Monday, February 1, 2010

Results, correction offer opportunity for investors

The results declared by the corporates for the third quarter so far have been good. Out of the 767 companies' results that are available, the revenue figures have gone up by around 18 percent and the profit or PAT growth has been around 45 percent. The revenue growth is an important indication of recovery. The second quarter results had shown an increase in the bottomlines rather than toplines due to cost cutting and suppressed commodity prices.

Hence, the December 2009 results assumed importance to indicate revenue growth, and economic recovery taking place in the country.

Auto and energy sectors shine

The increase in the revenue growth was contributed by the auto sector, which grew by around 55 percent, real estate by 62 percent and energy sector that grew by 46 percent. In contrast, sectors like fertilizers declined by 36 percent. This shows that the recovery is sector-specific and in select sectors.

The auto sector has moved from strength to strength since the day excise duty was rolled back as a part of the stimulus package. The quarterly performance of engineering companies has been a mixed bag so far. The engineering companies have seen many projects face delays on various fronts.

These include delays in financial closures, execution issues, funding problems from the client's side amidst ongoing execution of a project etc. The surprise element in this quarter's earnings was the energy sector. Due to suppressed prices the volume growth has been high as shown in the revenue numbers.

Interest rate and costs crucial

In the last few quarters, including the current one, companies benefited from lower overhead costs and lower raw material costs. But in the next few quarters, increasing raw material costs will impact the bottomlines, especially in the auto sector, which has reported such stellar numbers.

If there is an interest rate hike, the higher interest rate regime will also hit the toplines in the auto sector where the predominant buying is on borrowed money. So, to an extent, sales could be slightly lower than what investors are expecting. Hence, the impact of these two factors should be watched for early indications of earnings status in the fourth quarter.

Investment strategy

A series of changes has brought about a steep fall in the stock markets. Firstly, China had started withdrawing stimulus measures, which was followed by the US President's proposal to prevent US banks from engaging directly in some of their most profitable lines of business - proprietary trading.

A substantial part of the foreign institutional investor (FII) funds invested in emerging markets is through proprietary trading. Hence, the concerns and sell-offs in emerging markets are attributed to this change in regulation.

Correction offers opportunity

These steep corrections will provide opportunities for investors to buy quality stocks at reasonable valuations. This year, the markets will be ruled by three broad factors - earnings visibility, global recovery and extent of government reforms. While one can be optimistic on all these factors, a major issue the economy will face this year is the withdrawal of the stimulus - on both the monetary and fiscal fronts.

How it would impact the economy remains to be seen. Investors at this juncture should adopt a wait and watch policy till the budget. A good level of clarity will emerge then. Going by the third quarter results, IT, energy, auto and FMCG sectors can be chosen for investments after the on-going correction.

1 comment:

santosh chaudhary said...

really nice you write very nice