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Sensex companies' earnings growth likely to moderate

SI Team  |  Mumbai 

Analysts fear worse days ahead on worries over inflation, interest rates and soaring input costs.

India Inc's top guns -- the 30 companies on the BSE Sensex list -- will post a healthy 20 per cent-plus aggregate growth in earnings in the December quarter, but the headwinds in the days ahead could worsen the mood.

Analysts said the over 20 per cent growth may be slower than some of the preceding quarters, but unlike the previous four quarters when the low base effect helped boost profit growth, India Inc did not gain on this front in the December quarter.

But the flip side is that overall growth will moderate further in the coming quarters due to factors like rising inflation, interest rates and input costs. Motilal Oswal Securities analysts have estimated Sensex PAT growth at 20 per cent in the March quarter. That apart, “with the favourable base effect wearing off and margin pressures creeping in, variance in performance across companies is rising,” wrote CLSA’s analysts in a recent report. If the results preview is anything to go by, the variation in performance is already visible.

The earnings variation across companies suggests that 2011 will remain a stock pickers' market, making portfolio management a difficult task. Analysts suggest the Q3 results and the company's guidance on future growth and their ability to mitigate cost pressures will provide further direction on earnings. Read on to know the results expectations of leading research houses from each of the 30 Sensex companies in the December quarter.(Click for table & graph)

Bajaj Auto: Higher realisations on price hikes and improved volumes should help it record a 26 per cent rise in revenues and slightly higher profits. Sequentially, Ebitda margins are expected to decline due to a higher marketing spend and lower volumes.

Bharti Airtel: Revenues are expected to rise on higher subscriber additions and network minutes. Ebitda margins are likely to remain flat as higher expenditure will offset revenue gains, while the net profit is likely to fall due to a lack of forex gains, vis-a-vis the September quarter.

BHEL: Backed by strong execution and its large order book, BHEL should report a good 23 per cent growth in revenue. However, with the rise in input costs, operating margins could fall by 100-150 basis points, leading to marginally lower growth (19 per cent) in net profit.

Cipla: Powered by an equal contribution from its export formulations and domestic sales, Cipla is expected to record a 16 per cent increase in revenues. Ebitda margins are likely to contract due to a higher staff cost, lower other operating income and expenditure on the Indore SEZ, thereby impacting profits.

DLF: Higher plot sales and project execution as well as mid-income residential project sales should lead to a 19 per cent year-on-year rise in revenues. Margins should improve, led by better realisations. However, a rise in interest costs and lower other income is seen impacting profit growth. Going ahead, debt reduction and higher leasing activity should improve financials.

HDFC: HDFC’s adjusted loan growth is estimated at 23 per cent year-on-year. Sequentially though, the spread would decline marginally due to a rise in the cost of funds. HDFC is likely to book treasury gains from the sale of its IL&FS stake. Overall, analysts expect strong profit growth, led by the core lending business.

HDFC Bank: Margins may decline marginally, led by an increase in the cost of deposits. Other income is likely to grow 27 per cent year-on-year, driven by a rise in fee income. Analysts expect HDFC Bank to lead the sector in terms of a profit growth of over 30 per cent. Sequentially, lower provisions should drive PAT growth.

Hero Honda: It has been able to grow volumes both on a year-ago basis as well as over the September quarter and should post a 33 per cent jump in revenues. Despite price rises, expect the Ebitda margins to contract on the back of higher raw material costs.

Hindalco: The company could report marginal growth in revenue aided by higher volumes and realisations in the aluminium and copper business. Net profit growth would be higher at about 15 per cent as operating margins improve and interest costs remain under control.

Hindustan Unilever: HUL is seen recording a volume growth of 11.5 per cent. An Ebitda margin contraction of 170 bps is likely on rising input costs, high ad spends and royalty. The bottom line should get support from a lower tax rate. The laundry, skin care and foods business will report a double-digit sales growth, while the soaps business will benefit from sustained up-trading.

ICICI Bank: Overall loan growth is estimated at 13-14 per cent year-on-year due to moderation in the international loan book. While the rising cost of funds could impact margins, its excess liquidity will provide a cushion. Operating expenses could rise 25 per cent, led by branch expansion. Positively, robust fee income growth and lower NPA provisions should drive PAT.

Infosys: Infosys will likely beat the higher end of its Q3 revenue and EPS guidance, led by 6 per cent volume growth (pricing seen flat). The Ebitda margins may decline 40-60 basis points due to a stronger rupee. Analysts expect a 1-2 per cent upward revision to its 2010-11 revenue and EPS guidance and await comments on the CY11 client budgets, discretionary traction and pricing.

ITC: The cigarette volumes are seen growing 2 per cent year-on-year and Ebitda margins expanding 30 basis points, driven by a better mix and price-hike benefit. A decline in other income could restrict PAT growth. Among businesses, hotels should see a rebound, FMCG losses should decline over 20 per cent and paper should gain from higher selling prices.

Jindal Steel: The strong growth in steel volumes and better realisation will help the company post about 16 per cent growth in revenue. The net profit will grow at a marginally higher pace, about 18 per cent, led by an improvement in the operating profit margins.

JP Associates: High cement volumes as a result of new capacities and improvement in the EPC project execution should drive revenue growth. The recurring net profit should remain flat or down marginally as a result of extraordinary transactions last year besides the expected margin pressure in the cement business.

L&T: The company should report good revenue growth on the back of higher execution and a low base effect. However, the net profit could remain flat as a result of adjustments pertaining to Rs 150-crore gains on the sale of a stake in Satyam and the reversal of a provision for loss on investment in the year-ago quarter.

M&M: Revenues will be driven by a robust growth in tractor and utility vehicle sales. While realisations are higher, both on a yearly and quarterly basis due to price increases, the Ebitda margins are likely to decline due to higher commodity costs.

Maruti Suzuki: Strong domestic volumes should help post a 27 per cent growth in revenues. Export realisations are expected to fall marginally due to the appreciation of the rupee against the dollar. Ebitda margins are expected to fall both on account of higher raw material costs as well as adverse forex movement.

NTPC: With the help of new capacity addition, and in turn, high power generation volumes, the company could report a strong revenue growth. Lower operating profit margins, lower other income and higher interest costs could impact net profit, which is seen growing a mere 4 per cent.

ONGC: Higher crude oil prices without a proportionate rise in fuel prices should increase the subsidy burden for ONGC. But, higher net realisation on crude oil sales ($64.8 a barrel versus $57.7 in Q3 last year as estimated by MOSL analysts) and APM gas, lower development expenses and a surge in other income should boost the adjusted net profit year-on-year.

Reliance Communications: Higher revenue realisations should help improve the Ebitda margins, with the revenue per minute too looking up as the company reduces the availability of free minutes on the network. Net profits are likely to drop due to a normalised tax rate as against a tax credit in the September quarter.

Reliance Industries: RIL is expected to earn about $3-$3.5 a barrel more on a year-on-year basis for processing crude oil, thereby netting gross refining margins of over $9. While the refining business will be a key driver of profits, a higher KG-D6 basin gas production and petrochemical margins will further boost profits on a year-on-year basis.

Reliance Infra: It could clock a decent growth revenue largely due to the expected 50-60 per cent growth in its EPC business. The net profit could grow by 4 per cent. Income from treasury operations as well as interest cost need to be watched, which could have their impact on the net profit.

SBI: While loan and deposit growth is seen 18-20 per cent, margins may moderate due to rising costs. Fee income is likely to remain strong. Although asset quality is seen stable, higher provisions -– to meet the provision coverage ratio as per RBI stipulations and towards standard asset provisioning on dual rate housing loans -– could result in a muted profit growth.

Sterlite Industries: Higher international metal prices and better volumes in the zinc and copper business could help the diversified metal major Sterlite Industries to report relatively better revenue growth. Net profit growth could be strong as a result of higher other income and improvement in operating margins by over 200 basis points.

Tata Motors: Driven by a strong volume growth in its standalone business and overseas subsidiary (JLR), expect the consolidated revenues to top Rs 30,000 crore. While standalone volumes will be driven by the commercial vehicles portfolio, higher raw material costs will impinge on the Ebitda margins both for the Indian entity as well as JLR.

Tata Power: The company could report a marginal 7 per cent growth in revenue. However, the net profit growth could be faster at about 14 per cent due to the full impact of gains from its merchant power capacity in Mumbai and strong growth in other income due to the treasury income. The operating profit margins are expected to be robust.

Tata Steel: A higher steel realisation will help in marginal growth in revenue due to flat volumes. There could be a strong spurt in profits as a result of cost savings in the international operations. However, the performance of Corus needs to be watched as a result of lower steel prices recently in Europe.

TCS: TCS is likely to post a volume growth of 6.5 per cent. Ebitda margins could decline 50 basis points due to rupee appreciation. A change in hiring guidance and BFSI traction will be closely watched. Adjusting for one-time benefits in rents seen last quarter, the bottom line growth should be better.

Wipro: Wipro’s IT services revenue would meet the higher end of its guidance, driven by 5.4 per cent volume growth. While the IT services Ebit margin should pick up due to lower SGA, the consolidated Ebit margin is seen lower by 30 bps. That along with a higher tax rate would limit the bottom line growth. Key monitorables include timely completion of fixed-price projects and a recovery in the telecom sector.

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First Published: Thu, January 13 2011. 00:53 IST