The early birds’ performance in the first quarter ended June is more or less in line with expectations and signals a slowing of sales and profit growth rate. The margins are down 150-200 basis points for non-banking and finance firms, indicating that manufacturing companies have not been able to pass on the rise in input cost to the consumers.
The sector-wise review shows decline in operating margins for software services firms on account of a rise in wage costs. Private sector banks have done extremely well, while public sector banks are expected to underperform their peers.
Automobile, auto ancillary, cement and fertiliser companies have not done well account of low consumer demand and input cost pressure.
Net sales for the 259 early birds rose 29 per cent, led by Essar Oil, Hindustan Zinc and private sector banks. Net profit increased 17.1 per cent, led by 15 firms (net profit of over Rs 100 crore each) which reported net profit growth of a little over 25 per cent each.
The net profit growth rate excluding these firms has been extremely poor, at 0.45 per cent. Nevertheless, these firms had reported a 22.8 per cent rise in net sales and a healthy 29.1 per cent growth net profit in the quarter ended June 2010.
The operating margins (excluding banks and finance) declined sharply by 178 basis points (a bps is one-hundredth of a per cent), as the cost of production moved at a higher pace, by 28.55 per cent compared to sales growth of 25.8 per cent. Interest costs were also responsible, rising 30 per cent compared to a rise of less than 10 per cent in June 2010 quarter. The cost of raw material rose 470 bps more than that of sales growth for manufacturing firms.
Moderation in overall earnings growth in the first quarter will not come as a surprise, but there is considerable room for surprise at the company level. For example, while Infosys Technologies and Wipro underperformed the technology segment, Tata Consultancy Services did extremely well, posting 31 per cent revenue growth and 27 per cent growth in net profit.
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Bajaj Auto’s sales and profit moved at slower pace compared to previous quarters, but the company performed better than industry leader Hero Honda. Dr Reddy’s Labs did better than Cadila Healthcare and Biocon. Godrej Consumer outperformed Colgate in the personal care category.
The preview, based on the estimates of 478 companies by nine brokerage houses, indicated the pressure of input costs was likely to hit operating margins by at least 100 basis points.
| QUARTERLY GROWTH RATE | ||||||
| (Figures in %) | Sales | Net profit | Interest | |||
| 10-Jun | 11-Jun | 10-Jun | 11-Jun | 10-Jun | 11-Jun | |
| Total sample (259 firms) | 22.81 | 29.07 | 28.33 | 17.13 | 0.60 | 53.06 |
| Excluding banks and finance | 26.16 | 25.79 | 29.91 | 16.53 | 9.15 | 29.98 |
| Most profitable 15 firms | 24.53 | 40.90 | 26.99 | 47.48 | -1.01 | 70.27 |
| Banks and finance | 12.05 | 40.93 | 24.58 | 18.60 | -0.30 | 55.74 |
| IT | 13.71 | 22.84 | 14.17 | 14.23 | -21.87 | 51.81 |
Sectors that will drive profit growth include oil and gas, capital goods, private sector banks, metals and fast moving consumer goods. Cement, public sector banks, realty, telecom and mid-cap software companies are expected to show a decline in profit.