Profit growth in Q3 indicates strong revival

Decline in employee, input costs help profit, core business income grow at fastest pace in at least eight quarters
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First Published: Sun, Jan 20 2013. 11 32 PM IST
A file photo of the BSE building in Mumbai. Stringent cost controls in the face of India’s slowing economic growth and a fall in commodity prices helped most Indian companies that have reported quarterly earnings to beat analysts’ estimates. Photo: Mint
A file photo of the BSE building in Mumbai. Stringent cost controls in the face of India’s slowing economic growth and a fall in commodity prices helped most Indian companies that have reported quarterly earnings to beat analysts’ estimates. Photo: Mint
Updated: Mon, Jan 21 2013. 01 31 AM IST
Mumbai: Net profit and core business income at Indian companies have grown at the fastest pace in at least eight quarters in the three months ended 31 December, helped by a decline in input costs and employee expenses, according to early corporate earnings reports for the quarter.
Stringent cost controls in the face of India’s slowing economic growth and a fall in commodity prices helped most Indian companies that have reported quarterly earnings to beat analysts’ estimates, sparking optimism that the worst is behind them, although sales growth remained muted.
“Softer commodity prices have helped company earnings, but during the last three-four years of down trend, companies have been cutting employee costs as there has been a drive to increase productivity. Things should start improving progressively from here,” said Nirmal Jain, chairman and managing director, India Infoline Finance Ltd.
An analysis of the earnings of 129 companies that have announced their results for the December quarter and for which data is available for the past eight quarters showed that while net sales grew 19.35%, below the 30.22% growth recorded in the year-ago quarter, operating profit, or income from core business, rose 36.34%—the highest in at least two years.
Net profit of these companies rose 43.12%, the fastest in at least eight quarters, as lower raw material and employee costs boosted their net profit margin, or the actual profit earned per rupee of goods sold or services rendered.
Net profit margin rose 11.43%, the second highest in four quarters, as raw material costs as a percentage of sales dropped to a five-quarter low of 56.09%. Employee costs as a percentage of sales was 9.34%, the lowest in three quarters.
Higher commodity prices, coupled with weakening global demand for goods and services, had been hurting corporate profits for several quarters now. However, commodity prices have cooled off from their highs recorded in early 2012. The Thomson Reuters/Jefferies CRB index, a gauge of global commodity prices, is down 7.58% at 301.2 points as on Friday from its peak in February 2012.
“The previous quarter seemed to be the bottom of the earnings cycle, and there have been hopes of modest growth. It is happening, largely by margin improvement rather than top-line growth. In the fourth quarter, we should see a combination of both lower costs and higher sales helping earnings,” said Saurabh Mukherjea, head of equities, Ambit Capital Pvt. Ltd.
Out of the 50 companies in the Nifty index of the National Stock Exchange, 11 firms that have announced their December quarter results so far posted a 15.28% growth in net profit, the second highest in four quarters.
Net profit margin of these companies widened to 12.62%, the second highest in five quarters. Raw material costs as a percentage of sales for these companies came in at 55.54%—the lowest in seven quarters. Employee costs as a percentage of sales stood at 11.2%, the second lowest in three quarters.
“Indian companies have an inherent ability to control costs during crises. Though top-line growth is nothing much to cheer about, margins continue to grow as they have in the past. That, along with the fact that raw material costs have come down, is an important signal that the worst may be behind us,” said C.J. George, managing director, Geojit BNP Paribas Financial Services Ltd.
December quarter earnings of some heavyweight companies that have announced their results so far have beaten Street estimates, indicating a strong revival in corporate performance.
“There have in fact been pleasant surprises from the numbers of Reliance (Industries Ltd, or RIL) and Infosys (Ltd), and there should be more,” said Mukherjea.
RIL beat investor and analyst expectations for the second quarter in a row with a 24% increase in net profit to Rs.5,502 crore and a 10.1% rise in revenue to Rs.96,307 crore in the three months ended 31 December.
RIL’s profit had been estimated to increase 14.4% year-on-year to Rs.5,079 crore on a 6.45% rise in revenue to Rs.90,622 crore during the same period, according to analysts’ estimates compiled by Bloomberg.
Infosys reported a net profit of Rs.2,369 crore for the December quarter, also beating analysts’ expectations, and kept its annual revenue growth forecast unchanged. Analysts had predicted that the company would see its December quarter profit decline by up to 6%, and that it could lower the revenue growth forecast for the year ending March 2013 by 1-2 percentage points.
Analysts at firms such as Barclays Capital Inc., CLSA Asia-Pacific Markets, JPMorgan India and Nomura differed, but it was only on how bad it could get
for Infosys. No one expected
the company to maintain its revenue growth target of 5% for this year.
Wipro Ltd, India’s third largest software exporter, reported net profit growth of 18% from a year ago to Rs.1,716 crore. Though net profit for the December quarter beat analysts’ estimates, the company continued to lag behind rivals in revenue growth.
HDFC Bank Ltd, India’s most valuable private sector bank, clocked net profit growth of 30%. Net profit rose to Rs.1,859 crore, or Rs.7.80 per share, in the quarter ended 31 December from Rs.1,430 crore, or Rs.6.10 per share, a year earlier, in line with a Bloomberg estimate of Rs.1,829 crore based on an analysts’ poll.
Ambit’s Mukherjea expects a similar performance from companies in the automobile and commodities sectors.
“There has been a great deal of angst last year over companies in these sectors. But I expect more positive surprises from automobile companies and some in commodity space like Tata Steel (Ltd),” he said.
The Sensex has gained 8.53% since the government on 14 September began a push for economic reforms by allowing foreign direct investment in multi-brand retail, and moved to cut its fiscal deficit by raising the price of diesel and capping the supply of household cooking gas.
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First Published: Sun, Jan 20 2013. 11 32 PM IST
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