Mumbai: The earnings rebound that started in the first quarter of fiscal 2010 steamed ahead for the three months ended September, signalling that a recovery in the world’s second fastest growing major economy remains on track.
Average profit growth at companies which constitute the 50-stock Nifty, the benchmark index of the National Stock Exchange, has been the best in seven quarters, helped by cost cuts and lower raw material prices, even though there has been a decline in sales growth. A fresh round of earnings upgrades, especially for the next two fiscal years, is likely, analysts said.
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Mint analysis shows firms listed on the Nifty on average posted a 13.65% year-on-year increase in net profit for the quarter ended 30 September. That’s their best performance since the December 2007 quarter, when earnings grew by 28.3%.
Interest rate reductions by the Reserve Bank of India (RBI) and government stimulus packages have helped revive demand and propel the Indian economy, which the central bank expects to grow by at least 6% in the year to March. India’s pace of growth is second only to China among major economies.
Profit at firms in the narrower 30-stock Sensex, India’s bellwether equity index, grew by 10.96% on average in the three months ended September, the best in five quarters. All Sensex firms are part of the Nifty.
For a broader sample of 1,545 firms that have so far announced their September quarter earnings, profit grew by 44.9%, the best in three years.
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“The trend is positive,” said Ajay Parmar, head of research at Emkay Share and Stock Brokers Ltd. “Quality of earnings is better since companies posted this growth despite falling other income (typically investment income).”
Operating profits grew marginally faster than net profit at 13.87%, suggesting firms had managed their operations better. Prices of raw materials such as steel, aluminium and rubber, which had declined sharply earlier this year due to slow global demand following the credit market seizure, also helped.
One area of concern, however, is tepid sales growth. In fact, sales growth declined by 2.05% for Nifty firms. Although Sensex firms posted 5.7% growth in sales, for the broader sample of 1,545 firms, the drop in sales growth was even sharper, 7.8%.
Still, the outlook for the rest of the fiscal remains positive due to a lower base of sales and profit growth in the corresponding months a year ago, even as the economic recovery gathers momentum, said analysts.
Earnings upgrade
“We expect earnings upgrades to continue on an overall basis,” wrote Prabhat Awasthi, Nipun Prem and Sanjay Kadam of Nomura Financial Advisory and Securities (India) Pvt. Ltd, in a 28 October report. “Apart from the strong recovery in the industrial and capex cycles, the growth in profits should also be aided by the favourable base effect in the coming quarters.”