Mumbai: Early results declared by Indian firms show that profit growth has moderated in the March quarter even as the momentum in sales growth continues.
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Profits of 103 listed firms that have so far declared their earnings in the March quarter grew 25.8% on the back of a 26.6% rise in net sales. While the earnings declared so far have largely been in line with expectations, analysts say these are early days yet as most companies are yet to post their results.
Among the 30 firms on the benchmark Sensex index of the Bombay Stock Exchange, only five have declared their earnings so far.
At least two Sensex firms—Infosys Technologies Ltd and India’s most valuable firm Reliance Industries Ltd (RIL)—have disappointed the markets.
In the case of Infosys, guidance for earnings in fiscal 2012 was below Street expectations, and the stock has been hammered down 12% since it declared its results on 15 April.
Its listed peer, Tata Consultancy Services Ltd (TCS) saw a 49% growth in profit, in line with expectations. Infosys and TCS are India’s two largest software exporters.
The 14.1% profit growth of RIL missed Street consensus estimates, and operating margins in its petrochemicals business fell below expectations.
Banks led by HDFC Bank Ltd, which posted a 33% growth in profit, have largely been in line with expectations.
“These are still early days, and there is no secular trend. The results have been mixed,” said Harendra Kumar, head of research at Elara Capital Plc. “While Infosys disappointed, other IT (information technology) companies like TCS and HCL Technologies (Ltd) have done well.”
Typically, brokerages cover at most 200 of the biggest firms. Of the 103 firms that have declared earnings, less than 15 are covered by analysts.
The earnings season is significant as it comes on the back of a pull-back in the stock market. After underperforming its peers for over three months, Indian markets have bounced back in the past month.
The Sensex has moved up 9.8% in line with other Asian peers on the back of rising fund flows to emerging markets. India has seen net foreign inflows of $1.3 billion (Rs 5,579 crore) this year so far, higher than any other equity market in Asia excluding Japan, according to Bloomberg data.
However, concerns on growth and earnings, which have brought down stocks since the start of the year, still remain. The ability of companies to pass on increases in raw material, interest and wage costs will be keenly watched by analysts to determine the extent of downgrades in their estimates of profit growth in fiscal 2012.
“So far, it is only banks and IT firms that have declared earnings. We have to see how manufacturing firms fare in protecting their margins,” said Rajesh Iyer, head of research at the wealth management arm of Kotak Mahindra Bank Ltd.
Economists have downgraded India’s gross domestic product growth estimate for fiscal 2012 to 7-8.5% from 8.5-9.5% earlier, citing slow pick-up in capital expenditure and high inflation, which could lead to higher-than-anticipated rate tightening.
Wholesale Price Index data for March released last week show inflation rose higher than expected at nearly 9%. The Reserve Bank of India (RBI) has raised its policy rates eight times since March 2010 to 6.75%, but real interest rates remain negative.
Analysts say many of the macro concerns have been priced in, and unless there is a sharp rate tightening by RBI, markets may not see a major decline.
Elara Capital’s Kumar said while there might be 2-3% downward revisions after the current earnings season, markets would not be affected much.
“We might see downgrades in profit expectations for fiscal 2012 by 2-3%, but even then, earnings for large caps would grow by over 17%,” said Kumar. “Things could turn out to be different if RBI starts tightening aggressively.”
Other than the earnings number that listed firms are declaring now, it is the level of crude oil prices and RBI’s moves that would determine the extent of change in the market’s expectations on corporate earnings’ growth.