Growth worries may dampen profit cheer

Sensex earnings likely to grow 20.5% in fourth quarter, amid slowdown in revenue growth and decline in margins

The last quarter before the next government takes charge would be a new high for India's top companies, which are likely to report 20 per cent-plus growth in earnings for a consecutive quarter.

Bad news comes in the form of a likely slowing in revenue and a sharp cut in operating margins for mainstream companies (excluding financial & oil & gas), reversing the trend visible in the previous two quarters.

According to earnings estimates by nine leading brokerages, the combined net profit of the 30 Sensex companies is likely to grow 20.5 per cent on a year-on-year basis in the fourth quarter, in line with the third quarter results. Information technology (IT) and pharmaceuticals biggies are again likely to outperform the broader universe, though likely to take a hit on their top line and margins due to the rupee's recent appreciation.

The results for the Nifty universe will be more modest, with a 12.2 per cent y-o-y increase in net profit in the fourth quarter. The broader Nifty 50 of the National Stock Exchange has a higher exposure to public sectors banks, oil marketing companies and capital goods & infrastructure that continue to face challenges. The BSE Sensex has higher weightages of IT, pharma and consumer companies that are likely to maintain out-performance. The analysis excludes Sesa Sterlite due to lack of comparable numbers for last year.

 

The negative impact of rupee appreciation is, however, visible in mainstream companies, ex-bank & financials and oil & gas. Their net profit growth is expected to decline to 23 per cent y-o-y in the fourth quarter against 29 per cent in the previous quarter. Revenue growth is likely to decline to 11.5 per cent from 16.3 per cent in the third quarter. Their operating margin is likely to fall to 19.7 per cent from 23.5 per cent in the previous quarter and 22.2 per cent a year ago.

According to CRISIL Research, five of 17 sectors (mostly investment related) are expected to report negative revenue growth in the fourth quarter. Export and consumption demand-related sectors such as IT, pharma, FMCG, telecom, readymade garments, telecom and tractors will lead with double-digit growth in revenue. Analysts attribute the revenue slowdown to fiscal tightening and the negative impact of rupee appreciation on exporters. "Belt tightening by the government is likely to affect the top line for capital goods and infrastructure companies, while rupee appreciation will hit IT and pharma companies," says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

Among individual companies, Tata Steel is likely to be the biggest contributor to the Nifty universe this quarter, with a Rs 7,500-crore positive swing in profits. It will be followed by ONGC and GAIL, which will gain from lower subsidy burden and higher volume (Click for sectoral boxes).