Bumper harvest ahead

Q1 GDP growth shows that this year's 7% will be exceeded

The Finance Minister erred on the side of pessimism when his estimate of the country's first quarter GDP growth fell short of the actual number by a full percentage point.

At the annual IMF bash a few days ago, Chidambaram had said that GDP growth in Q1 would be 7.1 per cent, while the CSO figure, released on Friday, puts it at 8.1 per cent.

With Q1 growth at 8.1 per cent, the economy is off to a flying start this year. In FY 2005, Q1 growth was 7.6 per cent, and the growth for the full year was 6.9 per cent.

With growth in Q2 and Q3 last year being even lower, at 6.7 per cent and 6.4 per cent respectively, the base effect should be enough to enable the economy to comfortably achieve this year's 7 per cent target.

In fact, given the much greater degree of comfort in agriculture this year, all the signs point to substantially higher growth this year.

That depends, however, on whether the momentum in several sectors will be sustained. While overall GDP growth in Q1 has been the highest in a year, manufacturing growth in Q1 is at a multi-year high, growth in construction is highest since the second quarter of FY04, growth in trade, hotels, transport is the highest since the third quarter of FY 04, and financing, insurance, real estate and business services have grown the fastest since the second quarter of FY03.

If agriculture does as well as it was expected to, there's no reason why the record growth in these sectors will not continue.

MphasiS "" bonuses can't make up for earnings volatility

The MphasiS stock has not performed very well in recent months. That's possibly why it has announced a third 1:1 bonus in the last three years. The first two bonuses were justified because the stock was a trifle illiquid. This time, the management says that it's just another way of rewarding the shareholder.

The management, however, needs to focus on the company's performance which has been inconsistent. In FY05, the company's growth was propped up by acquisitions (Eldorado Computing, Kshema, Princeton Consulting).

But despite that the full year performancea was disappointing with revenues growing 31.9 per cent (including acquisitions) and EBITDA margins falling 140 basis points. The EPS grew just 17.3 per cent on account of the dilution. For FY06, MphasiS had given a guidance of 30 per cent for earnings growth and 25 per cent for revenues.

The numbers for Q1FY06 have been none too encouraging: the consolidated net profit for the June quarter grew just under 9 per cent q-o-q, on a revenue growth of just 7 per cent. The stock would probably have got a boost if the sale of Barings stake had gone through but that has not happened.

To add to the firm's woes, a senior executive quit recently.

The market is definitely disappointed that no new investor has come in to boost the stock and give it a good valuation.

Moreover, analysts are concerned about performance. That's probably why at the current price of Rs 250, the stock trades at just 13.15 times estimated FY06 earnings of Rs 19. The management, however, says earnings volatility will reduce in the future.

With contributions from Amriteshwar Mathur and Shobhana Subramanian