Skewed picture

Given the concentration in earnings growth, the Sensex rise is unjustified

Instead of harping about the 24 per cent growth in the aggregate earnings of Sensex companies, it makes much more sense to look at the growth numbers in greater detail.

Interestingly, aggregate earnings growth is increasingly being driven by a top few companies. In the September quarter, just five companies accounted for 78 per cent of the total incremental earnings of Sensex companies.

The top 10, in terms of absolute earnings growth, accounted for 97.5 per cent of the total incremental earnings. This signals that things got worse compared with the June quarter, when the top 5 and top 10 companies accounted for 64 per cent and 89 per cent of the total growth.

This concentration in earnings growth is a cause for worry, especially since it's centred around cyclicals such as Oil and Natural Gas Corporation, Tata Steel and Reliance.

These companies' fortunes are largely dependent on global commodity prices, which means their growth would be hit if the global economy slows down. 
 

Centres of gravity
Year 2004	Absolute earnings growth in September quarter, Rs crore	Contribution to the earnings growth of Sensex firms, %
ONGC	558.87	22.42
Tata Steel	526.49	21.12
Reliance	463.79	18.60
Bharti Tele	240.31	9.64
Wipro	155.30	6.23
Infosys	154.69	6.20
Sensex firms	2,492.99	100.00

Aggregate earnings of Sensex companies had grown around 27 per cent even in the June quarter, and the better-than-expected earnings growth in the first half of the fiscal could be one of the reasons for the rise of the Sensex beyond 6000 level. Given the concentration in earnings growth, the rise in the Sensex seems unjustified.

SBI's bond issue

State Bank of India's (SBI) overseas bond issue is slated to be floated this week, and several private corporates will be offering bonds overseas for the first time.

In 2004, a record year for external commercial borrowings, funds had been raised in the overseas markets either through plain-vanilla loans or through foreign currency convertible bonds.

Bonds, on the other hand, are tradeable instruments, usually listed in Luxembourg or Singapore with a fixed coupon. The SBI issue is expected to set the trend and arrangers expect the pricing to be Libor-plus 100-125 basis points, given that its rating could be better than sovereign.

The reasons for raising resources through bonds are many. First, money is pouring into emerging market bond funds""-Emerging Portfolio Fund Research points out that global bond funds have seen net inflows for 16 consecutive weeks during which time they have pulled in about $4 billion of inflows.

Next, issuers need to diversify their resource base. Also, for those corporates looking at larger amounts, bonds are better. Typically, loan sizes are in the region of $75million-$100million or at times even $200 million, but amounts bigger than that of say $250 million-$300 million can be mopped up more easily through bonds.

Besides, bonds allow the borrower a longer tenor; while loans are usually for five years, tenors for bonds can stretch beyond that to seven or even 10 years. However, all recent issues of ICICI Bank, NTPC, IDBI and Exim Bank, have been for five-year tenors.

Incidentally, the secondary market for Indian bonds has been rather illiquid, despite there being strong appetite simply because there are very few issues and therefore no sellers. Unlike other Asian countries, Indian issues are few and far between. A little more Indian paper and the markets should see more action.

Corporates' project expenditure

With the revival of investment demand being the main theme for India Inc this year, the Reserve Bank of India has chosen the right time to bring out a study on "Corporate Investment: Growth in 2003-04 and Prospects for 2004-05".

The study underlines the fact that investment had already picked up last year. Total capital expenditure in 2003-04, which represents not just the projects started last year but also expenditure on ongoing projects sanctioned in earlier years, amounted to Rs 43,466 crore, an increase of Rs 1,717 crore over the previous year's total.

That may not seem like much, but the heartening fact is that Rs 27,431 crore of the expenditure in 2003-04 was on projects started last year, the comparable figure being Rs 5,763 crore for projects started in 2002-03.

What's more, an aggregate of 593 corporate projects with a total project cost of Rs 76,134 crore were sanctioned loans in 2003-04, compared with 246 projects costing Rs 14,775 crore last year.

Expenditure on the 2003-04 projects will continue till 2008-09, with Rs 25,634 crore due to be spent this year. With new project sanctions this year also being substantial (although the study doesn't make an estimate) it's likely that project expenditure this year will be much higher than last year.

That forecast is supported by the 26 per cent rise during April-September 2004 in the index for "machinery and equipment other than transport equipment" in the Index of Industrial Production.

Telecom accounted for 37.7 per cent of the project cost last year, followed by metals and metal products at 16.4 per cent and power at 15.4 per cent.

With contributions from Mobis Philipose and Shobhana Subramanian