With a strong 24 per cent rise in net sales and a decline in net profit, India Inc’s performance in the third quarter of 2011-12 was broadly in line with expectations. However, operating margins (OPM) played spoilsport by declining 265 basis points, as the companies could not pass on the high raw material costs due to limited pricing power.
Though the net profit during the quarter under review declined 1.32 per cent, the profit performance was significantly strong, compared to a 38 per cent decline in net profit in the second quarter. The reason: The three oil marketing companies sprang a surprise by reporting strong growth in their net profits.
The strong performance of the three oil marketing companies considerably reduced the aggregate net loss of loss-making companies in the third quarter — to Rs 4,769 crore, from Rs 11,763 crore in the corresponding quarter the previous year.
According to the research analyst at Citigroup, the Q3 results reflect the economy’s challenges, and managements’ orientation. Growth was coming off, as sales growth (ex-oil and gas) had moderated to 18 per cent from more than 20 per cent. While there were variations in trends across sectors, the numbers reflected a greater cost and caution bias than earlier, the analyst said.(Click here for graph)
The review of 3,059 companies that declared their third quarter results till February 15 showed a robust growth in net sales, at 23.8 per cent, on the back of strong growth in the revenues of industry leaders such as Reliance Industries, Tata Motors, Infosys Technologies, Sun Pharma, Tata Power and HDFC Bank.
While oil marketing companies’ performance came as a positive surprise, cement, pharmaceuticals, FMCG, automobiles, software, and mining and metals companies also posted strong results. Steel, non-ferrous metals, telecom, capital goods, realty, construction and most of the small and medium sectors, on the other hand, showed poor performance in the third quarter.
The aggregate figures of 63.5 per cent companies in the sample saw growth, compared with 66.5 per cent in the second quarter and 69.5 per cent in the third quarter the previous year. On the other hand, the number of companies reporting a decline in net sales increased from 28 per cent in the first quarter to 34.5 per cent in the third.
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Moreover, 32 per cent of companies reported a positive net profit growth in the third quarter, compared with 40.9 per cent in the first. The number of companies reporting decline in net profit rose from 858 in the first quarter to 978 in the third.
The aggregate net profit growth of Sensex companies stood at over 10 per cent, with 14 companies in the benchmark index exceeding net profit estimates. While the results for nine companies were below analysts’ estimates, the net profit growth of the remaining seven was in line with expectations.
Among Sensex companies, Sun Pharma, Coal India, Tata Motors, Infosys, Sterlite, HDFC Bank and Hindustan Unilever posted strong growth in net profits.
The recessionary trend was seen in manufacturing companies (ex-oil) that use raw materials to produce goods. For these companies, the cost of raw materials, as a percentage of net sales, rose 250 basis points. As a result, there was a 255-basis-point decline in operating margins. Consequently, the net profit of manufacturing companies declined at a faster rate, at 3.63 per cent.
Deteriorating business environment and high interest rates continued to impact capital goods. Order intake of the capital goods universe declined 21 per cent year on year, according to Motilala Oswal Research. However, with interest rates peaking out and the government attempting to speed up infra spend, the outlook has improved. The research house expects FY 12 aggregate orders to decline 10 per cent led by Bhel, excluding which order inflow is expected to grow moderately by 2 per cent YOY.
The third quarter results, however, need to be read with caution because, taking advantage of the favourable currency movement, most export-oriented companies increased their inventory valuation. For example, operating margins of Tata Motors, Sun Pharma, Coromandel International, Jindal Steel, Tata Steel and Lupin, among others, were cushioned from revaluation of inventory in the third quarter.
While revaluation of inventory improved operating margins, mark-to-market (MTM) provisioning dented growth in net profit of exporters and foreign currency borrowers.
Aurobindo Pharma suffered a setback and reported a net loss of 28 crore on account of MTM losses of Rs 185 crore. Jubilant Lifesciences’ MTM losses of Rs 155 crore resulted in a net loss of Rs 62 crore in the third quarter. Bajaj Auto’s net profit tapered largely because of MTM losses of Rs 154 crore. Also, many companies took advantage of a loophole offered by the modified accounting provision that allowed them to keep mark to market losses arising out of the rupee depreciation in abeyance. Several companies have also written back the losses provided in the first and second quarter.
However, the appreciation of rupee and the possibility of rate cut in the fourth quarter may reduce the interest cost headwinds for India Inc.
Meanwhile, the Industrial Outlook Survey conducted by Reserve Bank of India for October-December 2011 quarter signals continued moderation of business conditions in the manufacturing sector in January-March 2012 quarter. The Business Expectation Index, a measure that gives a single snapshot of the industrial outlook in each quarter, declined to 117.2 from 118.8 for the January-March 2012 quarter. Though there will be marginal improvement in production in the fourth quarter, order books, exports, imports indicate moderate demand conditions in the manufacturing sector.
According to Nischal Maheshwari, head research Edelweiss Securities, although the consensus earnings trajectory continues to witness downgrades, the pace has decelerated as compared with the previous quarter. Currently, consensus Sensex EPS estimates for FY12 at Rs 1,224 and FY13 are at Rs 1,287, respectively. He said, there have been some improvements in the margin for the first time in almost three quarters, and the breadth of earnings revision has improved. However, this in no way implies that we are out of the woods, but we may be closer to bottoming out of the earnings down cycle, he added.