BackQ3 numbers indicate corporate earnings may have bottomed out
Of the 958 firms that have reported Q3 earnings so far, net profit has gained 56.9% from a year ago, the most in 11 quarters
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Mumbai: Has the downward trend in corporate earning ended? Some fund managers think so, and an analysis of the results of 958 companies seems to suggest they may be right.
Indian firms reported their fastest quarterly profit growth in almost three years in the December quarter, prompting investors to forecast that earnings have bottomed out and are likely to rebound in the three months to 31 March.
Of the 958 companies that have reported earnings for the quarter ended 31 December
so far, net profit has gained 56.9% from a year earlier, the most in 11 quarters, as companies benefited from lower input costs. Net sales for these companies rose 14.8% in the same period.
“Results have been fairly satisfactory and we expect an upward revision in earnings going forward," said Gopal Agrawal, chief investment officer of Mirae Asset Global Investments (India) Pvt. Ltd. “Going by the trend, one can say the earnings cycle has bottomed out."
India’s biggest companies, including Reliance Industries Ltd, Infosys Ltd, ICICI Bank Ltd and Larsen and Toubro Ltd, have beaten analysts’ earnings estimates for the December quarter, as customers placed more orders and companies cut costs to boost profit.
The Reserve Bank of India’s decision to cut its key lending rates on 29 January and measures by the government in the past few months to attract overseas investments in retail, aviation and infrastructure projects and paring of fuel subsidies are also likely to spur growth in Asia’s third-largest economy.
Private sector banks and the oil and gas companies led profit growth among Indian companies.
The oil and gas sector was the best performer in the December quarter, boosted by higher crude oil prices and increase in fuel prices. Companies that comprise BSE’s oil and gas index posted a 36.8% gain in net profit from a year ago. They were collectively posting losses for the past four quarters
Similarly, members of the BSE healthcare index saw net profit more than double from a year earlier in the December quarter, while consumer durable companies reported a 29.5% profit gain.
“Profit gains are mostly because the cost cutting initiatives are working. However, things are better than what they were and we can say that the worst is behind us," said Neeraj Dewan, director of Quantum Securities from New Delhi.
Though volume growth was subdued in the packaged consumer goods sector, gross margins expanded as input costs declined.
Members of the BSE IT index, however, reported a mere 10.2% net profit growth—their worst since September 2010—as the business outlook in their main markets, the US and the UK, remained an area of worry.
In the December quarter, the rupee depreciated 3.88% against the dollar, providing some relief to exporters. BSE’s benchmark Sensex gained 3.54% in the same period, helped by inflows from foreign institutional investors.
India’s top companies surprised investors with their financial performance in the December quarter. Reliance Industries, India’s most valuable company, beat analysts expectations with a 24% increase in net profit to ₹ 5,502 crore in the December quarter. Revenue rose 10.1% to ₹ 96,307 crore.
Analysts had expected Reliance’s profit to increase 14.4%, according to estimates compiled by Bloomberg.
Infosys, India’s second-largest software exporter, beat analysts’ expectations to report a net profit of ₹ 2,369 crore for the December quarter. It kept its annual revenue growth forecast unchanged. Analysts had estimated that the company would see its December quarter profit decline by 6%, and that it would lower its revenue growth forecast for the year to 31 March by 1-2 percentage points. Moreover, the country’s largest software exporter, Tata Consultancy Services Ltd, also reported a 26.7% rise in net profit, beating analysts’ expectations in a seasonally-weak quarter.
The banking sector, too, did well with ICICI Bank, the country’s largest private sector lender, posting its highest-ever quarterly profit. The bank beat analysts’ estimates with a 30% rise in net profit to ₹ 2,250 crore from ₹ 1,730 crore in the year-ago period. A Bloomberg survey of analysts had forecast a profit of ₹ 2,080 crore.
There were a few disappointments, though. Consumer goods company Colgate-Palmolive posted a 3.47% decline in net profit at ₹ 111 crore for the quarter ended December as it spent more on advertisements.
“On a sectoral basis, earnings have been a mixed bag. Engineering, manufacturing and other capital investments driven businesses continue to show volatility in their earnings, while consumption driven businesses have reported good numbers," said Sandesh Kirkire, chief executive of Kotak Asset Management Co. Ltd.
Consumer demand has remained robust in despite slowing economic growth. The finance ministry has pegged India’s economy to grow at 5.7-5.9% in the year ending 31 March. Last week, the Reserve Bank of India cut its growth estimate for 2012-13 to 5.5% from the 5.8% projected earlier.
“It won’t be possible to reach the 7-8% GDP growth that we are targeting purely based on consumption. However, one can say the worst is behind us," said Kirkire.
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