Performance pays. Nary a doubt on that

Investors appreciate, applaud, and reward good performance. That is what they did, pushing up the Sensex from 10083 to 10741 in the first four days of the week at a Sehwagian rate of 164 points a day, when corporate results for the first quarter ended June 2006 were found to be rather encouraging. It then digested some of the gains and dropped back to end the week at 10680 for a weekly gain of 594 points (5.9 %).

Interestingly, though the Sensex dipped on Friday, neither the BSE mid-cap nor the small-cap index followed suit. The major contributors to the Sensex rise were ICICI Bank (82 points), ONGC (44) and HDFC (42).

ONGC, India’s most valuable company (also the one most dipped into by a financially and morally bankrupt government) came out with good results, with profits after tax rising 24% to Rs 4,110 crore on a turnover of Rs 15,000 crore.

The average crude oil realisation it received was $45/barrel, up from 42.5 the previous quarter and expected to be comfortably over $50 in the next (closer to $58). 

This means that so long as oil prices don’t dip and, of course, so long as the petroleum and finance ministries don’t kill this golden goose in their greed, the next quarter results would be stunning.

However, there are reports that senior executives are leaving, an offshoot, perhaps, of the cavalier manner in which the previous chairman Subir Raha, who was largely instrumental in the improved performance, was treated.

Public-sector oil and gas companies are asked to share a burden of subsidy on LPG/kerosene that rightly belongs to the Budget.

Not that it doesn’t ultimately get into the budget! For, in a convoluted manner, the government partially compensates these PSU oil & gas companies by giving them oil bonds so it does accept the financial burden on its books but in a roundabout way that makes no sense.

Interestingly, private sector Reliance has now laid claim to similar treatment, on the losses it makes on sale of petrol and diesel but doesn’t get the bonds.
Hindustan Petroleum’s balance sheet has been ruined as a result of such shenanigans.

It declared a loss of Rs 610 crore. in Q1 for which it will be partially compensated later.

The red ink impacts valuation of shares like IOC, HPCL and BPCL to the detriment of its minority shareholders, without in any way benefiting the government.

Subsidised kerosene, however, finds its way into adulteration of diesel, earning the oil mafia huge sums all of which goes in government books as a socially desirable end to subsidise cooking fuel for the deserving poor.

The same end can be met by an honest government by directing the subsidy to identified deserving poor, thus curtailing its misuse and reducing the burden on the exchequer.

ITC’s profits were up 16.8% for Q1 07, with the tobacco business still providing 84% of EBIDTA, though other businesses like paper/paperboard, hotels and agri business have also started kicking in. The tobacco business would continue gushing out oodles of cash flow to fund its forays in other areas and the rural initiatives ITC is taking would start paying off in a few years.

Dr Reddy’s put up a healthy performance with a 108% jump in Q1 PAT to Rs 130 crore aided by inorganic growth strategy, though there was also good organic growth. CIPLA’s net improved 52% to Rs 170 crore though that of India’s largest bank, SBI, dropped 35% to Rs 800 crore in contrast to J&K Bank, which rose 29%. The coming week will see two IPOs worth looking at. GMR Infrastructure and Tech Mahindra. Tech Mahindra is fairly priced for an IT company focusing on the telecom space, under 11 times forward earnings. GMR’s price band at Rs 210-250 is below the price of Rs 260 and 270 it was able to sell the issue to private investors two months ago.

The RBI raised repo and reverse repo rates by an expected quarter per cent. It sees GDP growth at between 7.5 and 8% this year. The market took this hike well in its stride.

Just as investors appreciate and applaud good performance and good governance in the corporate sector, so do they also look for similar performance in public domain. Alas, the story there is contrastingly different. The government has approved a bill under which it will not disqualify MPs holding office of profit, proving its desire to save the privileged skin. It was only in 1835 that Lord Macaulay made this comment to the British Parliament: “Such wealth I have seen in this country, such high moral values, people of such calibre, that I do not think we would ever conquer this country, unless…” How badly values and intentions of those holding power in India have fallen in 170 years.

Now the government has paved the way for a hike in government employee pay by appointing another pay commission. Doubtless, to get their votes, a significant hike would be granted, never mind the fiscal consequences. It is always great to throw a party if someone else is footing the bill.

The market could be pretty choppy in August as that’s when foreign investors take their annual vacation. When the FII cat is away, the domestic mice will be at play. Exit at any good rally.