Mumbai: The profits and sales of most Indian companies for the January-March quarter are likely to exceed the expectations of equity analysts, but the coming decline in their profitability is evident. This is the conclusion of an analysis by Mint of the latest financial results of 10 of the 30 companies that constitute the Bombay Stock Exchange’s benchmark index, the Sensex. The 10 firms have grown their revenue (for the quarter) by 39% and their net profit by 46%, compared with the January-March quarter of 2006.
The collective weightage of these companies in the Sensex is 28%, and because the index represents the larger market of around 3,650 listed firms, the performance of these companies can be taken as being indicative of the performance of all Indian companies. To date, 281 companies have declared their results for the January-March quarter. The average growth in revenue for these firms is 32%, and the average growth in net profit, 50%. “In a sense, the Sensex firms’ earnings have been in sync with the performance of India Inc.,” said a senior executive at a foreign brokerage who did not wish to be identified.
However, he cautioned that four of the 10 Sensex firms that have thus far declared their results are in the information technology (IT) business. The four IT firms grew their sales by 35-43% and their net profits by 38-68%.
“Broadly, these businesses are in a period of secular growth,” said the president of a large domestic mutual fund who asked not to be identified, citing company policy.
But the sequential growth in operating profits of the 10 Sensex companies shows a distinct deceleration. In the October-December quarter, these firms increased their operating profit 56% over the July-September quarter.
But in the January-March quarter, they increased their operating profit by a significantly lower 42% over the October-December quarter. Fund managers Mint spoke to expect a further slowdown in the growth in profitability of the Sensex companies. Andrew Holland, managing director, DSP Merrill Lynch Ltd, said that earnings (net profit) growth for the Sensex companies in the fourth quarter of 2007-08 would probably be in the 25-30% range.
“One has to look at it (the results) sector by sector. Those sectors which have pricing power such as cement and technology have seen margins increase,” said Chetan Sehgal, director, research, India Templeton Asset Management (India) Pvt. Ltd.
Cement companies such as ACC Ltd, Ambuja Cements Ltd and Grasim Industries Ltd grew their sales by between 22% and 37% year on year, and their net profits by between 43% and 80%. In contrast, private sector bank HDFC Bank grew its income 44.34% and its net profit 30.54%. And Reliance Energy Ltd grew sales 55.49% and net profit 40.1%
The cement companies have benefited from an increase in price. Banks have been hit hard by rising interest rates that led to a depreciation in their portfolio of debt instruments. Power companies have no shortage of demand with most of the country reeling under a massive power shortage but regulators at the state and central level, in effect, control the price at which they can sell the power.
The year ahead will be different, said experts. There are signs of that already. “So much currency volatility could have a significant impact on margins of companies going forward as a 6-7% appreciation of the rupee against the dollar in two months alone hasn’t been seen for a while,” said Sehgal.
He did not expect the profitability of Sensex companies to increase this year. Two of them, Reliance Industries Ltd and ONGC Ltd, are sensitive to any increase in commodity prices. And the “auto companies too do not seem to have enough pricing power. The guidance for 2007-08 revenue given by the software majors was good but the exchange rates have moved from the Rs43 to a dollar assumed in those guidance to Rs41 to a dollar now,” added Sehgal.
First Cut Analysis (Graphic)