Share prices are all tied up with growth in earnings per share (EPS). Put simply, these tend to move in line with a company's profitability. There are both internal and external factors that decide which way the profit graph moves. Hence, one needs to keep an eye out for how companies manage their expenditure to cut costs and run their sales force to increase revenue in order to clue in to a trend. The visibility of revenue, profit growth and challenges businesses face are some of the crucial pointers existing and prospective investors should keep in mind before plotting their next move.
The results season is here as the frenzy builds to put out those figures for the financial year ended March 2011. A deeper analysis of a total of 250 companies of the BSE 500 universe -- which does not include banks and energy cos -- lays bare the following trend:
* The net profit growth of companies in sectors like retail, consumer durables, textiles, refineries and infrastructure development is on a solid paltform.
* Sectors like tyres, telecom services, steel, construction and power generation and distribution saw a steep erosion in their profitability.
Another key indicator of the performance in a financial year is the growth in the operating profit margin of companies. This is the percentage of operating profit to net revenue from operations. It gives a sense of the environment that companies operate in and tells you how efficiently the company is managing its expenditure on raw materials, employees and fuel. The higher the operating profit margin, the better it is for the final outcome, that is the net profit.
* There are some definite signs of improvement in the operating profit margin for services sectors like packaging, engineering, shipping, power and pharma. The growth is clearly for those companies which offset the rising costs of inputs. This is primarily because many companies in the services sector were able to pass on the high costs to customers.
* But it's a different story for sectors like media, diversified companies, chemical specialty, metals non-ferrous and real estate. The decline in profit margins shows to what extent these sectors have been hit by pricey inputs. For example, the media sector, in particular, has been hurt by a spurt in newsprint costs.
There is a caveat though. Past performance is not a guarantee for the future. You often hear that disclaimer from those selling financial products to you. This is because the stock market usually discounts the past and asks what next?
Companies usually ride on the economic growth to drive consumption in India so that they could generate more revenues and profits. Business leaders Firstpost.com spoke to expect the economic growth in India to moderate this year. Many of them expect challenges on the way. Here is an 'ear on the ground' summary after mapping their mind.
When investors want to bet on India's infrastructure sector growth, Larsen & Toubro is usually the barometer. They watch the order book status and order inflow of the listed engineering giant to get a sense of the underlying economic activity. L&T chairman A M Naik said the company is relying on government orders this year to grow its business. The company expects the government to award more contracts this year now that assembly elections are behind us.
In the real estate space, companies providing housing finance like HDFC are hurt by rising property prices. Renu S Karnad, MD at HDFC, said most of these factors are beyond HDFC's control and hinted that the company is likely to focus on cost control, going forward. "We constantly look at optimising costs to reduce customer's inconvenience," she said.
In the two-wheeler segment, a company like Bajaj Auto rides on the GDP growth to boost the per capital income. Rahul Bajaj, chairman, Bajaj Auto, believes that the company needs the agriculture growth of 4% per annum. He also wants reasonable rates of interest on bank finance for customers looking to buy two- or three-wheelers. He hopes that the company is able to fight competitively with global majors in India and overseas.
When it comes to power transmission, the industry bears a high cost due to poor infrastructure. Ramesh Chandak, MD at KEC International, wants the government spending on state electricity boards to go up. "The trend of shortfall in actual power generation versus planned is not good," he said. KEC International is aggressively diversifying its revenue stream into new product areas like railway systems and water treatment, besides power transmission. The company is also looking at businesses overseas.
As for steel, B K Goenka, chairman, Welspun Group, a diversified steel products to textile conglomerate, has outlined three challenges. "Volatility in steel prices, high crude oil prices and ability to acquire raw materials at a reasonable cost are challenges," he said. The Welspun group is looking to minimise import costs of steel plates, the primary input for the manufacturing of pipes, by integrating backwards with the plate and coil mill, adjacent to the pipe facility.
In the tyre sector, Omkar S Kanwar, chairman at Apollo Tyres, sees increasing raw material prices and high inflation as the headwinds. The Indian tyre sector, he feels, has been shortchanged by dumping of tyres in India by countries like China and South Korea.
Adi Godrej, chairman, Godrej Group, swears by cost efficiencies. He believes this could also be useful to improve margins while consumer companies can pass on high input costs to customers.