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Business News/ Companies / Net sales foretell a recovery
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Net sales foretell a recovery

Sales in the three months ended 31 March rose at the fastest pace in seven quarters

Aggregate net sales rose 6.63% in the March quarter from a year earlier, the fastest expansion since the quarter ended March 2012, according to a Mint analysis of 275 of the BSE 500 companies. Photo: MintPremium
Aggregate net sales rose 6.63% in the March quarter from a year earlier, the fastest expansion since the quarter ended March 2012, according to a Mint analysis of 275 of the BSE 500 companies. Photo: Mint

Mumbai: Indian companies showed signs of a recovery, as sales in the three months ended 31 March rose at the fastest pace in seven quarters and profit growth stabilized, spurring investor optimism that the worst is over for corporate earnings.

Aggregate net sales rose 6.63% in the March quarter from a year earlier, the fastest expansion since the quarter ended March 2012, according to a Mint analysis of 275 of the BSE 500 companies. Sales were driven by export-focused industries such as pharma and software firms.

The 275 companies selected have reported March-quarter earnings and comparable data for them was available for the past 25 quarters. Banks, software and oil companies were excluded from the analysis as they follow a different earnings model.

“The downtrend in business seems to be over," said Deven Choksey, managing director and chief executive, KR Choksey Shares and Securities Pvt. Ltd. “By and large, earnings are quite satisfactory."

Investors are betting that Prime Minister Narendra Modi, whose Bharatiya Janata Party and its allies have been elected with the strongest mandate in 30 years, will take steps to spur investment and revive growth in Asia’s third-biggest economy, where gross domestic product (GDP) has expanded at less than 5% in seven of the past eight quarters.

“The new government is expected to steer the economy back to the growth path, though it will not happen overnight. We need to give them some time," said Choksey. “I would say things should start looking up in a couple of quarters."

Aggregate net profit for the companies included in the analysis grew at 5.6% from a year earlier, lower than the year-on-year 21.6% in previous quarter. However, in the December quarter, net profit growth was boosted by a jump in other income.

Operating profit growth for the quarter saw its second best showing in five quarters with 3.33% growth. To be sure, operating profit for the December quarter rose 11.15%, compared with a decline in the three quarters prior to that.

“While we do think the worst is over and the rupee is also stabilizing, it will take at least two more quarters for some results to show from the efforts of the new government. A lot also depends on how the monsoon pans out," said Vora, adding that interest rates also need to come down.

Operating margin, however, narrowed to 14.7% in the March quarter from 15.2% in the preceding three months.

“Operating margins will remain under pressure as long as the economy is weak and inflation remains high. The only green shoot is that there is confidence coming back, but that should translate into more investments for the profitability to improve," said Phani Sekhar, a fund manager with Angel Broking Pvt. Ltd.

While corporate earnings have not shown a dramatic improvement, analysts say the earnings outlook is robust enough to justify the increase in valuations seen since the start of the year.

India’s benchmark Sensex trades at 15.3 times projected one-year earnings, a premium of 37.4% over MSCI’s Emerging Markets Index, according to Bloomberg estimates.

“The premium is justified as with the favourable political and economic environment, the Indian economy is poised for economic recovery," Manish Gunwani, a senior fund manager at ICICI Prudential Asset Management Co. Ltd, said last week.

“Also, the economy is structurally better positioned than other emerging market economies to achieve earnings growth of companies," Gunwani said.

According to Darshan Bhatt, a managing partner at Glovista Investments Llc, this valuation measure includes the market’s expectation of projected earnings, and if Indian companies are able to generate greater earnings growth than current consensus expectations, then the valuation measure would be justified.

“Our view is that current earnings expectations in India are based on trough capex levels and there is a good chance of positive earnings revisions and surprises," Bhatt said in an email from New Jersey, US.

An analysis of sector-specific performance for the quarter shows that telecom companies have mostly fared better than expected, with sector leader Bharti Airtel Ltd posting an 89% surge in its March-quarter profit, its second straight gain in quarterly profit after nearly four years of declining growth. Rival Idea Cellular Ltd beat analysts’ profit and sales estimates helped by higher revenue from data growth.

Reliance Communications Ltd was an exception. The country’s fourth largest mobile carrier by subscribers posted a 48% drop in quarterly profit to 156 crore because of a surge in expenses and taxes.

Auto makers once again posted a muted performance, as domestic sales continued to be sluggish, and even the usual outlier Tata Motors Ltd disappointed this time.

A dismal performance at the India operations coupled with currency volatility, hurt earnings at Tata Motors, even as strong sales at the company’s UK Jaguar Land Rover unit helped to partially offset it.

Maruti Suzuki India Ltd reported a 35.5% drop in March-quarter profit as sluggish sales and higher costs took their toll on India’s largest car maker, while Bajaj Auto Ltd missed estimates and said its quarterly profit was little changed from a year earlier, as it sold fewer motorcycles and three wheelers in its home market. Mahindra and Mahindra Ltd reported a 0.86% rise in net profit.

It was a mixed bag for capital goods and power firms. Top engineering and construction firm Larsen and Toubro Ltd reported a forecast-beating 71% rise in net profit in the quarter, as strong domestic and international order inflow boosted profitability. Top thermal power producer NTPC Ltd reported a more than 29% drop in net profit, hurt by a surge in fuel costs.

However, the consumption story seems to have lost its shimmer, with Hindustan Unilever Ltd (HUL) and Godrej Consumer Products Ltd reporting March quarter earnings that have disappointed investors.

HUL said consumer product sales in India rose 9% in the quarter, but the underlying volume growth was only 3%, slower than that in the preceding quarter. Smaller rival Godrej Consumer Products saw volumes in its soap business decline 4% in the quarter ended March.

Consumer products maker Dabur India Ltd bucked the trend and reported a 17.3% jump in fourth quarter profit, propelled by higher sales of packaged foods and health supplements.

Major oil companies did not let investors down. Reliance Industries Ltd said March quarter profit rose 0.8% to 5,631 crore, the highest quarterly profit in more than two years, helped by better-than-expected refining margins and a weaker rupee that boosted exports.

Net profit of Oil and Natural Gas Corp. Ltd, the country’s largest oil and gas explorer, rose 44.3% in the quarter ended 31 March.

The earnings of the top four Indian software services companies were mixed, with softer-than-expected revenue growth.

Tata Consultancy Services Ltd and smaller rival HCL Technologies Ltd performed well and forecast an optimistic outlook for the current fiscal year, while the managements of Infosys Ltd and Wipro Ltd suggested they will take longer to work around client and leadership issues.

Krishna Merchant contributed to this story.

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Published: 02 Jun 2014, 12:41 AM IST
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