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Midcap cos on track for better Q4 despite high input costs

Midcap cos on track for better Q4 despite high input costs
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First Published: Wed, Apr 13 2011. 07 03 PM IST
Updated: Wed, Apr 13 2011. 07 03 PM IST
Mumbai: Indian mid-cap firms are on course to post higher profits in the last quarter of FY11, despite an increase in prices of raw materials such as crude oil and steel, as volume growth and robust demand keep revenue momentum buoyant.
Of the 82 companies polled by Reuters, 40 are expected to show double-digit profit growth in Jan-March with at least four likely to end the year with a multi-fold jump.
“Earnings for FY11 have been dominated by a tug of war between healthy topline growth and rising cost pressures, leading to pressure on the operating margins. We are expecting the fourth quarter earnings to be no less different,” brokerage Edelweiss Securities said in its earnings preview.
Strong volume growth will drive earnings of auto companies and consumer firms but margins are expected to be impacted by a sharp rise in raw material costs, despite a round of price hikes taken in this quarter.
“The overheads are moving up, raw material costs have gone up and while there has no doubt been topline growth, there will also be margin pressures which will build up,” Ambareesh Baliga, chief operating officer at Way2Wealth Securities, told Reuters.
“Approximately we expect a decline of 150-200 basis points as far as margins are concerned. In the mid-cap side the effect will be more,” Baliga said.
The spurt in crude prices, for instance, could see India’s top private airline Jet Airways slip into a quarterly loss despite healthy sales from growing passenger traffic.
Still, auto parts makers like Bharat Forge, the world’s second largest forgings maker, and engine maker Cummins India may see quarterly net profit rising almost 40 and 29% respectively.
Net profit at consumer goods maker Godrej Consumer is also expected to rise 28% driven by robust volumes and sales.
Banks, especially state-run, are set to report improved profits aided by loan and deposit growth. Net profit at Indian Overseas Bank and Allahabad Bank may jump 129% and 72% respectively, the poll showed.
However, higher interest rates will restrict growth for the banking industry in general, analysts said.
“There will be some pressure visible on the asset quality and some pressure on margins because the interest rates have gone up and it is not so easy to pass that on,” said Neeraj Deewan, director Quantum Securities.
India’s central bank has increased rates eight times in little over 12 months and has warned of inflationary pressures and emerging risks to growth.
The performance of India’s high profile IT sector and media firms are expected to lag peers in other industries. Software services firms like Patni Computer Services may see net profit drop over 21% as utilisation rates fall in a seasonally weak quarter.
Mphasis , which has been trying to reduce dependence on Hewlett-Packard , its parent and largest client, could see profits falling over 18%.
HP owns 60.53% stake in MphasiS, according to Reuters data, and also accounts for about 70% of its revenue and the firm has said it is not very optimistic on HP channel revenue.
For media companies, viewership in general declined as the Cricket World Cup hogged the spotlight for much of a seasonally weak quarter, analysts said.
Telecom firms will also have a downbeat quarter.
“A major laggard will be telecom and that sector will have another bad quarter because we have seen five to six quarters of bad performance,” Quantum Securities’ Deewan said.
State-run MTNL is on course to post a fourth quarter loss of Rs 600 crore amid nearly flat sales, the poll showed.
During the quarter-ended March, the CNX midcap index has fallen 10%, more than the benchmark 30-share BSE index, which fell 6% in the same period.
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First Published: Wed, Apr 13 2011. 07 03 PM IST