Mumbai: As companies get ready to report their first quarter results, it appears that both sales and earnings growth for the 50 firms that constitute the S&P CNX Nifty have slowed in the preceding quarter ended March.
The slowdown in the rate of growth of the Nifty companies is significant because one of the arguments that is used to justify the higher valuation of the overall Indian market, compared to its peers, has been that earnings growth for Indian companies is higher.
Whether that premium is justified will be evident when companies start reporting results, starting with HDFC Bank Ltd on 10 July and technology bellwether Infosys Technologies Ltd on 11 July.
Meanwhile, a Mint analysis of the 50 companies shows that year-on-year growth in net sales fell from 27.74% for the October-December quarter to 17.72% in the March quarter. The deceleration in net profits was more dramatic, with year-on-year growth slowing sharply from 64.86% in the December quarter to 14.68% in the March quarter.
Indian Petrochemicals Corp. Ltd, the last Nifty company to declare its results for the January-March quarter, did so on Saturday.
The slowdown, both in sales as well as net profits, at these firms, which constitute the broader market index, is sharper than that of the 30 firms that constitute the Bombay Stock Exchange’s benchmark index Sensex. All Sensex stocks except for National Thermal Power Corp. Ltd are part of Nifty.
Indeed, in spite of setting a new record this week, the price to trailing earnings for the Nifty is around 20.8, below the 21.5 levels reached in early January. Analysts say that the lower valuation could be an indication of concerns about future earnings growth.
“On the positive side, we expect banks, specially public sector banks, to do well,” says Deven Choksey, managing director of KR Choksey Shares and Securities Pvt. Ltd. “Capital goods will do better. IT companies that manage the rupee appreciation well will do better. On the negative side, higher wage costs and interest costs will affect companies. We have rationalised our expectation of results because of the interest rate hikes, which will have an impact this quarter.”
Adds Amitabh Chakraborty, head of equities at Religare Securities: “While we expect to see that topline growth will be unaffected, there will be some slowing because of the interest rate hikes. There are signs that the interest rates have peaked now so we expect profitability will improve in future.”
Harendra Kumar, head of research at ICICI Direct, says the slowdown is due to the higher base. “Companies are growing in volume terms but not so much in percentage terms because they are much larger.”
If oil companies, with their volatile earnings (because of crude prices and an administered price regime for fuel in India), are left out of the Nifty analysis, net profit growth for the Nifty companies shows a clear downward trend, slowing from 50.62% in the September quarter to 46.70% in the December quarter and then down to 37.71% in the March quarter. But, if commercial banks and financial institutions too are excluded, net profits of the Nifty companies show year-on-year growth of 38.94% in the March quarter, down from 54.30% in the December quarter, but higher than the September quarter’s 37.36%.
Four banks and the mortgages firm Housing Development Finance Corp. Ltd are part of Nifty, as are seven oil firms, Reliance Industries Ltd, Oil and Natural Gas Corp. Ltd, Hindustan Petroleum Corp. Ltd, Indian Petrochemicals Corp Ltd, Bharat Petroleum Corp. Ltd.
There’s also a clear distinctions within companies. Engineering companies such as Larsen & Toubro Ltd and Bharat Heavy Electricals Ltd showed higher profit growth in the March quarter thanks to India’s capacity expansion drive and the rise in infrastructure spending. However, profit growth at the cement companies slowed while two-wheeler companies posted negative earnings growth on account of the rise in interest rates.