CY 2011 is all about Sensex following margins decline of Indian corporate

Last week was another down week for stock market in India. 2nd Quarter results announcements are now almost over.

This quarter was the first quarter in last two years to see a y/y decline in profits for Nifty companies. The fall was despite steady 20% sales growth.

Operating and net margins declined for the fourth quarter in a row, and are now at three year lows.

Remember these four quarters has also seen Sensex falling from well over 21,000 to sub 16,000 levels.

We keep discussing issues like policy paralysis in India and/or EU debt worries as a guide to stock market movement. But as the data suggest it is all about companies’ basic financial information. Yeah, it is also partly true that issues like policy paralysis certainly adds to the negative of issue and partly to be blamed for this decline in Indian corporate margins

Consensus EPS estimate for sensex for FY12 has come down from 1259 in Nov 10 to 1121 Nov 11- meaning 11% decline. And market has fallen 19% - meaning compression in valuation multiple too due to macro issues.

So, important is how margis will behave going forward for predicting market movement for next one year. Iif RBI projection of inflation coming down from December is correct  and interest rate peaks out then Q2 might be the worst qtr in terms of margin compression. And then the market should be bottoming very shortly.

But if does not happen so, and there is more margin compression and/or more earning downgrade, then  after trading around current levels – market may fall more to re-adjust with new data points.

Also in the midst of all negatives about results, there are Two key positives-

1. Sales growth continued to surprise across sector – even banks had declared higher NII than expected

 And ,. One of the primary reason of inflation is wage inflation. But as Q2 results suggest- there has been only 5% y/y increase in personnel costs for Nifty companies and it was the lowest since Mar-10


So, need is to keep an eye on margin trend going forward, although one should not let EU get out of one’s radar as anything negative there is a big sentiment spoiler.

In terms of stock specific some of capex company are trading at attractive valuation- although in absence of any positive triggers – they may take a while before start performing good on bourses.

We at this point in time particularly like Thermax. Thermax sales for FY12 is expected to grow at 11% and the company has a ROE of 29% for FY11. The company has negligible debts and cash Flow from operations has remained positive. Presently the stock is available at a FY 12 P/e of 12.6

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