The Telegraph
Monday , June 13 , 2011
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Twin cost threats refuse to recede

Mumbai, June 12: Higher interest rates and input costs, which ate into the fourth-quarter earnings of corporate India, still remain a potent threat, brokerages believe.

Market watchers said investors should be cautious on their stock picks as the twin threat could erode values.

“While the macro headwinds led by slower industrial activity, higher interest rates and cost inflation had been threatening the earnings growth momentum, the toll is worse than expected in fourth quarter aggregates,’’ a report by Motilal Oswal said.

According to the brokerage, the underperformance of several heavyweights in the fourth quarter was disappointing and resulted in an earnings decline of 0.4 per cent in the sensex pack.

Analysts are advising caution to investors as the interest rate and inflation threats are yet to die down.

“The disappointments that we saw in the fourth quarter may continue in the current period as well and, therefore, investors should be cautious in their approach. They could look at specific stocks in defensive sectors such as FMCG and pharma,’’ an analyst said.

He said while the RBI was likely to keep jacking up rates to tame inflation, input pressures were unlikely to subside and could impact margins.

Besides auto and infrastructure, banking (largely PSU lenders), telecom, metals, oil and gas and real estate disappointed during the quarter.

The IT sector came up with a mixed performance as a seasonally weak period saw some companies disappointing on the volume growth front, while the others registering positive revenue growth. Pharmaceuticals and FMCG put up a good show with the latter benefiting from lower advertisement spend.

According to observers, banking and metals may see a dip in their margins because of high borrowing and raw material costs.

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