Growth Incorporated

Indians are buying like never before, helping corporates to leave hurdles of rising interest rates and global oil prices behind and net huge monies to sustain the ever-increasing growth rate

The commodity cycle, which triggered the bull run in 2003-04, has now been replaced by consumer goods and services companies, which are seeing raging growth. For example, Maruti has sold 1,57,683 units in a single quarter clocking a 12.2 per cent year-on-year growth. The big driver of this has been the A2 segment. The top five auto companies have all shown over 25 per cent growth in sales.

Upsurge in consumer demand catapults corporate India on to a growth trajectory The future will be volume-driven as topline growth is more robust than that of bottomline Increasing costs of manpower, raw material and higher depreciation are driving down profit margins Globalisation and income from exports help diversify the market risk substantially The competitiveness of the Indian industry has helped tide over margin pressure this season

However, Indians are not just driving in style. Cellular phone services company Bharti Airtel too has seen record increase in connections in a single quarter at 41.1 lakh. The company had over 2.86 crore subscribers as on September 30, 2006, an increase in the total customer base of 90 per cent, over the corresponding period last year. Commenting on the company's stellar results Sunil Bharti Mittal, chairman & managing director, Bharti Airtel, says: "This quarter, for the first time ever, India's mobile net additions surpassed those of China. Wireless services continue to drive the growth of telecom services across the country with over 126 million subscribers."

On the back of such stellar growth in manufacturing and services, stock market analysts have revised earnings expectations from Sensex companies from 20 per cent to 23 per cent as a number of other sectors are riding the wave of growing consumer demand. Typically, consumer companies clock good returns in the quarter after the festive season when people spend, but this year has been an exception of sorts. Benefiting from this boom are the banks today, which are not only funding consumer credit but are also financing massive capital expenditure plans of companies to expand capacity. India Inc is committed to Rs 1,00,000 crore capital expenditure over the next year and this figure is likely to touch Rs 2,50,000 crore by 2009. So if you have invested in banking stocks, hold on for the good times to roll as "banks are clocking a healthy 30 per cent increase in retail credit," says Jigar Shah, director, broking firm KR Choksey.

FROM D-STREET

"India Inc is committed to Rs 1,00,000 crore capital expenditure over the next year." JIGAR SHAH DIRECTOR, KR CHOKSEY "Bulk of the growth will come from oil, capital goods, auto and telecom companies." ANUP MAHESHWARI FUND MANAGER, DSP MERRILL LYNCH

Along with strong domestic demand, global factors too have contributed to India Inc's good health. Stable interest rates in the US and stabilisation of oil prices have benefited both the tech and oil sectors, respectively. Spending on the information and technology sector in the US is up, easing margins pressure on eight technology companies, which have reported a 59.2 per cent rise in net profit to Rs 3,534.32 crore during the quarter. The acquisition spree that India Inc has been on is also contributing to the healthy bottomlines. Fiscal 2006 closed with $100 billion (Rs 4,50,000 crore) in exports. And now the government has set a target of achieving $150 billion (Rs 6,75,000 crore) in exports, including commodities, by 2008-09 and doubling India's share of global trade to 1.5 per cent from 0.8 per cent at present.

While India Inc is making the most of the wave of consumption, profitability is under severe pressure due to rising interest and raw material costs along with higher depreciation. The current fiscal has seen interest burden of companies rise by 11.8 per cent. While they have added significant capacities in recent years, infrastructure bottlenecks and high transportation costs will begin to tell in the coming quarters. All these factors have contributed to profitability going down even though toplines (revenues from sales) are skyrocketing. Harinder Kumar, research head at ICICI Direct, believes this is a volume-driven story: "Growth in revenues will help companies absorb pressures on profitability."

In the past, topline and bottomline growth used to be aligned. For instance, in 2004-05, sales of S&P CNX Nifty grew at 16.5 per cent and profit after tax grew by 11.5 per cent, signaling that profit growth was in tandem with sales. However, this gap between profits and sales is increasing. While a majority of Sensex companies in this season have garnered 30 per cent growth in sales, profits are up only by 22 per cent and profit margins are down by 175 basis points, says Kumar. The sectors that will be maximum hit by rising costs of commodities like aluminium, copper and rubber are auto, consumer durables and fast moving consumer goods.

This season's good news still beats the blues as a number of factors have come together, thus pushing up the earnings of leading indices. Earnings of 17 Sensex heavyweights have clocked a 30 per cent growth over the previous year. Joining the earnings party, after a fairly long time, are former laggards-pharma, banking and cement companies-all of which have seen double digit growth rates this quarter. Cement, for instance, has grown at 141 per cent in the first half of the current quarter compared to its 8 per cent growth in fiscal 2006. Clearly the construction boom is here to stay.

Unlike the earning seasons of the past, markets are witnessing a secular growth. In 2004-05, they were dominated by commodity-led growth and this season several sectors have seen positive factors with both the global and domestic contributing to their growth story. Of these, the most positive has been the recovery of oil companies. Party-poopers in the previous two quarters, oil PSUs have turned around, thanks to the oil bonds issued by the government and a one-time payment made by ONGC. HPCL turned in a profit of Rs 1,222 crore against a loss of Rs 22.14 crore in the corresponding quarter, while ongc reported a meagre 0.86 per cent rise in net profit to Rs 4,173.98 crore. Reliance's profits grew marginally by 9.2 per cent to Rs 2,709 crore. Says Sandeep Nanda, research head at Sharekhan: "Oil companies have driven the growth of the Sensex earnings this quarter as they have clocked profits after losses in the previous quarters. Expected earnings of Sensex firms in 2007 have, thus, been revised from 20 per cent to 22 per cent."

Policy level changes too have impacted the growth of sectors like media and entertainment. With the government opening direct-to-home services, entertainment and content companies are slated to consolidate their position.

While the large caps have hogged all the limelight this season, the mid caps are quietly coming back into the reckoning with higher profits on equally higher sales. Even as Sensex companies will see volumes-led growth, the BSE 500 companies show that they have clocked 31 per cent growth year on year. Net profit has grown by 34 per cent, clearly showing better growth rates than the blue chips. Punters expect the Sensex to close above the 14,000 mark by the year-end as it's set to grow by 22 per cent with an earnings per share of Rs 738, compared to Rs 603 in 2006. All this is good news for the stock markets, which are priced at over 17 times earnings (PE 17.5) and that is fair valuation, say most analysts.

However, if you are looking for investment direction, "bulk of the growth will come from oil, capital goods, auto and telecom companies", says Anup Maheshwari, fund manager at DSP Merrill Lynch Fund Managers. It's evident that the party is set to continue in times to come as Indian companies invest more in building capacities and consumers spend more. But this year's earnings are just the beginning; 2008-09 will be a landmark year for the industry and markets as heavyweight Tata Steel doubles capacity and the Reliance Retail juggernaut rolls. There are lots more to come.

India Inc has for the past three years beaten the street and odds in sales and profit growth. If there is an IF it is in the domain of politics and of course the crimping effect of poor infrastructure that adds to costs. If the government delivers on its promise of better infrastructure, corporate India could well be propelled into a higher orbit of growth.

Index