Mumbai: The net profit of 99 companies that have so far reported earnings for the three months ended June grew at the fastest pace in four quarters, reflecting the strength of the domestic economy.
While the results have been healthy, analysts say these are early days yet, with only four Nifty firms having declared their results. The Nifty comprises the 50 most liquid stocks traded on the National Stock Exchange.
Net profit of these 99 firms grew by an average of 23.20%. Just as in the past quarter, the profit growth has been largely driven by increased sales. At 19.12%, sales growth has been the highest in six quarters.
At least two Nifty stocks—Tata Consultancy Services Ltd (TCS) with earnings growth of 22%, and Axis Bank Ltd with a net profit growth of 32%—have beaten expectations. Mortgage lender Housing Development Finance Corp. Ltd reported a 23% earnings increase. Infosys Technologies Ltd’s net profit declined by 2.25%, the only disappointment by a Nifty firm so far.
A robust economy is driving consumer demand and corporate profits. With the economy forecast by the International Monetary Fund to expand 9.4% this year, and double-digit growth in factory output at 16.5% in April and 11.51% in May, there are no major downsides on the domestic front except inflation.
Foreign institutional investor interest has remained strong over the course of the year with some $7 billion (Rs32,760 crore) of inflows in the first six months.
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But analysts don’t expect any significant re-rating of stocks. Despite the Bombay Stock Exchange benchmark index, the Sensex, touching a two-year high last week, the next breakout will have to come from earnings upgrades, which is unlikely anytime soon, analysts say.
The Mint earnings analysis counted net interest income (interest earned on loans minus the cost of deposits) and non-interest income as net sales of banks. For manufacturing and services sector firms, income generated from activities not central to their main business was excluded from profit calculations.
The earnings have not come as a surprise to analysts who had modest expectations to start with. Typically, brokerages cover at most 200 of the biggest firms. Of the 99 firms that have declared their earnings, less than 10 are covered by analysts.
“Expectations are very moderate”, said Ajay Parmar of Emkay Global Financial Services Ltd. “We expect 12-15 % bottomline growth for Nifty companies”.
“It’s still early to say but so far things have gone as per our expectations”, said Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd. “The TCS results have been on the dot, but Infosys has disappointed slightly and missed the mark by 4-5%. TCS results could have surprised many because it came just after the Infosys disappointment.”
Infosys and TCS are India’s two largest software exporters. There could be some worries for information technology firms.
“In IT, both pricing pressure and rising costs have played their part in slowing earnings growth”, said Deepak Jasani, head of retail research at HDFC Securities Ltd. “Volumes, however, look good in IT.”
Banks and financial firms are expected to sustain their good run. Oil and gas, capital goods, infrastructure and consumer durables are sectors that analysts predict would do well in the coming quarters.
“Axis Bank results were a slight positive surprise”, said Girish Pai, head of research at Centrum Capital Ltd. “But we have to wait and see till Oil and Natural Gas Corp. Ltd (ONGC) and Reliance Industries Ltd (RIL) come out with their results.”
The earnings of India’s biggest aluminium maker Hindalco Industries Ltd, largest auto maker Tata Motors Ltd, and Tata Steel Ltd, the biggest producer of the alloy, would “also be important before we can take a call”, he added.
RIL and ONGC are two of the largest constituents of the benchmark indices. Together they make up 17.47% of the Sensex and 14.2% of the Nifty.
This week, a number of blue chips such as HDFC Bank Ltd, Kotak Mahindra Bank Ltd, Maruti Suzuki India Ltd and Wipro Ltd are expected to declare their earnings.
Graphic by Yogesh Kumar/Mint