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Sales slowdown, subdued margins may hit profit growth

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Sensex companies are expected to report a better-than-expected growth in net sales — albeit at a slower pace than in the first three quarters. A significant drop in operating margins could impact net profit growth rate in the quarter ended March.

The fourth-quarter results, though expected to be subdued, may be the last leg of poor show. Analyst at observe slowing negative earnings revisions and the pace of increase in capital costs, notably interest costs, and improvement in margins through pricing power.

The preview provided by six brokerages hint at a net sales growth rate of 17 per cent — lower than the more than 20 per cent in the second and third quarters and way below the 26 per cent recorded in the first.

UNDER PRESSURE
Quarterly growth rate of Sensex companies (in %)
  Quarter ended
Jun-11 Sep-11 Dec-11 Mar 2012 E
Sales 26.81 24.85 25.62 17.31
Net profit 21.82 8.94 4.67 10.67
E-estimate; based on six brokerages

Operating margins (excluding banks and finance) are expected to decline 200 basis points, mostly due to an expected weaker performance from Reliance Industries and metal companies. However, on a sequential basis, margin compression, which has affected profitability in the last few quarters, is expected to moderate by around 25 bps.

Net profit growth is expected to be 10-11 per cent, mostly driven by State Bank of India (), which is expected to report strong fourth quarter results, followed by and FMCG, IT and pharmaceutical companies. Excluding SBI, the profit growth rate is expected to be dismal, at around three per cent.

Edelweiss Research expects yet another weak quarter, with a 6.4 per cent net profit growth for Sensex companies, while their sales growth is also expected to slow down to 16 per cent.

Core defensive sectors, pharma and consumer goods are expected to post good sets of results yet again.

The net sales growth of Sensex companies is likely to be dominated by auto and oil & gas sectors, accounting for a combined share of 57 per cent. Banks and finance companies in the Sensex are expected to do well, with revenue growth of 24 per cent and over 100 per cent growth in net profit. Apart from SBI, HDFC Bank and ICICI Bank will also add to the profit growth.

Three IT companies in the Sensex are expected to report strong 26 per cent sales growth, due to a modest volume growth on account of fresh budgets from clients and a year-on-year rupee depreciation. The net profit growth rate is likely to be around 19 per cent because of an expected poor show by Wipro.

Sensex pharmaceutical companies are expected to buck the trend of margin compression, with a strong 940-bp expansion, partly aided by the depreciation of the rupee. Oil & gas stocks are expected to contribute a sizeable growth in net sales, while operating margins are expected to decline rather steeply, by 360 bps.

Automobile companies are also expected to put up a strong show, mainly on account of a healthy volume growth, price increases and favourable currency impact, primarily on the JLR front, say Angel Broking analysts. Operating margins are expected to remain stable on account of an easing seen in raw material prices.

From the capital goods pack, BHEL is expected to witness 17 per cent sales growth and 13 per cent rise in net profit. Larsen & Toubro may see a strong growth in net profit, but a modest one in profit.

Bharti Airtel is expected to witness a strong sales growth, mainly backed by a strong growth in Africa. Net profit, however, is expected to decline due to higher amortisation expenses on account of 3G services rollout, as well as the impact of rupee depreciation on interest costs of foreign borrowings.

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