Smaller firms offer green shoot glimpse

10% of actively-traded BSE companies surpass their full FY13 profit in the first half of this year

The big boys may have been struggling on the profitability front due to rising interest costs, high interest burden and a weak currency, but a host of smaller companies have taken the market by surprise with their sterling performance. More than 10 per cent (274) of the 2,575 actively-traded companies on BSE have surpassed their net profits of last year (2012-13) in just six months of this year (April-September 2013-14).

In return, the stock market has rewarded them handsomely, with the value of their stocks surging 45 per cent on an average since March. The scrips of some of the better-known names, such as Tech Mahindra, Reliance Communications (RCom), Ceat, PVR, PI Industries and Suven Life Sciences have gone up nearly 50 per cent, while the benchmark Sensex has gained 11 per cent during this period.

Of these 274 companies, 10 belong to the S&P BSE mid-cap and 38 from the small-cap indices. Together, they posted aggregate net profit of Rs 7,563 crore during the first half of this financial year, compared with Rs 5,970-crore combined profit during the entire 2012-13. The companies in the sample had posted net profit of Rs 3,988 crore in the first six months of last year.

The earnings outperformers are from across sectors — non-banking financial companies, textiles, pharmaceuticals, chemicals, information technology, fast-moving consumer goods, agro chemicals, packaging and tyres.

The stock of Ceat, for instance, has appreciated more than 150 per cent to Rs 236 from Rs 94 apiece on March 29 on BSE. The tyre maker’s consolidated net profit for the first six months of this financial year saw a four-fold year-on-year jump to Rs 142 crore, on the back of strong volume growth and lower raw material costs.

Analysts at Angel Broking maintain a positive view on the company and suggest it will continue to benefit from the strong traction in the two-wheeler and passenger vehicle tyres and an expected stability in commodity prices.

Shares of most agrochemical firms like UPL, PI Industries, Sabero Organics Gujarat and Excel Crop Care have appreciated 40-50 per cent. These companies’ aggregate net profit for the first half of this year jumped 60 per cent, on a year-on-basis, mainly due to better monsoon and robust crop season.

PVR and Inox Leisure stocks surged 87 per cent and 37 per cent, respectively, after the companies reported a nearly two-fold rise in net profit during the first half. Given that big movies with strong content are lined up, analysts expect the third quarter (October-December) to be the strongest one for the entertainment sector.

Tech Mahindra’s results of for the first six months of 2013-14 include those of merged entities Mahindra Satyam and subsidiaries. If the company is excluded from the sample, the aggregate profit of the remaining companies stands at Rs 6,158 crore during the first half of 2013-14, compared with Rs 4,631 crore during full 2012-13.

Though analysts seem to be impressed with the performance of this set of companies, they are not willing to see this as a broad recovery signal. “Our bottom-up 2013-14 Sensex EPS (earnings per share) estimate has moved up to Rs 1,330 (compared with Rs 1,320) after the results, but we do not expect this to be a broad-based earnings recovery and continue to expect downgrades to our Sensex EPS estimates. We expect 2013-14 Sensex EPS growth to be eight per cent (compared with 12.5 per cent currently),” said Jyotivardhan Jaipuria, managing director & head of research, Bank of America-Merrill Lynch.

Herald van der Linde, head of equity strategy (Asia-Pacific) at HSBC, expects Indian equities to deliver below-average returns of three per cent in 2014 and pegs the earnings growth at eight-10 per cent. “We believe the Street’s estimate of 16 per cent earnings growth in 2014 looks too optimistic; we could see further earnings downgrades on the back of weaker domestic demand and higher interest rates,” he says.