The aggregate earnings of Sensex
companies are expected to grow about 10 per cent in the September quarter, compared with the same quarter a year ago, on a revenue growth of around 15 per cent. After six straight quarters of decline in growth rates, this is likely to be the first quarter of improvement in top line growth. Profit growth, too, is expected to be the highest in the last three quarters.
Though that should come as relief, the Street does not look impressed and there are many reasons. If the performance of companies with dollar earnings is excluded, profits could actually decline; or, if a select few are excluded, the growth rates would fall significantly.
“All the profit growth is being led by two international subsidiaries (Tata Steel Europe & JLR). Excluding these, net profit growth for the Sensex companies is a mere 2.1 per cent. Eight of the 30 companies still show a decline in profits,” say Jyotivardhan Jaipuria and Anand Kumar of Bank of America Merrill Lynch (BofA-ML) in a recent India Strategy note. That’s also the reason why Religare expects downgrades to continue.
The overall picture, definitely, is not rosy. And, that is in spite of the underlying message from most research houses in their second-quarter previews that there’s a positive side to a strong dollar and signs of economic revival could be seen in the developed economies, especially the US. Motilal Oswal Securities’ estimates suggest, of the Sensex companies, only eight might report profit growth rates of more than 15 per cent, those for two could be in the 12-14 per cent range, another eight might report 5-7 per cent profit growth , while 12 could see contraction in their profits.
Growth in the domestic business remains a key concern. Most research houses believe metal companies could be better off, as a weak rupee would boost volumes with imports becoming dearer, while domestic industries like capital goods, construction and power could remain under pressure and see a drop in revenues and earnings.
Also, analysts fear that a large part of revenue growth will not entirely get translated into profits growth. “Net profit growth has been scraping the bottom, since companies deal with forex MTM
(mark-to-market) losses, as well as rising interest costs,” says Rakesh Arora, head of research, Macquarie Capital Securities. A large number of companies with foreign debt could get hit because of MTM losses on account of volatility in the dollar-rupee exchange rate. Additionally, domestic interest rates have stayed high.
Companies that have large domestic debt and have seen an increase in borrowings will feel the pinch. And, that would impact their profitability.
On the positive side, a stronger dollar (or a weak rupee) will help drive top line and earnings of many Sensex 30 companies in the September quarter. Those catering to the US and other global markets, such as those from the IT
and pharmaceutical sectors, would continue to do well, contributing to Sensex firms’ revenue and profit growth.
Nischal Maheshwari, co-head (institutional equities) & head of research, Edelweiss Securities, says: “A weak rupee is expected to provide a stimulus to companies’ top lines. Sensex companies’ revenue growth estimate of 12.4 per cent year-on-year in the quarter (2.7 per cent in the previous quarter) is encouraging. This is the first quarter of improvement in top line growth after six quarters of declining growth.”
“This optimism for the second quarter comes mainly from the rupee’s depreciation. A large number of companies in the IT and pharma
space, besides many other individual companies like Tata Steel and Tata Motors that have significant foreign operations, will see good performance,” says Rajat Rajgarhia, director of research at Motilal Oswal Securities.
Maheshwari says, the top line growth of Sensex companies is expected to be driven by Sun Pharma (48 per cent), and TCS and Infosys (more than 30 per cent). For their coverage universe (excluding oil-marketing companies), Edelweiss estimates revenues to rise 11.8 per cent on a year-on-year basis (4.6 per cent in the first quarter).
Among other companies that might continue to report healthy profit increase and support the earnings growth of the Sensex firms are HDFC Bank, ITC and TCS. Power-generation utility NTPC and coal miner Coal India are also seen reporting a good rate of rise in profits in the September quarter. While Maruti’s strong rise in profits is partly due to a low base of last year, Sesa Sterlite’s figures are not strictly comparable due to the merger of Sterlite with Sesa.
Is an earnings recovery in sight?
Analysts believe the September quarter could be an exceptional one on account of the gains due to the rupee’s fall, but they are divided on future prospects.
“I would say the third and fourth quarters will be a little better than the second one. But for calling that a recovery, we need to see some signs of recovery in domestic businesses,” says Rajgarhia. Part of the positive impact of the rupee’s depreciation and exports could spill over to the next two quarters and help post better growth in the coming months as well. “Besides the export sector doing well, we should also see some gains coming from a pick-up in the domestic economy and government spending. So, on an overall basis, we should see good results in the second half of the current financial year,” says Saurabh Mukherjea, head of equities, Ambit Capital .
But others are not so optimistic and believe the way ahead might not be encouraging. BoA-ML’s Jaipuria and Kumar say: “Since the beginning of the year, our bottom-up 2013-14 Sensex EPS (earnings per share) have got downgraded by about five per cent to Rs 1,320. We continue to expect further downgrades to Rs 1,260.”
Maheshwari says “in the light of a subdued domestic demand, in conjunction with monetary tightening and possible cuts in fiscal expenditure, going forward, the current 2013-14 EPS forecast
(consensus Rs 1,340; Edelweiss’ Rs 1,355) of 8-10 per cent growth looks optimistic.”