The recently concluded June 2009 quarter results have brought some cheer to the markets and were ahead of expectations on a few counts. As against the estimated decline of 7-15 per cent in earnings for the BSE Sensex companies, its aggregate reported profit after tax (PAT) was down 4.2 per cent.

Even at a broader level, the earnings have surprised the markets. “The June 2009 quarter earnings season was a positive surprise, with aggregate earnings growth of two per cent after two consecutive quarters of year-on-year (y-o-y) decline. That is significantly better than our expectation of an 8.5 per cent decline,” say Nemkumar and Ashutosh Datar, analysts, India Infoline in a recent report, referring to the universe of companies tracked by the brokerage.

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Sensex earnings
For the June 2009 quarter, only nine of the 30 Sensex companies reported a decline in their adjusted profit after tax (PAT). Of these, four belong to the realty and metals sectors, which faced a decline in prices and weak demand whereas two companies from the hydrocarbon sector were impacted consequent to the decline in crude oil prices. The impact of lower realisations however, was higher on topline growth, which pulled down aggregate revenues by 20 per cent. Notably, cost efficiency measures and lower input costs helped companies improve margins.

Of the 26 companies from the manufacturing and services segment, 22 reported an improvement in profitability. Their aggregate OPMs (excluding BFSI) jumped 310 basis points (bps) to 26.9 per cent. The four BFSI companies reported strong profit growth helped by treasury gains and write-backs.

At the net profit level, the aggregate figures were influenced by extra-ordinary items for companies such as Larsen & Toubro, Mahindra & Mahindra and Sun Pharmaceutical.

The broader trend
The overall picture is not very different. The aggregate numbers of manufacturing and services space indicates a sharp improvement in operating margins. While the topline contracted by almost 12 per cent, mainly due to lower realisations in sectors like metals, realty and oil and gas, companies benefited from lower input costs. Additionally, “companies have contained their costs significantly. Forex losses too have been reversed because of a stronger rupee,” says Amitabh Chakraborty, President – Equity, Religare Securities. Put together, this helped India Inc post a whopping 220 bps rise in combined OPMs.

Although extra-ordinary items, which were up 56 per cent to Rs 3,273 crore, helped in sustain net profit at last year’s levels, even after adjusting for the same the profit was down just 1.1 per cent. But, if one adds the profits of the BFSI space, the aggregate net profit was up 7.7 per cent for the quarter. On the other hand, if the numbers of the oil & gas sector is excluded from aggregate numbers (but BFSI is included), the net profit is up 3.5 per cent.

The trend however, shows that the bigger companies are the main contributors to margin expansion and profit growth. Of the 320 mid- and large- companies (with market value of over Rs 1,000 crore), which account for 80 per cent of the total market value of BSE listed companies, over 200 companies reported an improvement in OPMs. Even as their combined revenues fell 13.7 per cent and profits got some boost from other income, they reported a growth in combined adjusted net profits on the back of a visible improvement in core profit margins.

While the broader trend is positive, the sectoral performance is also interesting.

Auto
Barring M&HCVs, healthy volume growth in car and two-wheelers helped companies post a 25 per cent growth in core revenues while adjusted net profits were up 68 per cent. The cut in excise duty, improved availability of finance and lower interest rates helped. Two-wheeler companies did exceedingly well with strong margin expansion; Hero Honda’s net profit jumped 83 per cent to Rs 500 crore and Bajaj Auto’s by 77 per cent to Rs 310 crore. 
 

Notably, companies maintained a tight control over costs which coupled with them retaining the benefits of lower commodity prices helped perk up margins. Barring Ashok Leyland, all companies reported a rise in margins, which were clearly ahead of expectations. For Tata Motors, its reported PAT is higher due to extra-ordinary items. Nonetheless, its adjusted net profit though lower surprised the Street. Going ahead, analysts expect volume growth to remain strong helped by lower base, while margins may dip slightly due to likely uptick in input costs.

Banking & Financial Services
The slowdown in capex by India Inc as well as retail loans took a toll in the form of lower credit growth, which in turn reflected in muted growth in net interest income (NII) and fee income. The impact was more visible on private banks (like ICICI Bank) as government banks (PSBs) were relatively aggressive in disbursing loans. However, NIMs for the latter came under pressure as most of them offered generous rates in second half of 2008-09 while cutting lending rates by 50-100 bps, say analysts. This led to a rush for deposits lowering the share of CASA deposits for PSBs, and thus the resultant contraction in margins (highest decline was for SBI) say analysts at India Infoline. However, many banks which reported a sharp rise in treasury profits reversed mark-to-market provisions, which supported profit growth. Notably, pressure on asset quality continued and most banks saw a rise in value of restructured assets, which as a proportion to total assets was at over 5 per cent. Hopefully, with an improvement in economic outlook, pressure on asset quality should ease, while repricing of high-cost deposits in 2009 should boost NIMs from December 2009 quarter.

Capital goods
Compressed by lower realisations and growth in order book, companies managed to grow their turnover. Companies such as BHEL, Alstom Projects and Areva T&D, which service the power sector, did well due to continuous capex in the sector. Growth was lower in the case of companies like Thermax, L&T, Praj Industries and ABB, which derive some revenues from the industrial segment which is yet to see revival in new orders. Except Suzlon, which disappointed as its standalone revenues fell and margins declined, operating margins were stable aided by lower input costs. Also, excluding the Rs 250 crore net loss (Rs 450 crore at consolidated level) incurred by Suzlon during the quarter, the sector has shown better adjusted net profit growth helped by improved margins. BEML turned around and reported a net profit of Rs 5.3 crore against an Rs 17.43 crore loss in the June 2008 quarter.

Cement
The second best growth rates in the current sample was posted by cement companies. The triple benefits of robust volume growth (up 12 per cent), higher realisations (up 10-20 per cent) and lower coal prices were key reasons for this performance, say analysts. Ambuja Cement’s profitability was lower as it had to purchase clinker due to plant shutdown, says Enam Securities in a report, adding that margin expansion for companies focused on the North and East surprised positively due to higher realisations. India Cements though surprised negatively as margins shrunk, while Ultratech, Shree Cement and ACC reported a sharp jump in margins. Both, Edelweiss and Enam, believe that the June quarter would likely be a peak for margins. To a large extent, the expected supply (35 million tonnes over 12 months) from second half of 2009-10 should lead to softening of cement prices and thus, impact margins.

Construction
Despite hiccups during the election period, companies recorded a strong 26.3 per cent growth in revenues helped by a strong order book. Among outperformers, JP Associates and IRB Infra reported about 80 per cent sales growth led by higher revenues booked from construction of roads. Again, most companies reported an improvement in OPMs due to lower input costs, and favourable revenue mix in companies like HCC. So far so good, the sector reported an 87 per cent increase in interest cost due to higher working capital requirements and borrowing cost. In the case of IVRCL Infra and Punj Lloyd, interest costs almost doubled leading to a decline in their net profits. Other income helped offset the interest cost rise which along with lower tax outgo boosted aggregate profit growth for the sector.

FMCG
Even as the topline growth of 11.6 per cent y-o-y appears subdued, which is largely due to absence of price hikes, companies posted healthy volume growth. Lower input prices helped improve OPMs, wherein Marico and Godrej Consumer reported the biggest gains. Even ITC, Nestle and HUL saw a visible rise in margins. 
 

IT
Despite weak global cues, IT companies posted better operating performance on a y-o-y basis led by higher share of offshoring revenues (TCS) and fixed-price contract. Along with a tight control over expenses as well as employee hiring, 12 of the 14 companies (in the current sample) posted a y-o-y improvement in margins. Although the sequential performance hasn’t seen any major recovery as revenue growth is either flat or marginally down, it was ahead of expectations. Notably, pricing pressures are receding and demand-related worries regarding the global BFSI space is easing. With volumes seen stabilising and companies continuing their focus on productivity improvement, margins should hold at current levels.
 

Metals
Inspite of higher volume growth, steel producers reported a decline in revenue and OPMs due to lower realisations. Thus, net profits of Tata Steel, JSW Steel and SAIL declined. In case of JSW Steel, the impact was lower due to the Rs 240 crore forex gains. Jindal Steel & Power reported a 122.8 per cent growth in consolidated net profit as a result of robust contribution from its power business. In non-ferrous metals, lower volumes and realisations led to a decline in sales. Sterlite, Nalco and Hindustan Zinc reported significant erosion in operating margins due to lower aluminium and zinc prices at LME.

Oil & Gas
While the sharp decline in crude oil and petrochemicals prices impacted revenue growth, the trend in margins was mixed. While ONGC gained on account of lower subsidy sharing on auto fuels, the oil marketing companies (IOC, HPCL and BPCL) reported better refining margins and inventory gains. Hence, even as they bore the subsidies on kerosene and LPG, the three companies reported a sharp turnaround at the operating level – they reported a combined profit of Rs 7,092 crore as compared to Rs 54 crore in June 2008 quarter. Excluding these three companies, the sector would have reported a y-o-y decline of 22 per cent in combined profits. For RIL, while lower GRMs impacted, petrochemical margins were a surprise and restricted the drop in net profit.

Pharma
The sector’s performance was muted with many companies reporting numbers below expectation. While Sun and Ranbaxy’s performance was impacted due to the US FDA issues, margins for half the 20 companies (especially bigger ones) in the current sample declined, leading to a margin contraction for the sector. However, Cipla surprised positively on the margin front, while Lupin and Biocon deliver strong performance. Overall, the sector posted lackluster performance with single-digit topline and bottomline growth.

Power utilities
Revenues grew by 16 per cent boosted by the strong 25.8 per cent growth reported by NTPC. Higher revenues were helped by higher tariff due to new CERC norms on account of the increased RoE on power sales. Improvement was also seen in the operating margins due to lower fuel cost. Overall, better returns and higher margins helped companies post healthy growth in net profit. NTPC, Power Grid, Reliance Power and Torrent Power reported strong profit growth. Despite almost flat revenues, Tata Power reported a 98 per cent rise in net profit due to the claim of prior period expenses. Adjusting for the same, its profits were lower by 24 per cent.

Realty
After a long lull, there was some action seen in the realty space. Although activity levels were lower and so were prices as compared to previous year, which is visible in the sharp fall in revenues and profits of realty companies, a few companies have seen a trend reversal. For instance, as per an IIFL report, Unitech and Jaypee sold 4,200 and 3,800 residential units in June 2009 quarter, which is far higher than 1,800 and 2,800 units, respectively sold by them in the entire 2008-09. On the other hand, DLF and HDIL sold half the units they sold in 2008-09 (12 months). Notably, realty prices are seen bottoming out, which along with the funds raised recently by many companies (about $3 billion) should provide some cushion in the near-term.

While the performance of India Inc still continues to be somewhat mixed, the trend suggests that a larger number of sectors and companies (especially the big ones) have been successful in reporting higher profit margins on the back of cost cutting and lower input costs. Analysts believe that the worst is over and things should look better if demand picks up in line with expectations from the second half of 2009-10. In fact, earnings upgrade have already begun and should improve further. “We believe there will be further material upgrades for all the key domestic sectors as analysts start building in the domestic recovery, upgrade their revenue estimates, and factor in the strong margin performance of June 2009 quarter. The monsoon will be the only key risk factor, in our view, but its potential negative impact is as yet unknown,” say Nemkumar and Datar.

With inputs from Jitendra Kumar Gupta

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