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Revenue growth is going back to normal

With the favourable rupee base effect over, aggregate net sales growth is at mid-single digit levels

The second quarter results season is drawing to a close. And with the favourable rupee base effect over, revenue growth has started to normalize. Overall, aggregate revenue and earnings growth have benefited appreciably over the past year on the back of significant rupee depreciation starting May 2013. As a result, revenue growth of ‘external-facing’ sectors were instrumental in salvaging aggregate sales growth, which had ground down to single-digits by June 2013 from the highs of 25% year-on-year (y-o-y) growth during the middle of 2011, in the backdrop of the wider economic slowdown. The sectors that helped include exporting sectors such as information technology (IT) services and pharmaceuticals, beneficiaries of favourable import parity pricing such as metals and mining stocks, and large sector-heavy stocks.

With the favourable rupee base effect now over, aggregate net sales growth is back to its pre-depreciation mid-single digit levels. However, while this may sound grim in itself, there are three things to note. First, even as revenue growth has been weak, operating margins have seen a respectable recovery and have held, on the back of easing input costs and other cost efficiencies. “Indeed, operating margins in this quarter were higher for 10 of 14 BSE100 index sectors compared to a year ago," stated the Nomura Global Markets Research report.

Second, as a result of margin expansion, y-o-y earnings before interest, depreciation, tax and amortization (Ebidta) and profit after tax (PAT) growth in the September 2014 quarter were above their rates over a year ago, even though net sales growth was not.

Third, consensus sales growth forecasts for S&P BSE Sensex are quite conservative at present at 9.5% compounded annual growth rate (CAGR) for FY14-FY17, and distributed uniformly over these years. As a reference point, this compares to 30% y-o-y sales growth during FY03-FY08.

Of the 95 stocks in Nomura’s coverage, net sales (excluding oil and gas, public sector undertakings and financials) were up 4.7% y-o-y; Ebidta was up 6.3% and net profit by 5.1%. Ebidta margins were up 27 basis points (bps) y-o-y. One basis point is one-hundredth of a percentage point. The financial sector’s profits were up 16.7%.

The sectors that contributed the most to the BSE 100 index’s net sales growth during the quarter were automobiles, IT services and fast-moving consumer goods (FMCG). Top contributions to Ebidta growth were IT services, automobiles, metals, telecom and pharmaceuticals; top PAT growth contributors were financials, IT services and pharmaceuticals.

“In terms of strategy, we maintain our positive stance on the market and reiterate our preference for rate cyclicals," said the report. The market’s 12-month forward earnings multiple, currently at 15.7 times, is trading at a 5-6% premium to its five-year and three-year averages respectively, which is not expensive at these levels.

Edited excerpts from Nomura Global Markets Research’s report: 2QFY15 (September-quarter) review.

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