What a contrast! The results season in the US and Europe is yet again, coming in ahead of market expectations at the top line as well as the bottom line. Back home though, the June 2010 quarter numbers have been rather disappointing; for a sample of 1,251 companies (ex-banks and financials), the growth in the top line has been reasonably good at 23.6%, but operating profit margins have been dented by nearly 340 basis points leaving the operating profit virtually flat and the increase in the bottom line at just 10%. This despite a very favourable base effect in many cases; for instance volumes at Hindustan Unilever grew 11% year-on-year, in the three months to June 2010, but on a low base of 2%.
Incidentally, high commodity prices that have driven top line growth have dented margins of the user companies, like a Hero Honda, for instance since many of them haven?t been able to pass on the increased costs. Should commodity prices ease, as is expected, it would help makers of cars and two wheelers. But since a fair share of earnings growth, in the aggregate, is driven by manufacturers of steel and aluminium, it would impact overall earnings growth. The short point is that while there may not be too many earnings downgrades just yet because research analysts had pencilled in more back-ended growth towards the later part of the year, but upgrades will be few and far between. On the ground, although the economy may be slowing down somewhat as seen in the lower IIP for May at 11.6%, demand it would appear is robust; car and two wheeler sales for July continue to remain strong- ? Bajaj Auto?s motorcycle volumes are up 0% y-o-y between April and July. And the July HSBC Markit PMI came in a notch higher at 57.6 from 57.3 in June ? amongst its components manufacturing output and new orders continue to show strong expansion though the employment index showed a slight decline.
But as Citigroup points out, India?s earnings revision cycle has been weak over the last quarter and has weakened further over the current earnings season. The brokerage now expects earnings to grow at just under 21% in 2010-11. That means, therefore, that the market is beginning to look a little more expensive in the short-term; at 18,081, the Sensex now trades at a multiple of 16.7 times estimated 2010-11 earnings and, assuming a 16% earnings growth in the following year, at 14.4 times estimated 2011-12 earnings. That?s still at a premium of more than 25% to emerging market peers.
But there?s liquidity globally and it?s moving into emerging markets; as risk aversion receded somewhat, investors, in the week to July 28, 2010, scooped up stocks worth $10 billion, following net sales of $3 billion in the previous week. Inflows into markets in Asia ex-Japan recorded a seventh consecutive week of inflows and, more significantly, these inflows at $1.3 billion, were the second largest amount seen in any week this year. The two largest economies, India and China, saw inflows of $6 million (0.28% of assets) and $ 331 million (0.83% of assets) respectively. It?s possible the rich valuations that the Indian market commands, could prompt investors to seek less expensive markets in the near term. Over the longer term though, which India?s GDP expected to grow at twice the global GDP, money will only move in.