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Small firms to outpace larger peers

B G Shirsat  |  Mumbai 

Analysts expect a stellar performance from small-, mid-caps in June quarter as well.

Small- and medium-sized companies are expected to report better profit growth for the quarter ended June, according to estimates from four prominent domestic broking houses. While their sales growth is expected to be healthy at over 20 per cent, net profits are expected to jump by around 30 per cent, helped by an over 200-basis-point improvement in aggregate operating margins to around 21 per cent.

In that case, the profit and margin growth rates will be reasonably better than 18 per cent and 70 basis points, respectively, as estimated for Nifty companies (excluding oil sector companies). Both sets of companies are expected to benefit from the lower base of last year, when India Inc suffered due to the global crisis and had posted a decline in sales and profit in the first quarter ended June 2009.

Notably, the small and medium companies had bucked the trend then, posting revenue growth of around three per cent during the June 2009 quarter. However, their combined net profits had declined by around nine per cent due to margin pressures.

In order to provide a perspective of earnings expectation at the broader level, we included small, medium as well as major non-index companies in our study, wherever data was available. The earnings preview comprises 151 manufacturing and service sector companies provided by the four broking houses.

Auto sector to drive growth
The growth for the quarter ended June 2010 will be driven by companies from the automobiles, auto ancillaries, capital goods, construction, non-ferrous metals, pharmaceuticals and steel sectors.

The poor show in terms of growth in revenue and profit are expected from sectors like cement, infrastructure, media-entertainment, agro and food products. FMCG firms, and particularly companies from the healthcare segment, are likely to report modest performance.

The recovery in the domestic market and exports, and the turnaround in automobiles, are expected to be reflected in performance of auto ancillary firms. Bharat Forge is expected to show a rise of more than 60 per cent in sales and a three-fold increase in net profit on account of the base effect. Bosch may show a modest growth in net profit, but strong revenue growth. Sundram Fasteners is expected to post a remarkable 38 per cent revenue growth and 55 per cent net profit growth.

% chg
% chg
% chg
% chg
Small-, mid-sized firms Key companies
Motherson  39.60 950.20 Ashok Leyland  178.00 1704.50
Torrent Pharma 9.70 433.10 Sesa Goa  176.30 227.40
Glenmark  30.90 75.50 JSW Steel  42.20 184.80
Sintex  50.70 70.30 Welspun Corpn  -14.40 136.90
Divis Labs 40.00 51.40 Nalco  54.30 108.90
GSPL  31.40 39.80 Bajaj Auto  63.20 94.40
Tech Mahindra  6.30 37.60 Hind. Zinc  56.70 61.00
Zee Ent.  36.00 37.20 HDIL  31.30 47.70
IRB Infra  62.20 31.70 Piramal Health  14.30 34.80
Sun TV  34.10 29.80 Biocon 24.60 32.30
Source: Angel Broking, Edelweiss Securities, IDFC Securities and Motilal Oswal Securities.

Ashok Leyland is expected to post a remarkable jump in profits, thanks to the low base — in the June 2009 quarter, the company’s net profits had tumbled to just Rs 7.77 crore, compared to Rs 50.6 crore in the June 2008 quarter

The cement sector is set for its worst performance in recent times, with small- and mid-cap companies expected to post a decline in net profit on the back of a decline in net sales.

Among non-index firms, Birla Corporation, India Cement, Madras Cement, Shree Cement, UltraTech Cement and India Cement are expected to show a decline in net profits on account of a decline (or subdued growth) in net sales. Ambuja Cements may be the only exception to the poor performance of cement sector.

Metals to shine, too
The strong price rise in ferrous and non-ferrous metals and robust demand from automobiles and infrastructure segments are expected to drive sales and profit growth of metal companies. Hindustan Zinc, National Aluminium and Sesa Goa are expected to benefit from the rise in realisations. JSW Steel is expected to repeat its stellar fourth-quarter performance on the back of a rise in steel prices.

Pharma companies are expected to post double-digit growth in sales and profit on the back of strong results from Biocon, Cadila Healthcare, Divi’s Labs and Glenmark Pharmaceuticals, while Lupin and Piramal Healthcare are expected to build further on their robust fourth-quarter performance. The growth is expected to be driven by new product launches in the US, strong growth in India, higher penetration in the emerging markets, rebounding contract manufacturing business and forex-related losses booked in the year-ago period.

Volumes are expected to be subdued for most Tier-II software service companies, with customer-specific events taking a toll on their revenues. Hexaware is expected to post a decline in sales and profits, while modest growth is expected for Patni Computer, MphasiS, Tech Mahindra, NIIT and KPIT Cummins.

First Published: Fri, July 09 2010. 00:18 IST