In Line With Expectations | Value Research The Q3 results came out as expected, with higher interest rates & rising input costs having no major impact…

In Line With Expectations

The Q3 results came out as expected, with higher interest rates & rising input costs having no major impact…

Higher interest rates and rising input costs have not yet had a big impact on corporate performance. But this could change in the next quarter.

The December quarter results of Indian Inc. are almost out. By and large, these results were in line with analysts’ expectations. Earnings have registered strong growth on account of increased sales. Margins too have remained strong during the quarter despite rising input costs as companies have been able to pass on part of the price rise to customers or have delayed the impact through hedging. During the quarter, interest costs have been marginally higher compared to the previous quarter. All this is likely to result in margins getting squeezed in the ensuing quarters.

Sensex: Twenty-four of the 30 companies belonging to the Sensex had declared their results till February 9, 2011. On an aggregate basis, these companies have registered a net sales growth of 16.8 per cent year-on-year (y-o-y) and 6.2 per cent quarter-on-quarter (q-o-q). Profit after tax, too, rose significantly at 28.2 per cent y-o-y and 11.1 per cent q-o-q. The major contributors to Sensex earnings were Bajaj Auto, Bharat Heavy Electricals and Jindal Steel & Power whose profit after tax grew 40.4 per cent, 30.8 per cent and 54.1 per cent y-o-y respectively.
This set of companies registered a growth in its operating profit margin (OPM) and net profit margin (NPM), albeit marginal. OPM grew by 0.97 percentage points while NPM grew 0.70 percentage points in Q3FY11 compared to Q2FY11.

Automobiles: The companies belonging to the BSE Auto Index posted a net sales growth of 29.08 per cent y-o-y and 3.28 per cent q-o-q. Their profit after tax grew at 9.94 per cent y-o-y but dipped sharply by 11.87 per cent q-o-q. Similarly, their operating profits (excluding other income) declined 10.6 per cent q-o-q. “Base metals account for 65 per cent of the raw-material costs of the auto industry. Rapid price increases herein have affected the operating profits of the industry. With the developed economies recovering gradually, we expect steel and aluminium prices to remain firm,” says Madhumita Ghosh, vice president-PMS and research, Unicon Financial Intermediaries. OPM and NPM of the companies belonging to the BSE Auto Index dropped sequentially 2.29 percentage points and 1.62 percentage points respectively. Volume growth of the auto industry is expected to slow down on account of increasing input costs, inflation, fuel prices and interest rates.

FMCG: Companies belonging to the BSE FMCG Index have garnered a decent net sales growth of 14.63 per cent y-o-y and 7.87 per cent q-o-q. Similarly, their profit after tax grew 9.42 per cent y-o-y and 8.34 per cent q-o-q.
FMCG companies posted decent results in Q3FY11 on account of growth in volumes across product categories. On the expenditure front, their raw-materials costs as a percentage of net sales inched up 175 bps but their employee costs as a percentage of net sales declined marginally by 12 bps in this quarter compared to the corresponding quarter last year. This in turn took a toll on the margins wherein both OPM and NPM fell 158 bps and 85 bps respectively during the period. Ghosh explains that increasing competition among players also resulted in most FMCG companies incurring higher advertising and promotion expenses. Companies in this space have either already hiked prices during the quarter or are planning to do so in order to protect their margins.

Banks: During the last five quarters (Q3FY10-Q3FY11), net interest income of the companies belonging to the BSE Bankex has been growing continuously. This quarter it registered a significant growth of 37.8 per cent y-o-y. Their profit after tax grew 23.1 per cent y-o-y. “Higher credit growth, especially in the SME and retail segments, and improvement in investment portfolio of some banks have added to banks’ revenues. Expansion of branches has helped banks improve their CASA (current account savings account) ratio, which reduced the impact of tighter monetary policy and protected banks’ net interest margins. We believe that with hardening of interest rates, banks will pass on costs to borrowers. However, much depends on the deposit growth in the system which has been lacklustre in the last few months,” says Ghosh.

Information technology: Companies belonging to the BSE IT Index have posted a y-o-y growth of 20.26 per cent in net sales and 15.34 per cent in profit after tax. Sequentially the margins of the sector too showed some signs of improvement with OPM and NPM inching up 1.10 percentage points and 1.60 percentage points respectively. However, their employee costs as a percentage of net sales grew 47 bps during the period. “For IT sector the quarter suggested improved demand, and signs of pick up in discretionary spending. Pricing outlook is positive for the sector. This will help offset wage inflation,” says Ostwal.
As for the future, Ostwal says: “Currency appreciation is the only risk this sector may face. The US recovery remains a positive trigger for the coming quarters.”

Metals: Companies belonging to the BSE Metals Index posted a decent y-o-y growth in profit after tax and net sales. However, the rise in raw-material costs as a percentage of net sales (2.27 percentage points) during the period squeezed margins. Operating profit margin dropped 228 bps while net profit margin declined marginally by 47 bps on a y-o-y basis. “Steel prices have been on an uptrend owing to rising input costs. Recent disruption in supply of coking coal and iron ore due to floods in Australia have been partly responsible for rising prices,” says Ghosh. She further adds: “Over the next couple of months we expect steel prices to remain firm on account of high-cost inventory. However, we believe that iron ore prices will come under pressure in future on account of high levels of inventory.”
Analysts opine that rising inflation rate and raising of interest rates by RBI will hurt India Inc.’s profitability over the next couple of quarters.

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