The fourth quarter results so far confirm India Inc’s worst fears: Low demand, with subdued margins and profitability. Though there is some relief on a sequential basis (quarter-on-quarter), largely due to 25 basis points (bps) savings on cost of raw materials, that isn’t much. Other income and partial reversal of mark-to-market losses (remarking assets to reflect current values) on account of rupee appreciation are expected to play an important role in fourth quarter profit.
The 322 companies that have declared their results, recorded sales growth of 17.9 per cent, significantly slower compared to the previous three quarters. The aggregate net profit is up marginally four per cent, thanks to strong profit numbers from the banking sector. The cost of production continues to be high on a year-on-year basis, as the growth rate of total expenditure and cost of raw materials have been 600 bps higher than that in net sales. Interest cost is up 33.6 per cent, at a much slower pace than the earlier three quarters, indicating softening of the cost of borrowing.
The 202 manufacturing (excluding information technology and banks) companies faced significant demand crunch in the fourth quarter. Their aggregate growth rate slumped to 18.3 per cent, compared to 27-32 per cent in the previous three quarters. Rise in cost of production affected the operating margin, down a little over 400 bps. The slowing in demand and margin pressure affected net profit, which declined by a little over 5.5 per cent over the level of a year before. Excluding Reliance Industries from the sample, the net profit of the rest of the sample was up three per cent over the level of a year before.
Banks and software companies are growth drivers in the fourth quarter so far, with 16 banks reporting a 27.4 per cent increase in net profit on the back of 16 per cent rise in total income (net interest income, plus other income). Operating margins of banks rose 147 bps due to the increase in value-added fee-based income and a marginal increase in provisions for contingencies. Interest costs as a percentage of interest income rose 300 bps, indicating high cost of savings deposits. Software services companies reported 25 per cent rise in software revenue and a 16 per cent rise in net profit, thanks to a strong show from Infosys and HCL Tech. (Click here for QUARTERLY PERFORMANCE)
Lack of pricing power
The review of 322 companies that declared their fourth quarter results till April 30 showed no respite in input cost pressure. The operating margins for manufacturers declined 350 bps to 11.3 per cent, as the cost of raw materials as a percentage of net sales rose 370 bps to 72.2 per cent. The cost pressure was significantly higher for Reliance Industries, which could not pass on the burden of higher crude oil prices.
Maruti Suzuki also felt pressure, as its operating margins declined 300 bps to 5.7 per cent on account of low sales volume and a sharp rupee depreciation that raised the cost of imports for the company and vendors and royalty. For Sterlite Industries, operating margin declined 600 bps as the cost of raw materials, including power, fuel and water expenditure as a percentage to net sales rose 220 bps to 54.3 per cent.
|Q4 IN FOCUS
||For 322 cos
||Mfg ex RIL
Y-o-Y growth in sales
||Y-o-Y growth in net profit
||BPS change in operating margin
|* Companies with RM/Sales ratio over 25%
The operating margins of Jindal Steel & Power crashed 1,000 bps on account of high steel inventory, increased import of sponge iron from the Oman plant, a spike in coking coal prices, coupled with sharp rupee depreciation. However, the operating margins of UltraTech Cement rose 65 bps due to rise in cement prices, decline in freight, transport, employees and consumption of raw material costs as a proportion of sales. The high cost of raw materials also impacted the operating margins of Hindustan Zinc, ACC and MRF.
Sluggish net profit growth
The profit growth for the sample of 322 companies remained sluggish, up a miniscule 4.3 per cent on account of a poor show from automobiles, auto ancillaries, cement, construction, oil & gas, metals and steel companies. Profit growth has been seen in banks, capital goods and software services. The breadth of negative earnings is clear bad news, with 45 per cent of the 322 companies studied here reporting a decline in net profit.
The oil refineries are heading for a sharp reversal in their performance as the two best private companies in this sector, Reliance Industries and Cairn, reported subdued profit this quarter. Reliance reported 21 per cent decline in net profit, mainly due to falling gas production from its KG-D6 fields. Cairn India reported 11 per cent decline in net profit, mainly due to a foreign exchange fluctuation loss of Rs 192 crore and a 100 bps increase in the share of expenses in producing oil and gas blocks.
Metals and mining
Sterlite Industries, Hindustan Zinc and Sesa Goa have reported a decline in net profit by 20 per cent each due to lower London Metal Exchange prices and a fall in iron ore sales. The performance of cement companies so far has been mixed, with UltraTech and India Cements reporting an increase in net profit on account of higher price realisation, while ACC and Ambuja Cement reported a decline in net profit due to change in the method of providing depreciation on captive power plants from Straight Line to Written Down Value.
Within software services companies, Tata Consultancy Services’ demand commentary is significantly different from Infosys’. While the latter has given a dollar revenue growth expectation of eight to 10 per cent, TCS is confident of beating Nasscom’s growth expectations of 11-14 per cent in 2012-13. While Infosys believes FY13 growth would be back-ended, TCS’ management expects the first half of FY13 to be better than the second half, like any typical year.
TCS has also indicated it had not seen cancellations or ramp downs in banking, financial services and insurance (BFSI) sectors, while Infosys said it had unexpected ramp-downs in BFSI during the fourth quarter of 2011-12. TCS’ decision to go ahead with wage rises in the first quarter of 2012-13 is in contrast to Infosys’ plan of not giving wage rises during the quarter.
The feeling is that fourth quarter results, would be similar to the first three quarters of the year. A fall in margins and single-digit growth in net profit is on the cards. The sales growth rate may slip below 20 per cent to 18-19 per cent, for the first time after several quarters of 20-plus per cent growth.