Corporate earnings | March good, June better, say analysts

Corporate earnings | March good, June better, say analysts
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First Published: Mon, Jun 08 2009. 12 35 AM IST

Signs of recovery: Indian companies are now performing better despite a global financial downturn. Ahmed Raza Khan / Mint
Signs of recovery: Indian companies are now performing better despite a global financial downturn. Ahmed Raza Khan / Mint
Updated: Mon, Jun 08 2009. 12 35 AM IST
Mumbai: In terms of net profit growth, the March quarter is turning out to be the best in the last five quarters for Indian firms, even though net revenue fell on a year-on-year basis for the first time in at least three years.
Signs of recovery: Indian companies are now performing better despite a global financial downturn. Ahmed Raza Khan / Mint
According to analysts, the June quarter will be even better as consumer demand has started picking up and most of the input costs for companies continue to remain low.
A Mint analysis of the aggregate results of 37 Nifty companies that have already declared earnings for the quarter ended March shows that these firms saw their net profit grow by 20%, and net revenue fall by 1.73%.
In the preceding quarter, net revenue for these 37 companies had risen by 8.5%, while net profit had fallen by 12.05%.
Nifty is a basket of 50 stocks while Sensex, India’s most tracked equity index, comprises of 30 stocks. Except for one, all Sensex stocks are part of the Nifty.
While the earnings have come as a pleasant surprise, analysts point to an important caveat—the net profits of many companies received a boost last quarter owing to the deferment in the implementation of an accounting standard (AS-11) related to accounting of foreign exchange (forex) losses. A number of companies reversed provisions made in preceding quarters, leading to large one-time gains.
Besides, aggregate numbers are to an extent influenced by oil bonds issued by the government to oil marketing companies such as Bharat Petroleum Corp. Ltd (BPCL), which is part of the Nifty. It would, therefore, make more sense to look at the aggregate results at the operating profit level, after excluding state-owned oil company BPCL.
In the March quarter, the operating profit of the remaining 36 companies fell 0.35% over the year-ago quarter, a slight improvement over the 1.25% drop seen in the December quarter compared with a year ago. The net revenue of these companies grew 1.6% in the March quarter compared with the year-ago period; they grew by 8.2% in the December quarter.
The numbers indicate that the decline in profitability witnessed in the December quarter has been arrested to a large extent during the March quarter. This was possible, in part, owing to a drop in raw material costs, with companies exhausting high-cost inventories of commodities and starting to purchase them at lower rates, say analysts.
Nilesh Shah, chief investment officer of ICICI Prudential Asset Management Co. Ltd that manages Rs65,549 crore, is one of those who believe that the stimulus packages of the government and the liquidity infusion by the Indian central bank have worked. Since mid-September, when Wall Street investment bank Lehman Brothers Holdings Inc. collapsed, the Reserve Bank of India has infused Rs3.9 trillion liquidity in the system through various ways—the amount is about 10% of India’s gross domestic product (GDP). The government’s three fiscal stimulus packages, including one announced in the interim budget in February, account for another 3% of GDP.
“To some extent, the deferment of AS-11 helped in avoiding forex losses. But what is critical is that results were better than what the markets expected and again demonstrated the Indian economy’s resilience,” said Shah.
That theory has some doubters. Another fund manager with a rival mutual fund said the results were mixed and were broadly in line with expectations. “While there were a few positive surprises in sectors such as cement, these were offset by negative surprises in sectors such as information technology. Critically, the results had hardly anything to support the sharp rally in the stock market since March,” added this person, who asked not to be identified.
In early March, the Sensex dropped to its 40-month low of 8,160.4 but since then it has risen at least 85%. Still, there are enough analysts who see signs of a recovery in the March earnings announcements—and signs that earnings for the June quarter will be better.
Raamdeo Agrawal, director and co-founder of Mumbai-based brokerage Motilal Oswal Securities Ltd, said inflation has come down drastically and sales have stabilized, improving the profitability of firms. “The operating leverage that was negative in the December quarter turned positive in (the) March quarter.”
According to Agrawal, in the December quarter companies faced foreign exchange losses and inventory pile-ups and had to account for several one-off expenditure items. The situation improved in the March quarter, he said. And the June quarter will be even better than the March quarter as the economy has picked up and the local currency is stronger, he added. The rupee closed at 47.11/12 to a dollar on Friday after rising to 46.75 mid last week, its strongest since November. Companies in the banking, real estate, automobile and petrochemicals sectors will improve their performance in the June quarter, Agrawal added
Prominent Nifty firms that have not yet announced their earnings for the March quarter include Hindalco Industries Ltd, Oil and Natural Gas Corp. Ltd, Tata Steel Ltd, Gail (India) Ltd, Power Grid Corp. of India Ltd, Unitech Ltd and Suzlon Energy Ltd. A few other Nifty companies such as Cairn India Ltd, DLF Ltd, Idea Cellular Ltd, Reliance Communications Ltd, Reliance Petroleum Ltd and Reliance Power Ltd that announced their earnings have not been included in this analysis as comparative figures for the past 12 quarters for these firms were not available.
ashwin.r@livemint.com
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First Published: Mon, Jun 08 2009. 12 35 AM IST