Mumbai: Early results show Indian companies have hit the roughest patch in at least 11 quarters as September quarter net profits fell for the first time since the March 2009 quarter, hurt by higher commodity prices, rising interest rates and a global economic slowdown.
Though aggregate net sales of 333 companies, which have reported their second quarter results so far rose 25.56%, the lowest in three quarters, net profits declined 25.67%. The last time these companies saw a fall in net profit was in March 2009, down 2.82%.
Net profit margins, or profit earned per rupee worth of goods sold, were at 11.07%, the second lowest in at least 11 quarters.
The impact of higher commodity prices is more pronounced this time as total expenditure for these companies, at Rs 1.99 trillion, was the highest in at least 15 quarters. It was 30% higher compared with the same period last year.
The Thomson Reuters/Jefferies CRB Index, a global commodities benchmark, has risen 7.51% in the calendar year so far.
High interest rates, too, put pressure on margins. Interest expenses for 276 companies, excluding banks, were at Rs 4,131.75 crore, the highest in at least 15 quarters. Interest as a percentage of total expenses for these companies, at 2.15%, was at an eight-quarter high.
“High inflation and interest rates have led to a drop in net profit for Indian companies and it is not because of the general business cycle slowdown,” said Sarabjit Kaur Nagra, vice-president, research, Angel Broking Ltd.
The Reserve Bank of India hiked its key policy rates by 25 basis points in September. It was the 12th hike by the Indian central bank since March 2010 and rates are higher by 5 percentage points at 8.25%. One basis point is one-hundredth of a percentage point.
Following the rate hike, the central bank was largely non-committal on its future action, saying the stance of the policy will change only after a “sustainable downturn in inflation”. However, inflation is still hovering around 9%.
Inflation has held above 8% for 20 months and the outcome of RBI’s policy meeting scheduled on 25 October is eagerly awaited.
However, blue-chip companies seem to have managed to keep afloat in these troubled times. For 14 of the 50 companies in the National Stock Exchange’s key Nifty index that have released second quarter numbers, net sales grew 31.06%, while net profit rose 23.81%. Net profit margin was at 12.86%, the second lowest in at least 11 quarters.
However, total expenditure at Rs 1.08 trillion and interest expenses at Rs 7,997.24 crore were the highest in at least 15 quarters. Interest as a percentage of expenses was 7.38%, the highest since September 2009.
For 12 of the 30 companies in BSE’s bellwether index Sensex that have announced results so far, net sales rose 31.04%. Net profits of these companies grew by 22.24%, while net profit margin was at 12.77%, the third lowest in 11 quarters. While total expenditure for these 12 companies was at Rs 1.06 trillion, interest expense was at Rs 4,172.78 crore, the highest in at least 15 quarters. Interest as a percentage of expenses was 3.91%, the highest since September 2009.
Corporate profits may continue to be muted in the next quarter, experts said. With most economic indicators painting a dull picture, December quarter may just throw up more insipid numbers.
“I don’t think next quarter will be any better. Things are slowing down. IIP (index of industrial production) is down, economic growth is slowing and cost of production is going up,” Raamdeo Agrawal, director and co-founder, Motilal Oswal Financial Securities Ltd.
India’s factory output grew slower than expected in August, indicating economic expansion may be losing steam at a faster rate than initially assumed, while inflation remains high, thus increasing the dilemma facing the central bank ahead of its monetary policy.
At 4.1%, the IIP is at its second lowest level in the last 17 months. Commenting on the data earlier this month, finance minister Pranab Mukherjee had said the data was not encouraging and “it may affect the” second quarter gross domestic product (GDP) growth rate.
Mirroring the subdued rate of growth in a high-inflationary scenario, India’s bellwether stock indices have fallen more than 17% year-to-date. While the Nifty is down 17.68%, the 30-share benchmark Sensex has lost 18.15% since January. Both the indices are among the worst performers in the emerging markets basket of indices. Foreign institutional investors, key drivers of domestic markets, have so far in the year sold Indian equity worth $372.3 million.
With the corporate calendar almost halfway through the year and the signs of a slowdown getting more evident, several broking firms have already cut their earnings per share estimates for the Sensex, while analysts have toned down their optimism for the full year.
“Since interest rates and inflation are peaking, our full year estimates are moderate,” said Angel Broking’s Nagra. According to her, fiscal year 2012 may pass by as a lacklustre one while fiscal 2013 may bring in some cheer.
“We expect fiscal year 2013 to be good. We are expecting the Sensex earnings to grow 20% in fiscal 2013,” she said. The consensus earnings per share estimate for FY12 is down 6% to Rs 1,185 for the Sensex from Rs 1,260 at the end of the March quarter. Since December, there have been about five-six rounds of downgrades.
A recent Edelweiss Securities Ltd report highlighted that the ratio of upgrades to downgrades (revisions ratio) has decisively inched downwards.
According to estimates by Motilal Oswal, contributors to earnings downgrades (within the Sensex firms) are State Bank of India (35%), Oil and Natural Gas Corp. Ltd (14%), NTPC Ltd (13%) and Bharti Airtel Ltd (12%). Earnings upgrades have been witnessed in Tata Consultancy Services Ltd (12%) and Reliance Industries Ltd (11%).
A forecast by Standard Chartered Securities points to a 12-month Sensex target of 16,000, suggesting a P-E multiple of 12 times FY13 earnings forecasts. On Friday, the index closed at 16,785.64 points, down 151.25 points or 0.89%.