Mumbai: High input costs, rising interest rates and tight liquidity will continue to dent profits at Indian firms in the quarter to September, and sales and net profit growth of publicly traded firms could be in line with the first quarter, or worse, say brokers.
Motilal Oswal Securities Ltd, the first brokerage to come out with a preview of second quarter earnings on Friday, said sales revenue will go up on high inflation but higher interest rates and the declining rupee will eat into profits.
Other stockbrokers are waiting for some month-end data, such as number of automobiles sold and subscriber additions for telecom firms, to publish their previews, but do not see any change in the trend.
“Profit growth is expected to be much in line with the first quarter, either in the high single digit or low double digits,” said Shriram Iyer, head of research at Edelweiss Capital Ltd, a local brokerage currently working on its results outlook.
A Mint analysis of 2,952 listed entities, excluding those in the banking and oil and gas sectors, showed first quarter profit growth at 10.73% and sales growth at 26.51%.
Oil and gas firms were not included because their profits vary depending on the subsidy they bear for the period, and the extent to which they are reimbursed by the government through oil bonds. Banks, too, were excluded as they can skew the picture because of variations in treasury income.
Infosys Technologies Ltd, India’s second largest information technology firm by revenue and part of the country’s most tracked 30-stock Sensex index, will kick off the earnings season on 10 October.
Among other big firms, HDFC Bank Ltd will announce its second quarter earnings on 16 October, Housing Development Finance Corp. on 17 October and Bajaj Auto Ltd on 23 October.
Motilal Oswal Securities expects sales to grow at an average 29% and profit at 13.5% for the 130-odd firms it tracks. These are part of the BSE-500 index, comprising the top 500 entities on the Bombay Stock Exchange by capitalization.
It said most of this growth will come from large-cap companies and a few sectors such as oil and gas and metals, while as many as a third of its tracking universe will see a decline in earnings.
“Earnings will fail to enthuse the markets, though much of the decline has already been factored in,” said Vinod Kumar Sharma, head of research at Anagram Securities Ltd, another Mumbai-based brokerage.
The Sensex has declined more than 35% since the beginning of this year.
Declining oil prices could have taken some pressure off the earnings in the second quarter, but as Iyer of Edelweiss pointed out, the full effect of declining oil prices may not be reflected in this quarter’s results. That is because oil prices ruled at over $120 per barrel till the end of August, and started declining only since 27 August. On Friday, crude oil was trading at $105.38 per barrel.
The sector to watch out for, however, is information technology. These firms will benefit from the 9.63% decline in the value of the rupee against the dollar in the second quarter, as they can earn more rupee while converting their dollar income.
According to Motilal Oswal Securities, metals, engineering and IT sectors would deliver the strongest earnings growth while cement, autos and the real estate will see the maximum decline.
Hitesh Agrawal, head of research at Angel Broking Ltd, said the saving grace for banks in the second quarter will be gain in their bond portfolio as yields on bonds have fallen since the beginning of this quarter.
While yields on the benchmark 10-year government bond ruled at around 9.5% at the beginning of this quarter, they have now dropped to around 8.5%.
Bond yield and prices move in opposite directions. With yields dropping, banks will be able to book marked-to-market gains.
Mark to market is an accounting practice of assigning value to a financial instrument based on the current market price of that instrument.
Ashwin Ramarathinam contributed to this story.