Results make for dim turnaround prospects
Investors sceptical about the prospects of a turnaround as margins get squeezed
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Mumbai: December quarter earnings at Indian companies have left investors sceptical about the prospects of a turnaround as margins get squeezed and profit growth fails to match the increase in sales. Some of the bigger firms have performed dramatically worse than expected.
About 2,800 companies listed on BSE, excluding those engaged in oil and gas, banks, non-banking financial companies and software developers, posted a 2.92% rise in net profit, while sales expanded 4.68% in the quarter ended 31 December from the year-earlier period.
The sales increase is the lowest in at least six quarters; data older than that doesn’t cover newly listed companies.
“Corporate India is going through a painful period. Supply creation has been at a standstill and interest costs have been playing spoilsport," said Nikhil Vora, managing director and head of research at IDFC Securities Ltd. “It will take them at least a couple of quarters to come out of the turmoil. A lot of action is required at the government, RBI (Reserve Bank of India) and even the private sector’s end. Cheap capital needs to be made available."
Companies are hurting as India’s economy is expected to slow to a growth pace of 5% from 6.2% last year. RBI did cut interest rates recently for the first time in nine months to bolster the economy, but the central bank is constrained by the need to keep inflation within limits. Operating and net profit margins for the companies covered in this survey in the quarter just ended came in at 15.6% and 6.5%, respectively.
To be sure, profit grew during the quarter compared with a 15.35% decline in the year before. But this has been offset by other factors such as interest costs shooting up 19.7% to ₹ 45,238.70 crore in the December quarter from the same period last year.
Companies that disappointed on the earnings front include Tata Motors Ltd, which said on Thursday that net profit dropped by half in the three months ended 31 December because of declining sales at home, the JaguarLand Rover (JLR) unit’s reduced contribution and higher depreciation costs.
Still, analysts were optimistic about its longer-term prospects as JLR, which contributes more than 70% of Tata Motors’ revenue, was investing in new models and greater capacity to meet demand.
State Bank of India, the nation’s largest lender, also disappointed on Thursday, reporting its slowest profit growth in six quarters and missing analyst expectations after setting aside money to cover a rising tide of bad loans.
While the big private lenders have beaten or met market expectations, worries about the quality of assets weighed on the performance of state-owned banks.
To be sure, there was a change in trend for some sectors. Angel Broking Ltd said in a note that tier-I information technology (IT) firms posted better-than-expected revenue growth. Volumes were soft during the quarter, which is partly attributable to lower billing days, it said. “During 3QFY2013, overall results of large cap companies were better than midcap firms as factors such as demand pressures, limited pricing power, high client concentration and limited bench sizes restricted profits of mid-tier IT companies," Angel Broking said.
“This is contrary to the trend seen in the past few quarters, when tier-II firms comprehensively outperformed their tier-I counterparts," it added. Initial signs show that IT budgets for the calendar year 2013 are expected to remain flat.
Higher subsidy support from the government helped most state-run refiners post better quarterly earnings.
Analysts said policy and corporate action along with an improvement in macroeconomic indicators are needed over the next few quarters if earnings are to bounce back.
Ravindra Sonavane and Ashwin Ramarathinam contributed to this story.
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