This Sensex, Nifty rally shares inverse relationship with India Inc's earnings show; here's why

The current market rally, it seems, has ignored the worsening profit growth of India Inc. While Sensex has gained 5,037 points since corporate tax rate was cut on September 20, data for 2,398 firms listed on BSE indicate deteriorating earnings performance of corporate India.

Net sales growth in the first half of FY20 has fallen to 0.4% compared to 17.3% in first half of FY20. Growth in operating profit of these 2,398 firms plunged to 3.1% in first half of FY20 compared to 17.3% growth in operating profit during the corresponding period of FY 20.

When it comes to growth in profit after tax, it was the worst indicator in performance of India Inc.

Infographic: Don't let Sensex fool you

In H1 of FY20, growth in profit after tax came in the red at 27.7 percent compared to 17.6 percent rise profit after tax during the corresponding period of FY19.

The rise in benchmark indices constitutes a majority of gains from blue chip companies. Top companies in Sensex and Nifty have reported outperformance in their earnings in the second quarter. Here's a look at some of them.

Reliance Industries reported a record 18.34% rise in net profit to Rs 11,262 crore for the quarter ended September 30, 2019 compared to consolidated net profit of Rs 9,516 crore in the same quarter last year. Mukesh Ambani-led firm reported gross refining margins at $9.4 per barrel, the best in four quarters.

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Similarly, country's largest lender State Bank of India logged over three-fold jump in September quarter profit, despite higher provisions. The bank reported a 218 per cent year-on-year growth in its net profit at Rs 3,011.73 crore in second quarter helped by higher net interest income and improvement in asset quality.

Another Sensex and Nifty component Bajaj Finance defied all the stress in the NBFC sector when it reported a 63.11 per cent year-on-year (YoY) rise in net profit at Rs 1,506.29 crore for the quarter ended September 2019 compared to net profit of Rs 923.47 crore in the corresponding quarter last year. Total revenue from operations rose 47.95 per cent YoY to Rs 6,322.55 crore during the quarter under review.

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Mortagage lender Housing Development Finance Corporation (HDFC) clocked a 60.57 per cent year-on-year growth in its standalone net profit at Rs 3,961.53 crore in Q2 aided by a tax gain of Rs 1,627 crore on stake sale in Gruh Finance in last quarter.

Private sector lender HDFC Bank reported an increase of 26.8 per cent in net profit to Rs 6,345 crore during the quarter under review against Rs 5,005.73 crore net profit in the corresponding quarter of last year.

Amid the auto sector slowdown, Bajaj Auto reported a 22 per cent increase in net profit for the quarter ended September 30, 2019 at Rs 1,402.42 crore. The firm's total revenue from operations for the second quarter stood at Rs 7,707.32 crore, down 4 per cent from Rs 8,036.64 crore reported in the year-ago period.

The strong earnings performance of these bluechip firms among others has helped their stocks outperform the returns from Sensex and Nifty during the last two months.

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This explains why 12 Sensex stocks alone have contributed to over 88% of the gains on the index since September 20.

Looking ahead, the government needs to take more steps such as corporate tax rate cut to address the slowdown in the economy. This will in turn provide more legs to the market rally which will help it maintain momentum and cover a larger universe of stocks.

By Aseem Thapliyal