Sales, profit, operating margins expected to be distinctly slower than in previous quarters.
First, the good news. India Inc’s top companies are expected to continue posting double-digit growth in net profit, sales (net interest income in the case of banks) and operating margins in the fourth quarter ended March 2011.
The consensus estimates of foreign and domestic broking houses are that net profit and revenue would go up by around 19 per cent each, while operating margins of the Sensex and S&P CNX Nifty companies would grow 20-30 basis points. That could be a welcome surprise, considering that corporate India has been reeling under a surging input cost burden.
The good news ends there. The growth would be much less than the previous quarters. For example, net profit growth at 18-19 per cent will be far less than the 29 per cent in the third quarter and 31 per cent in the second, though it is better than the 11 per cent recorded in the first quarter ended June 2010.(Click here for COMPANY-WISE PREVIEW)
| SECTOR-WISE ESTIMATED GROWTH IN Q4 | |||
| In % | Sales | OP | Net profit |
| Automobiles | 27.62 | 28.68 | 31.12 |
| Bank | 30.01 | 18.77 | 34.75 |
| Cement | 6.10 | -1.71 | -5.14 |
| Cap goods & engineering | 19.55 | 23.02 | 25.96 |
| Fertilisers | 14.11 | 18.78 | 16.72 |
| FMCG | 18.82 | 18.70 | 19.97 |
| IT | 22.21 | 17.90 | 15.27 |
| Media | 21.93 | 11.76 | 14.39 |
| Metals | 20.19 | 22.50 | 24.49 |
| Pharmaceuticals | 10.30 | -14.33 | -23.52 |
| Power | 12.13 | 20.85 | -3.58 |
| Realty | 11.60 | 19.34 | 13.19 |
| Refineries | 28.54 | 35.55 | 52.20 |
| Steel | 17.46 | 2.95 | -9.79 |
| Telecom | 8.42 | 24.28 | -28.17 |
| Data Compiled by BS Research Bureau | |||
Similarly, net sales growth is expected to be stable at around 19 per cent, but at a much slower pace of 22.5 per cent in the second quarter and 27.8 per cent in the first. Operating margins of the benchmark firms (expected 20-30 basis points) will follow the pattern. The corresponding figures for the second and third quarter were 130 bps and 80 bps. Margins declined by around 290 bps in the first quarter.
Also, the fourth quarter growth in margins will be driven by the strong performance of Cairn India, Tata Motors and ONGC. Automobiles, cement, steel and fast-moving consumer goods (FMCG) companies would face margin pressure.
The earnings growth is expected to get a significant boost from Cairn India (net profit expected to go up 833 per cent), Tata Motors (+85 per cent), Reliance Capital (+65 per cent), State Bank (+55 per cent), Tata Power (+49 per cent) Dr Reddy Labs (+44 per cent) and ICICI Bank (+43 per cent). However, the net profit growth rate of the remaining companies is expected to be only around 10 per cent. Among other benchmark companies, the net profit growth is expected to be 30-plus per cent for IDFC, ONGC, Reliance Power, Hindalco (consolidated), BHEL and HDFC Bank.
The fourth quarter profit growth would be more sector-specific, with automobiles, banks, capital goods and engineering, FMCG, non-ferrous metals and refineries are expected to do well in the fourth quarter. Among key sectors, the net profit is expected to decline for oil marketing companies, telecom, steel, pharmaceuticals and cement companies.
According to analysts at Motilal Oswal, the Indian corporate sector is significantly under-leveraged. On an aggregate basis, interest cost increases are unlikely to impact earnings significantly. However, sustained higher interest rates could impact demand (consumer and industrial) and, in turn, pose a longer-term threat to earnings. Three of the five most indebted companies on the Sensex-30 made large cross-border acquisitions and the other two are from the infrastructure sector. We take a look at some sectors:
AUTOMOBILES
The auto sector has sustained good volume growth in the fourth quarter and, hence, is expected to see net sales growth of around 28 per cent. The operating margins, barring Tata Motors, are likely to decline sharply on account of cost pressures. Tata Motors is expected to be the best performer, with adjusted profit growth of around 100 per cent. Ashok Leyland, Hero Honda, Maruti Suzuki, and TVS Motors are expected to register decline in margins, while Mahindra & Mahindra and Bajaj Auto are expected to post modest growth in net profit.
CAPITAL GOODS AND ENGINEERING
The revenue growth is expected to be robust at around 20 per cent, while profit growth is expected to be above 25 per cent. Among industry leaders, BHEL is expected to do well, while and Larsen & Toubro may show moderate growth. BGR Energy is likely to see a decline in revenue and earnings due to a high-base effect. Among transmission and distribution companies, ambiguity on operating margin would persist for ABB and Areva, while Crompton might fall.
CEMENT
Companies here expected to show six-seven per cent rise in net sales, despite only three per cent increase in volume, thanks to higher realisation of around nine per cent. All-India average cement prices were up 8.8 per cent, year on year. Average industry utilisation rates are likely to be 83 per cent, down from 87 per cent a year before. Margins are expected to decline r 100 basis points, following the substantial increase in costs. Aggregate net profit is estimated to decline five to 10 per cent.
FMCG
The sector is poised for a comfortable 18 per cent rise in net sales and 20 per cent growth in net profit on the back of four to 10 per cent increase in prices in the past two quarters. The operating margins are expected to be unchanged, as health care majors such as Hindustan Unilever (HUL), Colgate, Marico and P&G Healthcare are expected to report a decline in margins. Analysts expect GSK Consumer to report a healthy revenue growth and continue to expect dismal performance for HUL. ITC is likely to see a 20 per cent rise in net profit on the back of improved margins.
BANK
The net interest income (NII) is expected to show 30 per cent rise on the back of public sector banks’ performance. State Bank is likely to see a 37 per cent rise in NII, while private sector giant ICICI Bank may declare 15-20 per cent growth in NII. Strong credit growth, coupled with a better credit-to-deposits ratio, should result in strong NII growth. The credit costs for PSU banks would remain high, as banks move fully to system-based NPA reporting. Private banks could report lower credit costs as a percentage of loans and drive earnings growth.
REFINERIES
Oil companies are poised for strong growth in revenue on the back of public sector refineries. Profit growth is expected to be 50 per cent, as Cairn India and Chennai Petroleum are likely to report strong performance. Reliance Industries expect to report a modest rise in net sales and net profit due to marginal rise in the company’s gross refining margins to around $9.5/bbl. Cairn India would see significant improvement, owing to the steep rise in crude prices and a ramp-up of production at the Rajasthan block. Despite the greater subsidy burden, ONGC and Oil India would report significant jumps in net profit due to the APM gas price rise. Earnings of oil marketing companies would continue to depend on government compensation.
PHARMACEUTICALS
Pharmaceutical companies are likely to report moderate revenue growth of around 10 per cent and 20-plus per cent decline in net profit, mainly on account of expectation of negative growth in Ranbaxy. The revenue growth would be driven by domestic branded formulations and exports. The margin for the sector is expected to be sluggish. Dr Reddy’s Labs, Aurobindo Pharma, IPCS Labs and Cadila Healthcare are expected to report strong numbers.
