Testing times

Growth rates in sales and profits have been low in Q2 FY08 as expected while the stock markets are still high. What should investors do?

Since the December 2006 quarter, the year-on-year (y-o-y) growth has been slipping every quarter.

The overall growth rates in net sales, operating profit and net profit for 951 companies (excluding public sector oil and gas companies, banks and financial services) in the September 2007 quarter are much lower than what they were in the previous three quarters and less than half compared with the same quarter last year. Are we heading for a slowdown? What's in store for the next half of this financial year?

According to market experts, the outlook for the next few quarters is uncertain as there are many challenges like record high crude oil prices, rising rupee and fears of the US economic slowdown.

However, none of the market participants have a negative tone or have revised their year-end targets for Sensex companies as yet. But to be on the safer side, they advise investors to have a stock specific approach and be invested in domestic growth stories.

In this analysis, apart from a report on who did well and who did not in Q2 FY08, we also have a list of stocks representing the domestic growth story theme. 

STOCK WATCH
September 07	Net sales	% chg	OP	% chg	NP	% chg	P/E (x)
							FY08E	FY09E
Cement
Grasim	2519.00	25.26	805.00	51.32	500.00	47.93	12.11	11.61
ACC	1636.85	20.18	448.57	22.90	292.00	29.78	11.94	11.41
Ambuja	1300.00	14.94	406.68	2.70	292.00	11.45	14.50	13.18
Ultra Tech	1173.00	16.83	329.56	29.49	186.00	46.46	11.56	9.54
Shree Cement	466.39	47.59	201.00	40.56	106.00	36.25	10.22	7.42
India Cements	761.00	47.48	307.36	78.11	222.65	89.81	10.23	9.50
Power
Suzlon	1687.00	31.28	386.00	27.69	355.60	40.28	43.07	30.08
NTPC	8016.00	3.78	2749.00	-0.07	1925.00	30.69	24.10	22.52
Reliance Energy	1542.00	9.99	181.00	5.54	250.00	34.12	44.37	40.42
Tata Power	1350.00	12.41	261.00	4.40	257.00	27.23	41.55	35.78
Crompton Greav	905.00	9.83	107.00	45.46	74.19	82.46	37.05	25.47
Engineering
BHEL	3965.00	18.78	695.00	52.41	687.66	91.02	44.78	34.83
ABB	1377.55	28.74	172.00	55.52	115.69	41.09	66.79	50.09
Thermax	770.00	59.75	101.00	90.57	69.20	30.00	36.92	27.69
Cummins India	528.00	13.06	73.00	-7.12	66.46	6.00	25.87	20.42
Kirloskar Oil	556.00	13.24	63.00	9.57	33.66	-48.08	18.11	16.30
L&T	5500.00	47.45	586.30	147.38	348.00	73.13	47.29	35.16
Construction
Punj Lloyd	1038.60	159.00	94.00	224.14	31.40	3874.68	50.60	36.14
Hind const	549.00	30.71	60.00	53.85	11.60	178.18	48.00	29.54
Nagarjuna	677.00	3.83	84.80	36.77	33.60	2.70	36.75	26.73
IVRCL	699.00	89.43	55.00	78.57	35.25	126.40	37.79	27.84
Jaiprakash Assoc	862.00	11.08	221.00	8.33	104.00	15.56	51.70	38.78
Lifestyle
Asian Paints	891.00	13.50	151.00	25.83	108.00	39.18	29.31	24.53
Pantaloon Retail	1086.00	79.98	96.00	135.29	30.00	86.00	78.50	62.80
Titan	711.00	35.95	80.00	55.34	46.00	43.75	45.65	30.71
Gitanjali	598.00	19.60	36.00	26.32	26.85	20.67	10.61	8.23
United Spirits	753.00	0.10	155.00	-3.73	80.00	19.40	53.97	41.98
FMCG
HUL	3365.00	9.75	446.35	10.76	408.00	-21.69	22.07	19.59
ITC	3273.00	14.20	1032.00	6.06	783.00	15.15	21.25	17.00
Marico	386.00	13.20	51.60	1.18	38.10	42.70	26.92	23.33
Dabur India	475.00	11.24	99.40	27.76	85.80	24.71	26.25	22.11
GlaxoSmithkline	352.00	17.10	66.50	27.88	50.50	39.50	16.26	14.71
Godrej Consumer	210.00	15.07	43.40	28.40	33.70	29.62	16.97	14.64
IT *
Infosys	3862.00	8.76	1239.00	22.67	1074.00	4.47	21.53	17.98
Wipro	4150.00	12.80	892.00	14.21	760.30	13.24	19.88	16.45
Satyam	1948.00	10.74	402.00	-2.66	417.15	7.20	17.40	14.50
HCL Technologies	1103.00	17.22	286.00	40.89	264.17	-32.48	15.53	12.83
TCS	4577.00	9.50	1299.00	17.45	1147.11	6.82	18.83	15.59
Pharma
Ranbaxy	1038.00	-4.77	72.00	-51.35	150.00	55.00	20.33	19.41
Dr Reddys	866.00	-6.38	135.00	-59.82	125.00	-54.00	12.97	10.05
Cipla	1098.00	22.96	224.00	-1.32	190.00	5.70	23.87	21.06
Lupin	714.00	45.42	155.00	96.20	118.00	102.00	15.56	14.36
Glenmark	279.00	42.35	97.00	106.38	63.90	99.30	24.30	19.44
Auto
Bajaj Auto	2362.00	-3.00	371.00	5.70	336.00	5.79	18.45	15.71
Hero Honda	2352.00	5.52	291.00	2.83	204.00	-5.56	17.00	13.60
Maruti	4547.00	32.99	598.00	25.63	466.50	27.11	15.11	13.66
Tata Motors	6672.00	1.32	776.00	6.30	527.00	19.23	15.70	13.88
Ashok Leyland	1746.00	4.24	166.00	25.76	80.30	-15.79	10.26	10.40
M&M	2802.00	12.53	383.00	1.32	287.00	-4.50	11.88	10.13
Telecom
Bharti Airtel	6060.00	44.98	2570.00	58.74	1619.00	82.32	26.47	20.45
Reliance Comm	4553.00	31.74	1939.00	53.52	1304.00	85.75	33.05	25.07
Idea	1562.00	54.81	513.00	43.30	220.00	100.00	32.00	25.60
Metals
Tata Steel	4785.00	13.87	1969.00	18.61	1190.00	8.08	9.66	8.35
SAIL	9163.00	7.28	2629.00	12.69	1700.00	17.89	13.04	11.95
Hindalco	4960.00	7.03	921.00	-6.59	643.00	7.53	27.00	16.43
Sterlite	3542.00	7.04	168.00	-30.58	213.00	55.47	16.26	15.54
Hindustan Zinc	1984.00	-18.89	1419.00	-23.55	1148.00	-11.56	8.68	8.25
JSW Steel	2494.00	13.52	789.50	13.43	511.00	47.69	10.52	8.51
* q-o-q : quarter on quarter

These six stocks belong to the engineering, construction and power sectors and are comparatively cheaper than their large-cap counterparts, and can deliver decent returns.

Flashback

The performance of corporate India in September 2007 quarter, has been more or less in line with the analysts' estimates.

"There have been no serious surprises on the positive or negative side," says Shriram Iyer, head of research, Edelweiss Capital. Net sales, operating profit and net profit of 951 companies have grown at 15 per cent, 16 per cent and 20 per cent respectively, the slowest pace in the past four quarters.

However, there is both good and bad news. Though the revenue growth has slowed down since the last few quarters, companies managed to grow their profits a little higher than sales, which means that profit margins are protected.

Also, the growth has come on a high base. In September 2006, sales of these companies had grown at nearly 30 per cent, while operating profit was 40 per cent higher and net profit had grown 50 per cent.

But the bad news is that the expansion in margins continues to be slower as in the previous three quarters. For example, operating profit margin expansion has shrunk from 212 basis points and 184 basis points in December 2006 and March 2007 quarter respectively to 8.6 basis points in the last quarter.

The single largest factor affecting operating profit growth in each of the last three quarters has been a higher increase in employee costs. In the December 2006 quarter, both raw material and employee costs have risen at a high rate of 25 per cent y-o-y.

The ripple effect of the operating profit margin contraction has trickled down to the net profit level but to a lesser extent. For instance, net profit margin expansion of 190 basis points and 115 basis points in December 2006 and March 2007 quarter respectively has come down to 50 basis points in the last quarter.

The supp