Overseas units to help drive Q2 profit growth

The swing from losses to large profits by foreign subsidiaries of Tata Motors, Tata Steel and Hindalco are expected to buoy the second-quarter earnings of India Inc, suggests a results survey of 10 foreign and broking houses. The consolidated profit of 258 companies, based on Q2 preview reports, is expected to rise over 30 per cent on the back of a strong show by the subsidiaries. Domestic-only ones are lined up for a moderate show, with an 18 per cent rise in profits.

The average net sales growth is projected at 20 per cent, driven by automobiles, oil marketing companies (OMCs), realty and refineries. The operating margins, based on consolidated numbers from two Tata group companies and Hindalco, are expected to rise by 175 basis points (bps) compared with a rise of 110 bps on a standalone basis. A significant growth in operating margins is expected to come from automobiles, capital goods, construction, metals and OMCs.

Hindalco is expected to add around Rs 250 crore in consolidated net profit, as Novelis has become self-sustaining. According to an analyst at Motilal Oswal, Novelis has renegotiated nearly 60-70 per cent of its can contracts and the rest will be re-priced over time. Consolidated Tata Steel is expected to report Q2 net profit of Rs 1,200 crore, against a net loss of Rs 2,707 crore in Q2 last fiscal. The operating margins for Corus, its European arm, are likely to report an improvement year on year, but a sequential fall due to higher input costs.

Tata Motors’ consolidated sales are expected to grow 35-40 per cent, driven by 33 per cent volume growth in Jaguar and Land Rover. Margins are expected to improve by 600 bps, led by JLR’s sustained performance. Consolidated profit is expected to be strong at over Rs 2,000 crore, compared with a negligible Rs 18 crore last year. Tata Power is expected to show 50-plus per cent growth in consolidated net profit from savings on input costs. Its consolidated profit is likely to be up 15 per cent and margins better by 230 bps.

Sensex companies are expected to mirror the previous quarter, with a very strong profit growth of 35-45 per cent on a consolidated basis, but a relatively weak 18 per cent growth on a standalone basis. The bad news, according to Merrill Lynch analysis, is that like the previous quarter, growth is concentrated in global commodities. The ex-commodities profit growth drops to a more reasonable 24 per cent on a consolidated basis.

Among the Sensex companies, commodities (Tata Steel, Reliance Industries & Hindalco), banks (State Bank) and Tata Motors are expected to be the key contributors of growth, driven by the low base of last year. On the other hand, telecom (Reliance Communications and Bharti) and ACC should report weak results. Within autos, Hero Honda and Mahindra & Mahindra may report weak results.

Revenue growth is expected to be in single digits for sectors such as construction, pharmaceuticals, steel and telecom. Cement companies are lined up for a decline in revenues and profits. There has been no sign of improvement in profitability in telecom, sugar and textiles, which are expected to report a decline in net profit. Auto ancillaries, pharmaceuticals, power and realty sectors are expected to report single-digit growth in net profit.