Mumbai: Indian companies are expected to post impressive sales growth for the December quarter, reflecting robust demand in the domestic economy, but increased raw material and interest costs are likely to crimp profit margins at manufacturing firms.
The earnings season starts on 13 January when technology bellwether Infosys Technologies Ltd, which is a part of the Bombay Stock Exchange (BSE) Sensex, declares its numbers for the third quarter of the current fiscal year. India’s largest mortgage lender, Housing Development Finance Corp. Ltd, will declare its earnings a day later.
Also See Bright Quarter (PDF)
The earnings season starts against the backdrop of a slump in key stock indices. The Sensex, India’s most closely tracked benchmark index, has fallen nearly 4% over the past week, the first time it ended in the red in four weeks, over concerns of monetary policy tightening to fight inflation.
The consensus estimate for sales growth in the third quarter of the current fiscal year is around 20%, while the profit growth estimate varies between 15% and 24% for Sensex companies, according to six brokerages surveyed by Mint.
Analysts are divided on whether higher earnings growth of commodity-based sectors such as metals and oil and gas will be able to offset muted earnings growth in most segments of the manufacturing sector. Commodity-based sectors account for one-third of the Sensex market capitalization.
Besides, most brokerages track consolidated numbers that include the earnings of subsidiary companies. Much of the profit swing in Sensex earnings in the last few quarters has been because of the high profit posted by Indian firms’ overseas subsidiaries such as Tata Steel Europe (formerly Corus Group Plc) of Tata Steel Ltd, JaguarLand Rover of Tata Motors Ltd and Novelis Inc. of Hindalco Industries Ltd. Earnings volatility has also stemmed from the fluctuating fortunes of oil and gas firms.
The stand-alone profits of Sensex firms have grown only by 6% against sales growth of 23% in the first half of the current fiscal, according to data sourced from corporation information provider Capitaline. The consolidated earnings growth for the same set of companies was 13% and 18% in the June and September quarters, respectively, according to estimates by India Infoline.
In what has become a trend since the past two quarters, domestic operations of firms are expected to post high sales growth and relatively tamer profit increases as they absorb some of the rise in raw material prices and interest costs.
“Corporate earnings performance for the third quarter is expected to be good in terms of revenues but slightly lower in terms of profits due to lower margins,” a 6 January earnings preview note by analyst Apurva Shah of Prabhudas Lilladher Pvt. Ltd said.
“The margin decline is not surprising due to higher commodity prices. Profit-after-tax is also expected to be somewhat depressed due to higher interest costs”, the note added.
Commodity prices have risen sharply over the past few months with the Thomson Reuters Jefferies CRB Index, a widely tracked index of commodity futures prices, rising 11% over the past three months and touching a 25-month high of 335.3 on 3 January.
Shah estimates profits of Nifty companies excluding oil and gas firms will grow by 14%, driven by sales growth of 22%. Nifty comprises the 50 most liquid stocks on the National Stock Exchange.
While most firms in the metals and oil and gas sectors are expected to see higher profit growth this quarter owing to a favourable commodity cycle, information technology (IT) firms are expected to post higher profits owing to better revenue growth.
“IT might be the biggest positive surprise in the third quarter results,” said Sandeep Singhal, head of institutional equities at Emkay Global Financial Services Ltd.
IT stocks have, in fact, rallied the most in the past three months among all sectoral indices, rising 10.79%, with some of them hitting lifetime highs in the past week. Infosys and Tata Consultancy Services Ltd, for instance, hit record highs last week, owing to prospects of better earnings and an uncertain outlook for other sectors.
So have large-cap pharmaceuticals manufacturers such as Sun Pharmaceutical Industries Ltd and GlaxoSmithKline Pharmaceuticals Ltd, which are expected to post high earnings growth.
However, that also means that these stocks could see some declines if December results disappoint.
Auto firms are expected to continue to post strong volume growth although the outlook on their profitability is mixed, with rising raw material costs in the face of increased competition expected to limit margin expansion.
While banking stocks were mauled last week on fears that higher cost of funds would squeeze margins, the December results are unlikely to show up a major compression in margins.
Acceleration in loan growth to 23% is expected to drive margin growth of banks to 23%, a 4 January note by Manish Chowdhary and Aditya Narain of Citigroup said.
Private sector banks with a bigger deposit base are expected to outperform their peers, while asset quality and provisioning for bad loans might emerge as key concerns for state-owned banks.
“We believe private sector banks will outperform PSU (public sector units) banks with a profit growth of 30.5% versus 18.3% with the key distinction likely to be higher loan-loss charges for PSU banks,” the note said.
The cement and telecom sectors might continue to underperform, but capital goods could see a turnaround in earnings because of better execution.
Corporate earnings as also the monetary stance of the central bank in the wake of persistently high food inflation are going to be the key drivers of investor sentiment in the coming weeks.
The Reserve Bank of India had indicated a pause in its monetary tightening in its last monetary review in November and left rates unchanged in December. However, with food inflation touching a 23-week high of 18.32%, and economic growth remaining strong at 8.9% in the second quarter, the central bank is expected to hike policy rates in its review of monetary policy on 24 January.
Market experts do not see a major risk as long as aggregate earnings of Indian companies are broadly in line with Street expectations of 20% growth for Sensex companies for the fiscal ending March and similar growth for 2012.
The consensus estimate of growth in earnings per share of Sensex firms for the year ending March remains unchanged at 20% to Rs 1,056, according to Bloomberg data.
Prospects of a faster global recovery have ensured that India is facing stiff competition in terms of foreign fund flows. While Indian markets have declined by 3% in the past three months, all other equity markets among the top 10 in the world have gained. Foreign investors bought a net $329 million worth of equities in December against a monthly average of $2.4 billion in 2010.
Ashwin Ramarathinam contributed to this story.