Fourth quarter results likely to sparkle

Top companies are likely to report double-digit earnings growth for a consecutive quarter, despite moderation in revenue growth

Corporate earnings in the fourth quarter are expected to live up to the expectations built by the current rally on Dalal Street, despite lower contribution from information technology and pharmaceutical majors on account of the rupee’s appreciation. India’s top companies are expected to report high double-digit growth in net profits for a consecutive quarter, despite a moderation in revenue growth.

According to earnings estimates by the leading seven brokerages, the combined net profit of Nifty (the National Stock Exchange’s benchmark index) companies is expected to grow by 12.2 per cent in the March quarter over the same period last year. In comparison, these companies’ net profit was up  11.2 per cent over a year at the end of the third quarter and down 3.4 per cent in the March 2013 quarter. The earnings will be boosted by a turnaround in Tata Steel and a better show by Oil and Natural Gas Corporation (ONGC) and GAIL, on account of a lower subsidy burden. Information technology (IT) and pharmaceuticals will chip in with double-digit growth in earnings but their performance is likely to decline on a sequential basis, due to appreciation in the rupee in the past quarter.

Sensex (the BSE exchange’s benchmark index) companies are likely to do even better. Combined net profit of the 30 Sensex companies is likely to grow 20.5 per cent over a year in the fourth quarter, similar to the 20.3 per cent growth in the third quarter; there was fall of 8.6 per cent in the fourth quarter in FY13. The differences between Nifty and Sensex are due to their sectoral compositions. The latter has a higher weightage of outperforming sectors such as IT, pharma and automobiles. The Nifty has a relatively higher exposure to public sector banks, oil marketing companies and capital goods & infrastructure, which continue to face operational headwinds despite recent improvement in sentiments. The analysis excludes Sesa Sterlite due to lack of comparable numbers for last year.

Revenue growth, however, is likely to become slower, to 9.6 per cent year-on-year in the fourth quarter for Nifty companies against 13.2 per cent in the third quarter and 13.2 per cent in the second quarter. A similar trend is visible in Sensex companies, with their combined net sales growth likely to moderate to 10.7 per cent y-o-y in the fourth quarter against 13.8 per cent in the preceding two quarters.

“Export oriented sectors are expected to post robust numbers, while domestic-linked sectors — investment related (cement, construction, capital goods) and consumption related (consumers, automobiles, excluding Tata Motors) — are expected to post sluggish numbers. Slowing credit growth and higher deposit growth and provisioning are likely to translate into weak numbers for banks. However, the base is relatively favourable this quarter,” writes Prateek Parekh of Edelweiss Securities in his report on the fourth quarter earnings preview. He expects the Sensex’s underlying earnings per share (EPS) for FY14 to increase to around Rs 1,355, implying 11 per cent growth over a year.

Sanjeev Prasad of Kotak Institutional Equity expects a good show by consumer products companies and oil marketing companies. “We expect a yearly increase in net income of consumer products and the technology sector, and a decline in the net income of automobiles, banking and energy sectors. Oil marketing companies are likely to report huge profits, given a likely large compensation from the government,” he writes in a report dated this Thursday. Ex-energy (oil & gas), he expects earnings of the BSE 30 companies to grow by 6.4 per over a year and 3.9 per cent over a quarter.

According to the estimates, Tata Steel might account for as  much as 90 per of the incremental growth in the combined net profit of Nifty companies. The company is expected to report a net profit of around Rs 1,100 crore in the fourth quarter against a net loss of Rs 6,529 crore last year. ONGC is likely to account for around a quarter of the Nifty’s incremental net profits, while Tata Consultancy Services’ contribution to incremental earning míght decline to 19.2 per cent from 24.5 per cent in the third quarter.

Government-owned Bharat Petroleum is likely to be the biggest laggard, with its net likely to halve in the fourth quarter, followed by NTPC, Bharat Heavy Electricals and State Bank of India. In all, 20 of the 50 Nifty companies are likely to report a lower net profit in the fourth quarter compared to their numbers a year before.