Sectoral review shows SME-dominated segments did well
Small and medium sectors were real winners in the second quarter with textiles, shipping, packaging, entertainment and edible oils outperforming all heavyweights, posting more than 100 per cent growth in net profit.
A respectable 30-plus per cent growth in net profit was also seen from the other SMEs in agro chemicals, breweries, auto ancillaries, gems & jewellery, fertilisers and paper. Banks performed in line with expectation, while the information technology sector is back in double-digit profit growth, after two quarters. The poor show continued for sectors such as automobiles, cement, chemicals, consumer durables, hotels and restaurants, print and television media, realty, sugar, tea, telecom and tyres. (Click here for table BEATING RETREAT)
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Non-ferrous metals and steel makers were unable to repeat the earlier quarter’s performance on account of a fall in prices and rise in input cost. Engineering and capital goods firms have come back to the growth path, after a disappointing first quarter. Fast moving consumer goods (FMCG) continued to post double-digit profit growth.
Revenue growth came from Cairn India and NMDC, apart from automobiles, auto ancillaries, engineering and capital goods, chemicals, edible oils, entertainment, mining & metals, packaging, power, telecom services, textiles and tyres. Decent double-digit sales growth came from agro-chemicals, FMCG, oil and gas, software, pharmaceuticals, paper, plantations, power and steel. The sales declined or eluded for cement, shipping and sugar sectors. Gems and jewellery, hotel and steel sectors did well, but marginal growth was seen in non-ferrous metals and print and television media.
High oil and oilseed prices and volumes were positive for edible oil makers, while strong growth in the automobile segment drove sales and profit growth higher for auto ancillaries. Banks did well on improving net interest margins on the back of credit growth and a decline in cost of deposits, while the electronic media cashed in on an improving public issue market and blockbuster films. Lower cement prices were negative for the sector, while telecom companies continued their slide, owing to increasing competition and higher costs.
Automobiles
While Tata Motors has not announced its Q2 results, Ashok Leyland, Bajaj Auto and TVS Motors led auto sector growth, while Hero Honda faced a rough ride. Automakers recorded net sales growth of 30 per cent, the slowest in the last three quarters. Growth continues for the two-wheeler and commercial vehicle segments, but the rate of growth has declined compared to the past three quarters. Operating margins declined sharply by 150 basis points (bps) to 11.36 per cent, as the raw materials to sales ratio rose sharply, by 300 basis points. The net profit growth rate was lower at 16 per cent, compared to 29 per cent in the first quarter and over 100 per cent in the second half of the previous financial year.
TVS Motors churned out good numbers, with profits jumping 123 per cent on improvement in margins and volume, as well as decline in interest cost. Ashok Leland’s net profit growth rate slipped below 100 per cent on flat realisation and change in product-mix. Bajaj Auto lessened input cost pressure through volume growth and price raises.
The profitability of automobile firms is expected to increase sharply after Tata Motors’ consolidated results. The company’s sales are expected to grow 35-40 per cent, driven by 33 per cent volume growth in Jaguar and Land Rover. Margins are expected to improve by 600 bps, led by JLR’s sustained performance. Consolidated profit is expected to be strong at over Rs 2,000 crore, compared with a negligible Rs 18 crore last year.
Auto ancillaries
The revenue growth rate has stagnated at 30-35 per cent in the past four quarters in a row, while profit growth slipped from over 200 per cent in the second half of 2009-10 to 40-45 per cent in the first two quarters of the current financial year.
Exide reported deceleration in the profit growth rate in the past four quarters due to higher input cost. Motherson Sumi saw 67 per cent rise in sales on the back of 60 per cent growth in the domestic business, while profit shot up 123 per cent, with a 440-bps expansion in margins. Favourable foreign currency movement supported margins to a certain extent.
Cement
A double-digit decline in sales on account of poor volume growth due to the extended monsoon. The net profit decline was 80 per cent, on poor realisation due to the fall in cement prices across the country. The operating margins declined 2,000 bps due to a 1,000-bps rise in the RM to sales ratio. Almost all big and small cement companies reported decline in sales and profit due to lower price realisation.
ACC’s sales declined 16 per cent on the back of a 3.6 per cent fall in volumes and softening of cement prices. Average realisations stood at Rs 3,339.6/tonne, down by 13.8 per cent. The RM cost per tonne was up 16.7 per cent on account of increase in slag and fly ash prices. The margins declined significantly, which led to 77 per cent decline in net profit.
Madras Cement reported 20 per cent decline in sales and 80 per cent in net profit, on account of 25 per cent decline in average realisation.
Steel
The sector has underperformed, compared to the previous three quarter. The net sales were up 17 per cent but due to the 600-bps decline in margins, net profit declined by 16 per cent. Steel Authority of India (SAIL) results were below expectations, with a single-digit rise in sales and 34 per cent decline in net profit. There was a 3.85 per cent fall in blended realisations to Rs 35,700 per tonne. The margins fell by 820 bps, due to increased coking coal cost and due to a one-time gratuity provisioning.
Consolidated Tata Steel is expected to change the Q2 profitability of the sector when the company announces its results. Its Q2 net profit is expected to be Rs 1,200 crore, against a net loss of Rs 2,707 crore in Q2 last year. The operating margins for Corus, its European arm, are likely to report an improvement year on year, but a sequential fall due to higher input costs.
Non-ferrous metals
The sector saw a decline in growth rate in sales and profit compared to the previous three quarters, due to margin compression. Operating margin of companies declined by over 300 bps, due to lower prices and higher costs. The net profit, however, increased by 24 per cent due to strong performance from Sterlite Industries, Hindustan Copper and National Aluminium. Sterlite Industries showed sharp improvement, with an improved sales volumes from the zinc, lead and aluminium segments, along with higher LME average realisations in all base metals.
The sector’s profitability is likely to change upward after aluminium giant Hindalco announces its Q2 results. The company is expected to add around Rs 250 crore in consolidated net profit, as its Canadian subsidiary, Novelis, acquired in 2007, has become self-sustaining. Novelis, says an analyst at Motilal Oswal, has renegotiated 60-70 per cent of its can contracts and the rest will be re-priced over time.
