Base effect to bump up sales, profits in 3rd quarter

Base effect to bump up sales, profits in 3rd quarter

Mumbai: Indian companies are likely to show significant growth in revenue and net profit for the three months ended December 2009, largely because both were subdued in the same period in 2008.

That’s the consensus among brokerages, ahead of the so-called earnings season that kicks off on 12 January when Infosys Technologies Ltd declares its results for the December quarter.

Seven brokerages, whose reports were reviewed by or whose research heads spoke with Mint, said profit will grow at a double digit rate. Morgan Stanley India Co. Pvt. Ltd’s analysts expect the aggregate earnings of the 102 companies they track to grow 13%. Angel Broking Ltd estimates the aggregate profits of the 30 companies that comprise the Sensex (the Bombay Stock Exchange’s benchmark index) to grow 20% while Motilal Oswal Financial Services Ltd has projected a similar rate of growth for the aggregate profits of the 118 companies it tracks.

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A set of strong numbers may prompt earnings upgrades by analysts, albeit in specific sectors.

“We expect earnings estimates for FY11 (fiscal year 2010-11) will continue to grow further," wrote Edelweiss Securities Ltd’s Nischal Maheshwari and his team in a 31 December equity strategy report. “Even if there is no further uptick in the multiples, Indian equities will keep moving up along with such earnings upgrade."

The Sensex has risen around 80% since the start of this fiscal year in April. It’s now trading at 16.5 times the estimated earnings for fiscal 2010. which is comparable to the multiple at the end of the last bull run. The price-earnings multiple is a measure of valuation. A high multiple means the stock or index is over-valued, a low one that it is undervalued.

“The undercurrent is good and the base is highly favourable," said Mohan K.R. Swamy, head of equity research at the Royal Bank of Scotland Plc’s Indian equity division, referring to depressed numbers in the December quarter of 2008. “It (the global economic turmoil) all started last year this quarter."

The September 2008 collapse of iconic US investment bank Lehman Brothers Holding Inc. marked the beginning of a financial crisis that resulted in an economic slowdown. The consequent fall in demand saw prices of commodities such as steel and crude oil fall sharply. These low input costs helped Indian firms post sharp gains in their profits for the first six months of this fiscal year.

A Mint analysis of 1,545 listed firms showed profit growth of 44.9% for the three months ended September compared with a year ago, the highest rate of growth in three years.

“Margins are going to look good," added Swamy pointing to stable raw material costs and the base effect that could ensure higher profits.

Indeed, Morgan Stanley analysts say that the earnings growth could have been greater but for rising interest costs.

“The likelihood of rising interest and depreciation costs is tempering net profit growth to 20%," wrote Ridham Desai and Sheela Rathi of the institution’s local arm in a 5 January report.

Profits for the quarter are also likely to benefit from a growth in revenue. Unlike in the first two quarters of this fiscal year, when weak sales were a major concern, the third quarter will see a strong growth in revenue, said analysts.

Motilal Oswal expects an 18% growth in sales for its coverage universe. IDFC-SSKI Securities Ltd estimates a 23% growth in revenue for the Sensex firms, as the economy recovers and effects of the government’s fiscal stimulus package lingers.

Other economic indicators have also been signalling a revival for some time now and industrial recovery is gaining momentum.

“The Indian economy has started improving as is visible in auto and cement sales," said G. Chokkalingam, head of equity research at wealth manager Barclays Wealth India. He added that this would lead to better numbers in the December quarter.

Monthly automobile sales have been growing at an average 18% since the beginning of this fiscal. In November, the latest month for which consolidated figures are available, auto companies sold 1.21 million units, up 21% from a year ago.

The HSBC Markit Purchasing Managers’ Index, an indication of coming growth in the manufacturing sector, rose to 58.5 in December, up from 55.5 a month ago. A reading above 50 indicates expansion. And India’s factory output grew 10.3% in October, the last month for which this data is available.

Companies in the automobile, cement, power and metals sectors are expected to grow the fastest, primarily because of strong sales and favourable input costs.

Graphics by Ahmed Raza Khan/Mint

Ashwin Ramarathinam contributed to this story.