Results have been better than expected, but analysts say it may take 2-3 quarters to build confidence
Mumbai: Fiscal second-quarter revenues of 40 firms on the Nifty index grew at the fastest pace in a year but profits saw a muted rise because operating costs and a volatile rupee played spoilsport.
The 40 companies saw net sales rising by 12.5%, the fastest in four quarters, while net profit rose 2.2%, after declining in the two preceding quarters.
For 27 Sensex companies for whom comparable data was available for 25 quarters, profits grew at 6.9% in the September quarter, while net sales rose 13.8%, both at their quickest pace in seven quarters.
All 50 constituents of the Nifty index on the National Stock Exchange have announced their earnings but Mint’s analysis is based on financial results of 40 of them, excluding energy firms and those for whom comparable data was not available for the past 25 quarters. All firms that constitute the Sensex, BSE’s 30-stock benchmark equity index, are also part of Nifty.
State-owned energy firms such as Oil and Natural Gas Corp. Ltd, GAIL (India) Ltd, and Bharat Petroleum Corp. Ltd are not included as they share a subsidy burden on account of the revenue loss for government-owned oil marketing firms from selling fuel below cost. For the sake of uniformity, Reliance Industries Ltd was also excluded.
All earnings are taken on a standalone basis and do not include so-called other income, or income that’s not earned from core activities.
“The quarterly numbers have surprised on the positive and the earnings season has been moderately ahead of street expectations in light of the beaten-down expectations," said Vaibhav Sanghavi, director of Ambit Investment Advisors Pvt. Ltd, a financial services firm. “Given the current environment, managements of companies seem to have pulled up their socks and have gone an extra mile, which has led to the increase in sales." Business in rural areas have done better than in the cities, Sanghavi said.
Also, the fall in the value of the rupee translated into higher realizations for export-driven sectors such as information technology and pharmaceutical companies. The local currency depreciated 5.15% against the dollar in the September quarter.
Export-focused software companies benefited the most from the sharp decline, which boosted their revenues. Top software services provider Tata Consultancy Services Ltd beat analysts’ estimates with a 35% rise in fiscal second-quarter profit from a year earlier, aided by the rupee’s sharp depreciation against the dollar and robust volume growth. Rival Infosys Ltd posted a better-than-expected 3.8% growth in dollar revenue from the last quarter, signalling greater confidence after it signed five new contracts.
But a cheaper rupee has not uniformly helped all sectors. “Although industrial metal prices softened, rupee depreciation has dampened the positive impact from that," said Ambareesh Baliga, managing partner, Edelweiss Global Wealth, the wealth management arm of Edelweiss Financial Services Ltd. “Energy costs have been moving up, inflating total expenses."
Domestic companies may have got some boost from government spending, which was up 16.5% in the first half of the current fiscal year after rising 4% in March quarter of 2012-13, said Dhananjay Sinha, head of research and strategist at Emkay Global Financial Services Ltd.
Employee expenditure as a percentage of net sales for the 40 Nifty companies stood at 15.36%, the highest in the past 25 quarters, while raw material expenses as a percentage of net sales stood at 25.37%, the highest in three quarters.
Operating profit margin narrowed to 28.37% in the three months ended 30 September from 29.74% in June quarter due to higher input costs.
Although sales were growing, they were still not growing at the pace that would enable companies to exhibit pricing power, as overall demand remained tepid, according to Phani Sekhar, fund manager of portfolio management services at Angel Broking Pvt. Ltd. “If revenue does not grow at an adequate pace and companies are not utilizing their capacities at optimal levels, then fixed costs will remain high," Sekhar said.
Among sectors, banks have put up a weak show as rising bad loans forced many of them to set aside hefty amounts and that dented their profits. State Bank of India’s quarterly profit fell 35% after the nation’s largest lender set aside more money to cover bad loans amid forecasts that Asia’s third-largest economy will grow at its weakest pace in a decade.
“Public sector banks’ results are slightly better than what we had expected in terms of asset quality, but again the question is: has the provisioning been deferred?" asked Baliga of Edelweiss Global Wealth, adding that he would wait for the rest of the fiscal year to see the total provisioning made by the banks.
Reliance Communications Ltd, India’s fourth-largest telecom firm, smashed estimates with quarterly net profit more than doubling before a one-time gain. Sector leader Bharti Airtel Ltd’s net profit declined to ₹ 512 crore in the quarter from ₹ 721 crore in the year-ago period, but revenue rose 9.9% to ₹ 21,324 crore, boosted by a doubling of mobile data revenue, accounting for almost 40% of overall incremental revenue.
While there has been a rise in revenues for companies at large, analysts said it was too early to jump to a conclusion that the worst was behind us.
“The MSCI Earnings Revision Indicator has been trending up over the last few months, but remains in negative territory, implying downgrades outnumber upgrades even now," Religare Capital Markets Ltd said in a note on 8 November. “We expect this trend to continue, led by muted demand."
“High cost of funds and weak rupee are likely to weigh on margins, offsetting commodity gains. Overall, we expect muted top-down Sensex earnings growth of 5-7% in FY14," Religare analysts Tirthankar Patnaik, Prerna Singhvi and Saloni Agarwal said in the note.
While sales have been encouraging for the quarter that went by, it could take two-three more quarters to reach a confident situation, according to Sanghavi of Ambit.
“It is too early to say that there are green shoots. If earnings and sales continue to show improvement into the March quarter, then we might have some evidence to believe a turnaround is round the corner," said Baliga of Edelweiss. “There has been consumption slowdown in tier-I cities, but it remains to be seen whether that gets compensated by election expenditure and good crop in tier-II or tier-III cities in the next quarter."