Should you get excited about India Inc's Q1 performance?

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Moneycontrol Bureau Once considered fragile, Indian stock market has now become fabulous, riding high on the Modi wave. The Sensex and Nifty have soared around 25 percent so far this year, and analysts are calling for more gains to come. In fact, market watcher Ajay Srivastava, CEO of Dimensions Consultings believes another 20-25 percent portfolio returns by March of next year is not a farfetched idea.However, there are some, like HSBC's Jitendra Sriram and market expert Anand Tandon, who believe the euphoria around the “acche din” is starting to fade and the hope rally will turn into an earnings-based rally. This may not be such a bad thing after all since the early indicators of that are promising.    According to data compiled by Care Ratings, over 1,204 companies have registered a substantial growth of 33.4 percent at Rs 62,040 crore in net profit for the first quarter of this fiscal. This is against 8.8 percent, at Rs 46,792 crore, registered in the corresponding quarter of fiscal 2014.Net profit margin has also recorded an increase from 9.5 percent in Q1 FY14 to 11.3 percent Q1 FY15.  During the quarter, total net sales grew 12.8 percent at Rs 5,54,426 crore against 4.8 percent or Rs 4,91,689 crore in Q1 FY-14.A Kotak report said net profits of the BSE-30 Index grew 19.3 percent (YoY), marginally ahead of its estimate of 18.2 percent growth, while the EBITDA grew 31 percent (YoY) versus the expectation of 29.5 percent growth. Kotak said the stronger-than-expected results of ONGC and TTMT contributed to the positive surprise while many others disappointed significantly. “Underlying parameters such as (1) loan growth, credit quality for banks, (2) volume growth for consumer stocks and (3) domestic order inflows for industrial companies were largely weak in 1QFY15 too. However, we would attribute a part of the weak performance to the national elections and note that it is too early to expect an economic recovery in any case. However, some industries (automobiles, electricity) are starting to show strong growth,” it said in its report.  

For Kotak the key takeaway was lack of improvement in banks’ slippages and NPL position. It believes the trends are clearly worrying and suggest that the bad loans issue in the Indian banking system will take time to resolve. “It may be too early to expect a turnaround in the economy post the formation of a new government but it appears the next 2-3 quarters will also be sedate,” the report said. Broking firm Motilal Oswal highlights that 18 percent of the companies in its coverage universe reported earnings growth of over 30 percent, which is lowest in nearly 30 quarters. In total, 40 percent of MOSL Universe saw growth of over 15 percent, which is stable since the past 6 quarters. The percentage of companies reporting negative earnings growth was lower during 1QFY15 at 36 percent of MOSL universe.Large-caps which delivered earnings above estimates are Tata Motors, Lupin, PNB, Bank of Baroda, M&M, Oil India, Ambuja Cements, Idea Cellular, HUL and JSW Steel.While, the major disappointments in earnings were from JSPL, GAIL, Hero Moto, NTPC, Bajaj Auto, Hindustan Zinc, Dabur, Coal India, Sesa Sterlite.Motilal raised its FY16 Sensex EPS to Rs 1,854, up 1 percent, which means a growth of 21 percent. Top contributors to FY16 EPS growth are Tata Motors (+11 percent), Reliance (+9 percent), ICICI Bank (+8 percent), SBI (+7 percent), Infosys (+7 percent).It has raised FY15 EPS by 50 bps at Rs 1532, which is a growth of (14 percent). It expects earnings growth to be driven by financials, capital goods and energy. “We have upgraded FY15 and FY16 EPS estimates for 10 Sensex companies, while 17 companies saw downgrades in estimates,” it said.Motilal's Upgrades/Downgrades:Tata Motors saw earnings upgrade of 26 percent driven by superior JLR margins. Hindalco EPS FY15 was increased by 15 percent on depreciation rate cut. Tata Steel led the downgrade bandwagon (-27 percent) due to higher interest and depreciation charge, followed by L&T (-15 percent) due to constrained environment for hydrocarbons.