Rising costs to hurt India Inc in Q1

Brokerages expect revenue growth at a seven-quarter high but profitability may disappoint

India Inc’s profit growth is likely to disappoint in the June quarter after a reasonably good performance in January-March. The financial year is likely to start on a muted note for top companies.

Revenue, on the other hand, is likely to be at a seven-quarter high, and is expected to grow for the second consecutive quarter after declining in five previous quarters.

The combined net revenue of the 50 companies that are part of the NSE Nifty index is estimated to grow by 4.1 per cent, year on year, in April-June.

Net sales were down 4.5 per cent during the corresponding quarter last year while they grew 3.8 per cent, year on year, in the March quarter.

Companies are likely to take a knock on their margins with the sample net profit likely to decline 1.9 per cent, year on year, in the first quarter of 2016-17, down from 3.4 per cent growth during the corresponding quarter last year.

The analysis is based on April-June quarter earnings estimates by six leading equity brokerages – Kotak Securities, Edelweiss Securities, Antique Stock Broking, Religare Securities, ICICI Securities and Nomura.

For banks and financial firms, net sales are gross revenue minus interest expenses, while for others they are total income from sales of goods and services minus indirect taxes. Profits are net and may include exceptional gains and losses as estimated by the brokerages.

The average operating margin, including other income, for 41 index companies, excluding banks and financial companies, is estimated to decline by 1.63 percentage points, year on year, to 20.2 per cent of net sales.

Companies had reported a record high margin of 22.5 per cent of net sales in the March quarter.

The decline in margins may force manufacturing and services sector companies, excluding banks and financial firms, to report their first decline in operating profit in at least five quarters, despite the acceleration in top line growth, both year on year and sequentially.

The combined net profit for non-financial companies is estimated to grow by 2.8 per cent, year on year, in the first quarter, better than the 1.7 per cent growth in the same quarter last year but down sharply from the 27.8 per cent growth in the March quarter.

Analysts attribute the dichotomy in top line and bottom line growth to the recent surge in commodity and energy prices. “While the recent rise in international commodity prices may aid the top line growth of energy and metal producers such as Reliance Industries and Hindalco, it forces manufacturing companies to function at lower operating margins,” said Dhananjay Sinha, head of institutional equity, Emkay Global Financial Services.

He expects a further decline in margins in the forthcoming quarters as the impact of higher commodity prices widens during the second half of the financial year.

Edelweiss Securities’ Prateek Parekh expects a sectoral shift in profitability even as headline growth remains tepid. “EBITDA (earnings before interest, depreciation, tax and amortisation) margins are expected to jump 0.50 percentage points, year on year, almost entirely led by investment companies such as cement and capital goods. Consumption companies, which had seen sharp margin expansion over the past two years, are likely to see limited gains in the first quarter,” he wrote in his report.

Among individual companies, Sun Pharma, Hindalco, GAIL and ACC are likely to lead the earnings growth chart while BHEL, Bank of Baroda, Idea Cellular and Tata Steel are likely to be the biggest laggards during the quarter.

In terms of sectors, the brokerages expect higher profit growth in select automobile makers like Eicher Motors, private sector banks, cement makers and infrastructure players such as Larsen & Toubro. Defensives such as TCS, Infosys, HCL Technologies, ITC, Hindustan Unilever and Asian Paints may have a muted quarter with low-single digit net profit growth despite an improvement in their top line.