India Inc may face cost pressure

Analysts expect operating, net profit to be lower than sales growth in Q4.

All eyes are now on the fourth- quarter results of Indian companies, which will start flowing in this week. The Sensex is near its all-time high and corporate performance this quarter will decide whether stock prices are too high.

As far as market expectations are concerned, analysts estimate this quarter to be better than the previous two quarters for India Inc in terms of top line growth due to robust demand.

But cost pressures could result in lower growth in operating and net profit, both of which are expected to be lower than net sales growth.

For the March 2006 quarter, analysts""taking the average projections by Merril Lynch, ICICI Securities and Motilal Oswal Securities""expect net sales to grow at 21.7 per cent for the 30 stocks comprising the Sensex, to Rs 1,16,455 crore in the fourth quarter of 2005-06, as compared with the March 2005 quarter.

Operating profit is expected to grow at 17.35 per cent to Rs 31,486 crore. With these estimates, analysts expect fourth-quarter growth to be much better than growth in the previous two quarters.

In the December 2005 quarter, the Sensex stocks had reported a mere 10.66 per cent growth year-on-year in operating profit to Rs 28,795.44 crore, with net sales expanding 13.7 per cent to Rs 99,401 crore. In the September quarter, net sales had increased by 17.71 per cent with operating profit growing by 10.89 per cent.

Higher sales growth forecast in the March 2006 quarter as compared with the December 2005 quarter is due to an improved performance from diverse industries.

For instance, sectors such as IT, metals, telecom, banking and financial services are expected to do well. TCS, Wipro and Infosys are expected to see 40 per cent plus growth in their top line.

With strong aluminium prices this year, Hindalco's sales are expected to grow at 55-60 per cent. Dr Reddy's is also likely to grow revenues at over 40 per cent. Upstream player ONGC is expected to be a key beneficiary of higher crude oil prices in the March 2006 quarter.

The major improvement in operating profit is expected from companies in sectors such as engineering, cement, automobiles and IT. The net profit growth is expected to be 15.05 per cent.

However, these figures exclude NTPC and Tata Power, both of which had seen net profits go up last year due to extraordinary income last March. This quarter, however, analysts expect their net profits to fall over 30 per cent.

Reliance Industries and SBI are expected to see a flattish trend in net profit. Meanwhile, IT (TCS, Wipro, Infosys and Satyam), telecom (Bharti) and engineering (BHEL and L&T) are expected to see an impressive growth in their net profits.

Of course, the growth anticipated in the March 2006 quarter, pales in comparison to the sizzling performance recorded by Sensex stocks in the June 2005 quarter, when the 30 stocks' operating profit grew 31.5 per cent y-o-y along with a 23.2 per cent growth in sales.

In the March 2005 quarter, net sales for the Sensex stocks, excluding TCS, had increased by 24.72 per cent y-o-y, with an operating profit growth of 36.45 per cent and a rise of 51.11 per cent in net profit.