Auto, pharma do well; cement, steel, telecom net may see a sharp fall.
The December quarter results announced by companies show a relatively moderate performance. A total of 360 companies from manufacturing and financial sectors have announced their results. They’ve reported a 20.7 per cent rise in revenue and 22 per cent growth in net profit.
With the favourable base effect wearing off and margin pressures creeping in, the profit growth is likely to be around 20 per cent. During the quarter-ended December 2009, the corporate sector had reported net profit growth of a little over 30 per cent.
Operating margins are up five basis points on a yearly basis, as the total expenditure to sales ratio has remained unchanged over the year. The cost of raw materials, which rose at a slower pace of 18.1 per cent compared to sales growth of 19.6 per cent, helped manufacturers show a small growth in operating margins.(Click for table)
More than half, or 183 companies, outperformed the sample by reporting net profit growth of 25 per cent. The net profit of as many as 61 companies more than doubled, 96 posted profit growth in the range of 25-100 per cent and 26 saw a turnaround.
A sector-wise analysis suggests moderate growth in earnings in sectors such as information technology, auto ancillaries and banks. Automobiles and pharmaceuticals are expected to do well, but cement, steel and telecom may see a sharp decline in profit.(Click for EARLY BIRDS)
Analysts’ view
Reliance Industries’ earnings from refining and petrochemicals continued to improve, with its refining throughput of 16.1 mt much better than expectations. According to Edelweiss Research, at $9/bbl, the gross refining margin was marginally lower than the estimate of $9.25/bbl. Integrated polyester margins, at $1,200/mt, were the highest in the decade. According to analysts at Citigroup Research, crude oil production from the Krishna-Godavari (KG) block was down 21 per cent quarter-on-quarter. Also, lack of clarity on raising the gas output from the KG-D6 field beyond 60 mscmd will limit future earnings. At Rs 959, the stock has been down three per cent since the results, despite a buy call from analysts.
ICICI Bank reported a 12.3 per cent rise in net interest income, after considering its merger with Bank of Rajasthan. After the merger, it was up just eight per cent. The bank’s net interest margins (NIMs) remained stable at 2.6 per cent. Its third quarter performance was built on the good work done in the previous quarters. The consolidated profit growth of 77.5 per cent was on the back of a change in the accounting policy in the life insurance business. The stock was up after the results, but fell three per cent to Rs 1,038 after the monetary policy review.
Punjab National Bank reported an eight per cent increase in net profit, four per cent lower than the market estimate. NIMs of 4.13 per cent were on the back of a higher increase in yield on advances due to an increase of 100 basis points (bps) in the base rate and 75 bps in BPLR during the quarter. The slippages of Rs 1,000 crore were high, resulting in higher provisions.
State Bank of India’s profits were up 14 per cent. Qualitatively, it was a strong quarter, with a 17-bps rise in NIMs, high proportion of low-cost deposits and a 22 per cent increase in lending. NIMs were up 18 bps to 3.61 per cent.
Banking sector analysts indicate that SBI’s net profit increase of 14 per cent was due to inadequate provisions for dual rate housing loans. A Reserve Bank of India (RBI) circular required the bank to provide a cover on two per cent of the Rs 30,000 crore of teaser home loans during the quarter. The management believes the bank’s special home loan product does not come under the circular’s purview. Going ahead, the bank has to provide Rs 140 crore for gratuity, Rs 540 crore for higher standard provisioning on special home loan products and pension provisions. SBI’s stock has corrected significantly in the past three months due to macro concerns and apprehensions about its asset quality and NIMs.
ITC’s net revenues were up 19 per cent, primarily driven by cigarettes, other fast moving consumer goods (FMCG)and the agro business. Operating margins were a flat 33.6 per cent. FMCG losses continued to decline despite new launches. The performance of hotels was disappointing, as the Commonwealth Games impacted the October results. According to an analyst, the company is entering a phase of high free cash flow of around Rs 20/share over 2010-2013. With no increase in capex plans, an increase in the dividend payout ratio is likely.
BHEL reported strong revenue growth, aided by one-offs of about Rs 440 crore due to revision of the revenue recognition methodology. This led to an increase of Rs 88 crore in profit before tax and Rs 60 crore in net profit, according to analysts. Operating margins were up 250 bps due to various cost-control measures, but this may not sustain in the face of higher commodity prices. During the last rally in commodity prices, BHEL’s margins were affected the most among peers, though with a lag.
Bajaj Auto did well in the third quarter, beating analysts’ estimates by around seven per cent. The company has been on the growth path for the last three quarters and has been maintaining margins of over 20 per cent. The stock has underperformed the Sensex in recent days, possibly due to the seasonally weak volumes in November and December.
IT picture
Infosys Technologies disappointed the Street, with only a three per cent increase in volume. This has been attributed to higher customer closure days, especially at some of its top client sites this holiday season, resulting in a drop in utilisations and lack of any budget flush. However, according to an HSBC analyst, the strength in business process outsourcing and products businesses, which resulted in a reasonable overall top line growth of six per cent quarter-on-quarter in dollar terms, has gone totally unnoticed.
The management expects 2011-12 to be a ‘normal’ year when the information technology industry can grow 18-20 per cent and Infosys even more. The stock was down five per cent after the announcement but recovered after the results, up 1.3 per cent.
Tata Consultancy Services (TCS) reported a good set of numbers, outperforming analysts’ expectations. According to the management, growth was not led by pent-up demand or a budgetary flush but by investments made by them in the different markets. The outperformance at the net profit level was largely on the back of higher foreign exchange (forex) gains of $11.6 million, as against a loss in the second quarter. TCS’s growth was broad-based in primary geographies of the US and Europe. Other than telecom, all vertical markets reported strong growth. The management expects telecom growth to improve in 2011 but remain slower than the overall group growth.
Wipro’s 5.6 per cent quarter-on-quarter dollar revenue growth was lower than market expectations. At three-five per cent, revenue growth guidance for the fourth quarter has been lower than market expectations. A lower growth compared to peers is attributed to its financial services vertical, which contributes only 27 per cent to total revenue as compared to 36-45 per cent for peers. So, analysts expect Wipro to underperform the latter in revenue growth for the next two to three quarters.
