Sales growth robust, but margin worries persist

Apart from cost pressures, one-offs can also restrict earnings growth in June qtr.

With the monsoons having finally arrived and now covering most of the Indian continent, the next key trigger for the markets is India Inc’s earnings for the recently concluded quarter. Amid the dynamic and volatile global conditions and rising cost pressures at the domestic front, things haven’t been easy for India Inc. Notably, despite this, corporate India is expected to post a good show. Partly helped by the low base of the last June quarter, the worst in five years, when the combined net profit of the 30 Sensex companies had fallen by about 20 per cent.

With the underlying demand improving and higher spending on infrastructure, volumes across sectors have been good. So, overall top line growth is expected to be robust. However, due to cost pressures, as well as one-off items, estimates indicate profit growth at the broad level is likely to be slower, as compared to recent quarters.

Robust topline
Analysts at top domestic research houses estimate that year-on-year revenue growth for the Sensex companies will be 26-32 per cent for the June quarter. Even at the broader level, the growth is expected to be robust, at 23-25 per cent. For the companies these domestic research houses track, IIFL estimates a top line growth of 24 per cent, Edelweiss Securities 23.8 per cent and Motilal Oswal Securities (MOSL) 23 per cent.

Among the key contributors to revenue growth include companies from sectors like oil (Cairn, helped by higher production of crude oil) and petrochemicals (Reliance, higher gas and refining volumes), metals and auto. Notably, sales for almost 10 out of 15 sectors are expected to grow by 15-35 per cent, including banking, retail, engineering, construction and media, led by improving demand.

Margin pressure, skewed profit growth
On the flip side, the inflationary environment and pricing pressures, among other factors, are likely to see a decline in margins across many segments. “For the companies in our coverage, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins are expected to decline both sequentially (over March) and year-on-year. Margins for the June quarter are expected to be under pressure for auto (higher raw material costs), metals (sequential decline in base metal prices and rising cost-push for steel), real estate (cost overruns) and cement (price correction and oversupply concerns) and, to some extent, technology as well (increasing salary costs and foreign exchange headwinds),” wrote analysts at Edelweiss Securities.

Also, companies from the telecom space are expected to report a 12.7 per cent decline in operating profits (on flat sales) and a 44 per cent fall in net profits for the quarter, estimates analysts at MOSL.

Likewise, OMCs and ONGC are estimated to report a decline in margins and a 28-75 per cent fall in profits, more than offsetting the expected 30 per cent rise in Reliance Industries’ earnings. Since the sector accounts for about a third of Sensex earnings, the 26 per cent estimated decline in the sector’s combined profits will prove to be a drag on overall earnings.

Cement, telecom and oil and gas sectors apart, where the margin fall is likely to be the steepest, the broader trend is expected to be reasonably healthy. Sectors like metals, media, engineering and retail should see good expansion in margins.

At the broader level, excluding the OMCs, MOSL estimates the Sensex earnings to rise by 19.3 per cent, year-on-year. It has estimated that its universe of 121 companies (excluding OMCs) will post a 17 per cent year-on-year growth in earnings. Notably, excluding telecom and ONGC, the growth in profit for the rest of universe will be better at 31 per cent for the quarter.
 

SENSEX EARNINGS ESTIMATES
	Sales   % chg	PAT  % chg
ACC	-1.4	-24.2
Bharti Airtel	0.1	-2.5
BHEL	27.6	21.0
Cipla	9.6	12.1
DLF	24.6	1.6
HDFC	26.5	22.8
HDFC Bank	25.2	31.2
Hero Honda	12.0	11.0
Hindalco	36.6	780.0
HUL	7.1	-1.8
ICICI BANK	-2.5	21.0
Infosys	4.4	-2.4
ITC	13.9	16.6
JP Associates	20.5	-7.0
JSPL	38.3	23.3
L&T	19.0	15.0
M&M	25.0	13.0
Maruti Suzuki	28.9	14.8
NTPC	12.0	2.5
ONGC	8.9	-11.0
RCom	-15.5	-62.0
Reliance Infra	26.0	9.5
RIL	86.6	31.1
SBI	31.6	3.7
Sterlite Inds	42.8	59.4
Tata Motors*	63.5	55.8
Tata Power	-7.0	7.6
Tata Steel	27.9	LP
TCS	3.8	-4.8
Wipro	3.5	1.0
% chg is y-o-y, except IT & telecom which is q-o-q; In banking, sales is NII; *Standalone; LP: loss to profit  Source: Research reports

Beyond cost pressures, one-off items, too, are seen skewing the earnings picture. IIFL analysts wrote, “We reckon that PAT (profit after tax) growth for our universe would be up seven per cent. However, reported results will be skewed by one-time items for some companies; excluding these, we reckon profits would be up a robust 16 per cent.”