Rising costs to hurt mid-cap firms’ Q2 profit

Rising costs to hurt mid-cap firms’ Q2 profit


New Delhi: Profit growth at mid-cap Indian firms in the September quarter is likely to be pressured by risings costs, but sectors such as auto-parts and construction could see robust growth, according to a Reuters poll.

According to a Reuters poll of 23 brokerages, profit growth in mid-cap firms in July-September will be led by auto-parts makers and consumer goods, while cement and sugar makers will be laggards, and may even post losses.

“The macro economic environment continues to be in fine shape, except for inflation that is a little stubborn at this time. I think domestically things are in very fine shape," Manish Sonthalia, a portfolio manager at Motilal Oswal, told Reuters.

Strong volume growth and pick-up in exports will drive earnings at autoparts firms while rising demand will boost earnings at consumer goods makers, analysts said.

“I think commodities and real estate are going to outperform in the next three months or so...My sense is that the construction sector will do relatively much better in the second half than what we have seen so far," Sonthalia said.

Of the 88 companies polled by Reuters, 42 are likely to show double-digit growth while as many as seven companies may even post multi-fold profit growth.

However, as prospects of soaring input costs soared, these firms could see profitability being hurt.

Profit at mid-cap Indian firms has been driven by high inflation in the past couple of quarters, as the economy leaves the global financial meltdown behind. “Most mid-cap firms are facing rising raw material and overheads cost which has put pressure on their margin," said Ambareesh Baliga, vice-president at Karvy Stock Broking.

Not so upbeat

Among the 88 companies polled by Reuters, as many as 27 will likely report a fall in net profit in the September quarter led by auto-parts makers, while seven could post losses.

Some sugar makers may disappoint on profits, as higher prices hurt production costs, and crashing sugar prices squeezed margins. Cement numbers are also likely to be disappointing.

“We believe the cement earnings this quarter would be extremely weak, and over supply will remain an overhang," Macquarie said in a pre-earnings note.

Realisations have remained muted during the quarter and sales volume also remained low for the cement makers, analysts said.

Banks are set to report mixed results this quarter, as profit growth may not match up to some of the other sectors. In fact, some analysts predict lower profit at some banks.

In the quarter-ended September, the CNX midcap index has risen 13% in line with the benchmark 30-share BSE index.

“Mid-cap companies need to come out with results that would far exceed expectations for the shares to show any upside. Markets have already priced in all optimism," Karvy’s Baliga said.