Mumbai: Inflation that is at a 13-year high, rising raw material costs, and high interest rates may have dented the profitability of many Indian companies, but the constituents of the country’s two benchmark indices, Sensex and Nifty, continue to significantly grow revenue and profit, much to the surprise of analysts who maintain that this growth momentum won’t last.
The analysts point to the Reserve Bank of India’s recent and earlier interest rate hikes as one reason for this and say these will tighten money supply and crimp demand.
A Mint analysis of the earnings of the firms that constitute India’s most-tracked equity index, the Bombay Stock Exchange’s Sensex, shows the year-on-year, or y-o-y, growth in net sales was a six-quarter high in the April-June quarter while the y-o-y net profit growth, after adjusting for extraordinary income—or that earned from the company’s non-core or non operating businesses—was the best in three quarters.
THE SHOW GOES ON (Graphic)
Collectively, adjusted net profit of the Sensex companies rose 15.85% in the June quarter. For the firms that constitute the National Stock Exchange’s broad-based Nifty index, it rose 12.24%.
The net sales growth of the Sensex firms in the quarter was 29.32% and that of Nifty companies, 32.66%—both the highest in six quarters.
The Sensex is a basket of 30 stocks and the Nifty has 50 stocks. For the purpose of this analysis, however, the earnings of 28 Sensex firms and 43 Nifty components were considered. Two Sensex constituents—Reliance Communications Ltd and DLF Ltd—are relatively new entrants and comparable figures for their earnings in past quarters are not available. Similarly, only those Nifty firms have been considered whose earnings are available for the past eight quarters.
The constituents of both the indices do change periodically. Even after the June quarter, two Sensex companies—Ambuja Cements Ltd and Cipla Ltd—have been replaced by Sterlite Industries (India) Ltd and Tata Power Co. Ltd.
All Sensex firms, except for Jaiprakash Associates Ltd, are also part of Nifty.
In the April-June quarter, Sensex slipped around 14% and the Nifty had an even a sharper fall of 14.66%.
Tata Steel Ltd, India’s largest steel producer, was the last of the Sensex firms to announce its earnings. It did so on Thursday.
The growth in net profit of these firms was progressively reducing in four quarters preceding the June quarter and there was no definite trend in terms of growth in sales and operating profit.
Analysts said it is unlikely that these firms would repeat the June quarter’s performance.
“The impact of macro economic concerns is generally felt with a lag. The next few quarters will see inflation and high interest rates dragging the firms’ margins,” said Anjan Ghosh, general manager at rating agency Icra Ltd, an affiliate of Moody’s Investors Service.
Inflation in India is now ruling at 11.98% and the central bank has, since the beginning of the year, raised the policy rate by 125 basis points and the cash reserve ratio, which defines the money that commercial banks are required to keep with it, by 150 basis points.
One basis point is one hundredth of a percentage point.
The government has also taken a series of other measures such as banning the export of cement and levying export duties on steel products to rein in inflation.
It has also asked steel firms to freeze prices for three months.
In the June quarter, there were pressures on profitability on account of rising commodity prices but because the prices of the final products also rose, the performance of companies has not been as bad as it could have been, said the head of research at a Mumbai-based brokerage, who did not wish to be named.
“The real slowdown began in May as the industrial production data shows. Around the same time, tightening of monetary policy also started. We will see the impact in the next quarter—considerably lower sales and net profit growth,” this person added.
Industrial growth plunged to 3.8% in May, sharply down from 10.6% a year ago, due to poor showing of the manufacturing and electricity sector.
Industrial output, as measured by the Index of Industrial Production, grew by just 5% in the first two months of this fiscal year, against 10.9% during the same period last year.
Hitesh Agrawal, head of research at Angel Broking Ltd, a Mumbai-based domestic brokerage, said pressure on profit margins will intensify in the coming quarters with the effect of higher interest rates kicking in. “It’s safe to say that the next two quarters will be much more challenging for these firms,” he added.
“It was expected that sales will be good in June quarter due to higher realizations (or the difference between the price a company gets for its product or service and what it takes it to create and sell it). The FMCG (fast moving consumer goods) firms saw good volume growth and higher selling prices; steel firms too had higher realisations because of price increases in March,” Agrawal said.
He added that the rise in input costs had not entirely been passed on to the customers which is “why we see a better sales line but the net profit and operating profits have not seen the same growth”.
The performance of the Sensex and Nifty firms would not have been as impressive had two companies—Reliance Industries Ltd (RIL) and Oil and Natural Gas Corp. Ltd (ONGC), been excluded.
Ideally, they should be excluded as earnings of oil firms are volatile and depend on international crude prices and the subsidy sharing mechanism, determined by the government.
Excluding the two oil firms, the earnings growth during June quarter for the Sensex firms would have slumped to 8.87%, lower than 11.20% growth seen in the quarter ended 31 March.
If commercial banks and financial institutions are also excluded from the Sensex basket, the earnings growth of Sensex components would have been a be mere 7.77% in the June quarter, compared with the March quarter’s growth of 7.24%.
State Bank of India, ICICI Bank Ltd, HDFC Bank Ltd and India’s oldest mortgage player, Housing Development Finance Corp. Ltd, are the four financial services firms in the Sensex index.
Excluding oil and financial services firms, three companies which are part of the Sensex have recorded significant growth rates in the June quarter. They are Bharti Airtel Ltd, Satyam Computer Services Ltd and Tata Steel Ltd.
Bharti Airtel grew its net profit by around 40% on the back of a record number of new customer additions.
Tata Steel reported a 22% growth in its net profit on increased prices of higher grade products used by carmakers.
Ranbaxy Laboratories Ltd is the worst performer among Sensex firms and saw a 92% drop in net profit in the June quarter.
India’s largest power generator, state-run NTPC Ltd, saw its net profit dropping around 27%, while cement maker ACC Ltd saw its net profit down 24%.