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Business News/ Companies / Sluggish sales, higher costs may hurt earnings
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Sluggish sales, higher costs may hurt earnings

Sluggish sales, higher costs may hurt earnings

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Mumbai: Brokerages expect Indian companies to report a decline in earnings in the quarter ended 30 June as sluggish sales growth and higher input costs crimp margins.

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“High inflation and slowing GDP (gross domestic product) growth are expected to continue hampering the earnings growth for the Sensex and our coverage companies. Normalized earnings growth for the Sensex is expected at 9.4% and that for our coverage companies is expected at 10.7% (this is excluding the oil and gas sector, State Bank of India and Tata Motors Ltd to eliminate distortions)," Angel Broking Ltd said in a report.

In the June 2011 quarter, aggregate net profit of companies on the Sensex, India’s benchmark equities index, rose by 13%.

Motilal Oswal Securities Ltd expects the earnings of the Sensex companies to grow 9% from a year earlier with technology and financial sectors putting up a strong show. The brokerage’s top picks among Sensex companies include State Bank of India, Infosys Ltd, Tata Consultancy Services Ltd, Dr. Reddy’s laboratories Ltd and HDFC Bank Ltd.

ICICI Securities Ltd expects information technology (IT) and pharmaceutical companies to report strong earnings boosted by a weaker rupee.

“Rupee depreciation (7.5% quarter-on-quarter, q-o-q, and 20.8% year-on-year, y-o-y) has acted as a strong tailwind in supporting growth for oil and gas, IT and pharma," the brokerage said in a report.

The trend is expected to be the same in the wider 50-share benchmark Nifty index of National Stock Exchange of India Ltd.

“Revenue growth of the Nifty companies is expected to fall to a two-and-a-half-year low of just 12.2% y-o-y, from its previous low of around 10.5% in Q3FY10 (third quarter of fiscal 2010)," Prabhudas Lilladher Pvt. Ltd said in its quarterly earnings preview.

For June 2011 quarter, the aggregate earnings of the Nifty companies grew by 8.58%.

“Revenue, excluding companies in the oil and gas sector, is expected to rise at 15.3% y-o-y, a nine-quarter low (the previous low was in Q4FY10 at 8.8% (y-o-y)," it said.

Even as the lacklustre performance is likely to continue in the quarter ended June, market experts are hopeful that the government will now pursue policy reforms, thereby reviving optimism among investors.

Prabhudas Lilladher, in its report, said, “Hope has been rekindled with the original reformist triumvirate of early 1990’s comprising Manmohan Singh, Montek Singh Ahluwalia and C. Rangarajan assuming charge of reversing the negative sentiment that had seen many foreign investors turning negative on India growth story."

Motilal Oswal also shares this view. In its report, the brokerage said it expects technology and financials to dominate in a muted quarter, while it expects lower oil prices to ease macroeconomic concerns and the political realignment to boost confidence.

Meanwhile, some say the end of a earnings downgrade cycle of Indian companies may be in sight.

“In the last few quarters, we have been witnessing pressure on margins with reasonable revenue growth and this trend should continue. Overall, the earnings downgrade cycle seems to have stabilized," said Sivasubramanian K.N., chief investment officer, Franklin Equity (India), Franklin Templeton Investments.

“India also continues to score well vis-à-vis emerging market peers and rest of the world in terms of return on equity and lower earnings cyclicality. Given the low leverage and cash reserves, a conducive policy environment should lead to increased capex and lay the foundation for a higher growth trajectory in the coming years," he said.

Commodity sectors such as metals, mining and oil and gas as well as cyclical and rate-sensitive sectors such as infrastructure, capital goods and mid-sized state-run banks are expected to bear the brunt of weak earnings, according to Angel Broking.

The brokerage expects defensive sectors such as consumer goods, technology, pharmaceuticals and high-quality companies in some of the cyclical sectors (such as private banks) to continue playing an anchoring role for corporate earnings.

However, Citigroup Inc. has a different view on performance of Indian companies for the current fiscal and the next.

“India’s earnings growth— which was showing signs of reviving—is once again slackening. The improving downgrade-upgrade ratio has slipped, and forward looking EPS (earnings per share) has slipped marginally," it said in Citi Asian Daily. “That said, we still expect 11% and 14% growth in FY13 and FY14, respectively."

vyas.m@livemint.com

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Published: 08 Jul 2012, 10:42 PM IST
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