areva T&D and Alstom Projects have turned in a robust performance for Q2. And these stocks, which had started inching up in the run-up to the earnings announcement, have surged thereafter.

For instance, LMW, which announced its earnings on October 16, recorded a revenue growth of 43 per cent and a rise in post-tax earnings of 188 per cent for the quarter. This strong announcement, along with the proposed stock split from Rs 100 to Rs 10, set the stock on fire. From October 13, when the market crossed its earlier all-time high, the stock appreciated over 20 per cent. Contrast this with Aban Offshore, which reported a relatively lacklustre performance on October 14. The stock has shed over 15 per cent since October 13.

Metals: The biggest surprise has been the sharp rally in the metals pack. Metals, languishing since the May/June meltdown, have seen some strong price action, largely backed by their solid performance. Among the non-index pack, Madras Aluminium (Malco) and Hindustan Zinc have seen significant rallies. Bolstered by the over three-fold jump in profits for the July-September quarter, the Malco stock soared 17 per cent from October 13 to now.

Software: Buoyed by strong performance, several mid-cap software stocks gained pace over the past month. The ones at the top of the returns heap are Tech Mahindra, NIIT Technologies, KPIT Cummins and Aztec Software, among others, aided mainly by strong earnings numbers.

Pharma: In the pharma capsule, the stock returns picture has been mixed. While the frontline pharma companies have had a fairly uninspiring run, select mid-rung stocks such as Divi's Labs, Glenmark Pharma and Cadila Healthcare marched ahead on the strength of their good earnings card.

However, Nicholas Piramal turned in a somewhat sedate performance on October 18 and its stock price reflects this trend.

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