Slowing operating profits  of  cos  keep earnings in check

“So far, the results season seems to be a fairly mixed bag, with 40% of companies having announced results in the fiscal third quarter with an upgrade/downgrade ratio of 1:2,” said Manish Jain, a fund manager at Ambit Asset Management. The large companies have delivered earnings growth, led by margin expansion as volume growth moderated, Jain added.

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Price hikes companies took to offset inflation drove revenue growth even as weak volume growth eroded some gains. According to data for 399 companies (excluding banks and financial companies) analysed by Mint, net sales in the December quarter rose 15.9% from a year earlier, the slowest in eight quarters.

Further, companies continued to feel the impact of higher input costs, though the intensity of the cost pressure ebbed.

Profit before interest, tax and depreciation (PBIDT) grew by 1.5%. Raw material costs rose 14.5% from a year earlier during the December quarter, slower than the 40% rise in the preceding three months.

Further, higher interest costs crimped earnings, with net profit declining 3.8% from a year earlier but gaining 11% from the preceding September quarter.

The BFSI (banking, financial services and insurance) sector continued its stellar show.

An analysis of the data for 495 companies, including banks and financial companies, showed net revenue grew 15.9%, PBIDT rose 14.5%, and net profit advanced 9.7%.

Analysts said that mid- and small-sized companies delivered fairly robust growth owing to market share gains.

Only some companies’ earnings were supported by the softening of raw material costs, and overall, the performance remains a mixed bag, said Amnish Aggarwal, head of research at Prabhudas Lilladher Pvt. Ltd.

The December quarter was also better than anticipated for the IT services companies. Analysts were expecting cuts in revenue forecasts in the current quarter due to the slowdown in western markets. Caution still prevails, but, tier-I IT services companies outperformed on revenue performance, experts said.

V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, said the banking and IT sectors performed well.

HDFC Bank, ICICI, Kotak and Axis have posted excellent numbers, and IT services, too, has done well despite the concerns associated with the US slowdown, Vijayakumar said.

Infosys excelled. The performance of IT services and financials are hugely important since these two segments contribute around 52% of India Inc.’s profits, Vijayakumar said.

Another segment that stood out was the automobile sector, with unexpectedly good earnings from Tata Motors, Bajaj Auto and Maruti Suzuki India. However, the manufacturing segment is still exhibiting strain from rising interest costs, experts said.

“Margins are under pressure from rising interest costs even though lower input prices have benefited segments such as FMCG (fast-moving consumer goods). However, demand continues to be a concern for the FMCG segment”, Vijayakumar said.

Among blue chips, Asian Paints and Pidilite disappointed, he said.

For companies dependent on discretionary consumption, the traditionally strong third quarter is critical.

“In line with expectations, we witnessed robust demand for discretionary consumption companies during the quarter,” Jain said.

However, rural demand continues to be weak, and growth is led by the premium segment, Jain warned.

The other encouraging sign is that gross margins have begun to improve sequentially on stability in raw material prices, and the outlook remains optimistic, Jain said. Overall, he said, quality orientation and growth focus should come back in the market.

As the optimism prevails, however, performance in the ongoing quarter may not be able to contribute much to the market’s upside. The results will have a limited role, and big events such as the budget will drive the markets, Aggarwal said.

It is better to be in the safety of large caps in this challenging environment, said experts. If there is some tinkering on taxes on the capital gains, then mid-cap and small-caps can come under more pressure, Aggarwal said.