Mumbai: The first flush of corporate earnings for the December quarter, the third in fiscal 2007-08 for most firms, shows a distinct slowdown in profit growth, but analysts say this is because the profit of companies is already at a high level and claim that these companies still look good in terms of their so-called fundamentals.
According to an analysis of 225 firms for which numbers are available for the December quarter of 2007 and the corresponding quarter of 2006, profit?growth?has dropped to 36.3%, its lowest in six quarters.
FUNDAMENTAL MATTERS (Graphic)
As companies grow bigger in terms of revenues and profits, they find it difficult to show as much growth on these higher numbers as they did previously. This is termed the base effect. The competitive position of a company in terms of its operations, efficiency, financials and other such factors is called its fundamentals.
To be sure, a 36.3% growth isn’t low by any measure. The significance of this number is also debatable because the list of 225 firms includes only seven firms whose stocks are part of the Bombay Stock Exchange’s benchmark Sensex index. They are: Infosys Technologies Ltd, HDFC Bank Ltd, Reliance Industries Ltd (RIL), Reliance Energy Ltd, ITC Ltd, Wipro Ltd, and Tata Consultancy Services Ltd (TCS). All seven also belong to the broader Nifty index of the National Stock Exchange. Besides these, HCL Technologies Ltd, another company whose stock is part of Nifty, has also declared its results for the December quarter.
The growth in the adjusted net profit for the companies has dropped from 51.1% inthe December quarter of 2006-07. It had previously fallen below this level in the June quarter of 2006-07, when it touched 23.34%.
The growth in net sales has also fallen—from 35.56% in the December quarterof 2006-07 to 22.57%.
On a sequential basis (the performance in the December quarter compared with that in the September quarter), however, net sales of these 225 companies rose by more than 6 percentage points. Adjusted net profit declined by 4 percentage points, a trend that has been evident all through 2007-08.
“The drop in the profit growth was expected compared with earlier quarter, as the companies are now working on a higher base,” said Amitabh Chakraborty, president equities, Religare Securities Ltd, a domestic brokerage. Interest costs have also gone up and this always hurts corporate earnings, he added.
“Most of the corporate earnings reported,?so far, have been quite decent and have bettered expectations, including the ones in the technology sector like Infosys Technologies Ltd,” said Ambareesh Baliga, vice-president at Karvy Stock Broking Ltd. “The fall in growth was expected as the companies have moved to a higher base—you cannot expect the companies to keep growing at the rate that they were doing earlier,” Baliga added.
Among the Sensex stocks, Infosys’ net profit in the quarter ended December rose by 23.80% compared with the corresponding quarter of 2006-07 and its net sales rose by 15.78%. TCS saw its net profit rise by 20%, while HDFC clocked a rise of more than 60% and ITC a rise of 16%. Mukesh Ambani’s RIL’s profit, excluding an asset sale, rose 26% and Anil Ambani’s Reliance Energy recorded a 50% rise in net profit.
“According to us, the trend is very positive (in corporate earnings). Up to Thursday, the companies had reported average growth of about 30% in their net profits. We were expecting a growth of about 27% on an aggregate basis,” Chakraborty said.
On the back of an economy expanding at more than 9% and impressive corporate results, Indian stock markets rose in 2007 with the Sensex returning 45%.
“While India will maintain momentum…, (the) real GDP (gross domestic product) growth is expected to moderate to 8% in 2008 from an estimated 8.8% in 2007 as tighter monetary conditions dampen demand for credit and take some steam out of consumer spending,” said a recent report published by rating agency Moody’s.
(Ashwin Ramarathinam contributed to this story.)