Patchy performance

On the face it, the April-June quarter results of major companies suggest that the recovery in corporate fortunes is well on its way. Sales for 700 NSE-listed companies that have declared results (two-thirds of the universe) expanded by 13 per cent over last year, maintaining the same pace as the previous quarter. Net profits showed a marked acceleration at an average of 25 per cent (21 per cent in the March quarter). But delve deeper into the numbers, and the recovery is patchy or uneven. Cyclical and core economy sectors, on which the stock market has been pinning its hope, seem to be losing momentum, while consumer-oriented companies, software and pharma majors are carrying on the show.

A breakdown of the quarterly numbers suggests that consumer confidence has made a strong comeback post-election. The only sectors that have managed to grow both sales and profits in double-digits are automobiles and auto components, banks, consumer durables and FMCGs. If automobile and white goods companies, thanks to excise duty cuts, were able to offer discounts and woo back fence-sitting consumers, FMCG firms such as Hindustan Unilever saw rural consumers drive up sales volumes. Sustained demand for retail loans have helped banks expand their loan books at a healthy pace, even as older industrial loans continue to slip into non-performing assets. But while consumption is back on track, the same cannot be said of the other engine of economic growth — investments, which are stagnant. With the Reserve Bank of India not budging on interest rates and the new government yet to work the expected miracles on large turnkey projects in power, metals and mining, order flows and earnings for power equipment makers, construction companies and EPC contractors have flagged. This, in turn, has impacted steel and cement numbers. While domestically focussed companies faced challenges, export-oriented ones from sectors such as pharma and software continued to deliver good numbers, buoyed by a weaker rupee (year-on-year) and reviving US and European markets. But as the base effect of rupee depreciation wears off, it will get tougher for these sectors to maintain their recent momentum.

For the stock markets, which are already trading at a price-earnings multiple of 20 times (above the long term average of 18), these quarterly numbers present a roadblock. Stocks from cyclical and core economy sectors which have seen their valuations expand the most in this bull run, on expectations of a quick rebound in earnings, have belied these hopes. This realisation may now spark a market correction and prompt investors to re-allocate money from cyclical stocks back into defensives. For policymakers, the message from the results is that concrete steps to restart the investment cycle are now imperative. The feel-good factor that has brought in foreign portfolio flows and held valuations aloft for ten months now cannot last forever, without hard numbers to back it up.

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