Any recovery in the March quarter has been largely limited to large companies. A Mint analysis of the quarterly results of 1,059 companies— excluding banks, financial firms and oil companies, the earnings of which are very volatile—shows that only those with quarterly sales in excess of Rs1,000 crore showed a growth year-on- year (y-o-y) in net profits in the three months to March.
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For the 800 firms in the sample that had quarterly sales of up to Rs100 crore, net profits plunged 86.37% in the period.
As the accompanying table shows, for most companies, operating profits as well as sales in the March quarter showed a decline compared with the corresponding period in 2008. Also, the drop in sales for these companies has been more muted than the drop in operating profits, which means the pressure on margins continues.
But those firms that had a turnover of at least Rs1,000 crore did see growth in operating profits, although even these showed pressure on operating margins despite a decline in most raw material prices during the quarter.
The big question, however, is whether the performance has improved compared with the December quarter.
All classes of companies showed a drop in their sales growth. For instance, while the y-o-y growth in net sales of companies with a turnover of at least Rs1,000 crore was 23.55% in the December quarter, the rate of growth slowed to 4.57% in the March quarter.
But there has been an improvement in net profit growth for most companies. The largest companies had a fall in net profit of 11.83% in the December quarter, but this has been transformed into a 5.26% rise in net profits.
The smaller companies saw only a small improvement at the net profit level, but companies with a turnover of between Rs500 crore and Rs1,000 crore saw a deterioration in their net profit position. For these companies, net profits, which had fallen 20.55% in the December quarter, plunged 44.42% in the March quarter.
To sum up, while sales growth has deteriorated in the March quarter sequentially, operating net profit positions have improved for most firms. That means margins have increased, a result of lower input and interest costs.
Will the improved performance mean higher stock prices? The latest numbers of fund flows indicate scope for the liquidity-driven rally to continue. Global fund flow tracker EPFR.com points out that “a pattern that started in late March, with cash coming off the sidelines and bypassing funds geared to developed markets in favour of emerging markets equity, high yield bond and some sector funds, carried into the first week of May”.
Analysts say that valuations—with the benchmark Sensex index on the Bombay Stock Exchange at around 12,000 points—are no longer as compelling as they used to be.
According to brokerage CLSA, “While we see India recovering ahead of export-led Asia, the growth momentum in domestic cyclicals in January-March 2009 partly reflects release of pent-up demand. For a meaningful upgrade to FY10 Sensex EPS (earnings per share), global cyclicals will need to recover quickly... With current valuations now near historical averages...earnings upgrades will be key for further market upside.”
While CLSA analysts say that the outlook for earnings upgrades is mixed and that global recovery holds the key to any upside, the note also points to concerns about the outcome of the general election.
Graphic by Ahmed Raza Khan / Mint
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