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Fourth quarter may be worse than feared

Fourth quarter may be worse than feared
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First Published: Mon, Apr 21 2008. 12 12 AM IST

Updated: Mon, Apr 21 2008. 12 12 AM IST
Mumbai: The collective fiscal fourth quarter financial performance of Indian companies could be worse than what most analysts feared, if early results in the past two weeks are any indication of what is in store.
A Mint analysis of 89 firms that have announced fourth quarter results for the period ended March reveals that their profit growth rate has been the worst in eight quarters, despite revenues having risen handsomely. So far, some 96 companies have announced their quarterly earnings but the analysis focuses on 89 firms for which comparative numbers are widely available.
The net sales of these 89 firms have risen 41.7% during the March quarter, nearly double the 20.8% growth rate during the same period last year. But, collectively, these firms have reported that profits have grown only at 7.79%, down sharply from the 58.5% growth in the year-ago quarter, as well as sharply below the 18.17% growth in the third quarter that ended 31 December.
The slump in net profit could be attributed to a slew of factors, including rising cost of inputs or raw materials, a slowdown in overall industrial production and the soaring inflation, according to analysts.
To be sure, it is too early to conclude that Indian firms are hurting significantly from a profit growth slowdown. The universe of listed entities is about 3,000 firms.
Still, even though only two firms that belong to India’s bellwether stock index Sensex of the Bombay Stock Exchange have announced their quarterly results so far—Infosys Technologies Ltd and Wipro Ltd—neither has sparkled.
While Infosys’ results could not meet its guidance set a year ago, Wipro saw a slowdown in fourth quarter profit growth to 11.3%.
The overall performance so far is lower than what some adjusted estimates have expected. Indeed, a recent Citigroup Global Market’s India Equity Strategy report had pegged “potential growth for the Sensex companies (excluding oil companies) at 11%.” According to the report, this will be “the most pronounced dip in growth rates over the last few quarters.”
Many large brokerages expect the slowdown in earnings growth to continue.
“India clearly has earnings growth risk this year,” said Christopher Wood, equity strategist at CLSA Asia Pacific, in his latest report. He points at moderating economic growth as well as potential funding constraints for those firms where business models are based on raising equity.
The Indian stock market hasn’t yet fully factored in some of this. Thanks largely due to global financial concerns, the Sensex is down 18% so far this year, after recouping some losses that had seen it fall some 30% from its peak recorded on 10 January.
“Markets have so far reacted only to the global events but from now on domestic issues will also impact the market,” said Satya Narayan Bansal, chief executive for the India business of Barclays Wealth, a division of the UK-based bank.
Still, the Sensex is now trading at price-earnings multiples (one year forward) that are lower than the 15-year average multiple of 17.5 times.
Meanwhile, the Citigroup report also points to a potential downside risk on earnings growth, especially on forex derivative mark-downs.
The Institute of Chartered Accountants of India, the body that oversees the audit profession, has suggested early adjustment of mark-to-market losses on quarterly results after some firms revealed losses from their exposure to foreign exchange derivatives products which were originally meant to hedge against sharp currency movements. Marking to market is an accounting practice that values investments in accordance with the prevailing market prices.
Some companies which reported a decline in profit growth during the fourth quarter include Power Finance Corp. Ltd (-19.9%) and New Delhi Television Ltd (NDTV) (-157%). But others, such as Yes Bank Ltd, saw more than 108% growth in profits.
Apart from Infosys and Wipro, two other constituents of the National Stock Exchange’s broader Nifty index have announced Q4 results. They are Zee Entertainment Enterprises Ltd and HCL Technologies Ltd.
While Zee Entertainment saw a 37% rise in profits, HCL Technologies’ profit growth was 10%.
Analysts expect to get a clearer picture by the end of this week. Reliance Industries Ltd, India’s largest company by market capitalization, will announce its results on Monday, as will two other Sensex firms—Tata Consultancy Services Ltd and Satyam Computer Services Ltd.
According to a pre-earnings strategy report by Motilal Oswal Financial Services Ltd, a publicly traded retail brokerage, there is limited downside from current levels. “The risk-reward equation has turned favourable,” it said.
Many foreign and domestic brokerages, including Motilal Oswal Financial, had downgraded corporate India’s earnings in the last quarter of 2008.
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First Published: Mon, Apr 21 2008. 12 12 AM IST