As the fourth quarter results season sets in amid a global economic recession, focus shifts to the 30 Sensex companies to get a sense of what could be in store. The finding: More than half of them are poised to report a decline in net profit.
Yet another bout of bad news is about to break. For the first time since 1998, when India Inc started declaring quarterly results, most of the 30 Sensex companies look poised to post a decline in sales as well as net profits in a fourth quarter.
As many as 16 Sensex companies are expected to record a fall in their net profits in the fourth quarter, compared to 14 in the third quarter. But the worst is likely to come from sector leaders such as Tata Steel and Ranbaxy Laboratories. While Tata Steel is expected to post a consolidated (including Corus) net loss of over Rs 900 crore, Ranbaxy is likely to uncover a wound inflicted by mark-to-market (MTM) provisions.
Among others, DLF, Grasim, Hindalco, ICICI Bank, Maruti Suzuki, Mahindra & Mahindra (M&M), Sterlite Industries and Tata Motors could see a significant decline in net profits, while the fall in net for Reliance Industries (RIL), Reliance Communications (RCom) and Wipro could be modest.
The Sensex companies had reported an 11 per cent drop in their net profits despite a single-digit revenue growth in the third quarter. However, in the first two quarters, these companies had recorded a significant growth in their revenues and had also reported growth in net profits. To be precise, their revenues and net profits grew by 29.6 per cent and 17.5 per cent respectively in the first quarter, while the same jumped by 27.4 per cent and 3 per cent in the second quarter.
Most corporate analysts expect ACC, Bharti Airtel, Bharat Heavy Electricals (BHEL), HDFC Bank, Hindustan Unilever, Infosys Technologies, NTPC, ONGC and Tata Power to show a strong net profit growth of over 20 per cent in the fourth quarter.
A growth in net sales is expected to come from ACC, Bharti Airtel, Bhel, HDFC Bank, Infosys Technologies, Jaiprakash Associates, Larsen & Toubro (L&T), Maruti Suzuki, Reliance Infra, TCS and Wipro. These firms are likely to show a strong 20 per cent-plus growth. But DLF, Hindalco, ICICI Bank, M&M, RIL, Sterlite Industries and Tata Motors are likely to show decline in sales.
Operating profits of the Sensex companies are expected to dip by 8 per cent and margins by 130 basis points (bps) year-on-year (y-o-y). The top five margin performers in the Sensex could be Tata Power, Reliance Infra, Infosys, HDFC Bank and L&T. The losers on this front are expected to be Ranbaxy, DLF, Tata Steel, Sterlite and Tata Motors.
However, Edelweiss analysts expect core earnings of the Sensex companies to decline by 12 per cent and their revenues by 4 per cent. These analysts see the firms' operating margins improve by 81 bps. They attribute their optimism to falling commodity prices that have eased input cost pressure. However, this will not be sufficient to offset the adverse impact of the reverse operating leverage. This could be the second quarter in a row to see declining earnings, but the fall this time may be more widespread than in the previous quarter, they say.
While the decline in earnings in the third quarter was led by high commodity prices, this time round it is the slowdown that is going to play the spoilsport. In the fourth quarter, earnings are expected to decline in real estate, automobiles, BFSI, media, construction, metals and cement sectors. However, oil marketing companies are expected to post a strong earnings growth, while the earnings growth for FMCG and capital goods could be marginal.
According to Religare Research, the fourth quarter promises improvement in corporate performance, compared to the worst-case expectations built up following the third quarter results. Religare expects the net profits of the Sensex companies to dip 9 per cent as against a 15 per cent decline estimated at the beginning of the quarter.
Importantly, Religare Research expects the Sensex companies to report a 4 per cent improvement in net profits on a quarter-on-quarter (q-o-q) basis. However, auto, oil & gas and metals could undermine the quarter's performance. The key concern for the quarter is that several large players are facing the risk of earnings erosion due to MTM losses. According to Religare Research, operating margins of the Sensex companies are expected to shrink by 381 bps, a much lower decline than the 462-bps drop witnessed in the third quarter.
The biggest contributors to the earnings growth of the Sensex companies in the fourth quarter could be ONGC and SBI. These two are likely to contribute 17 per cent and 12 per cent respectively to the Sensex companies' y-o-y growth. Other Sensex constituents with single-digit contributions to the earnings growth could be Bharti Airtel, Infosys, Bhel and HDFC Bank.
According to Motilal Oswal Securities (MOSL) Research, while 14 of the 30 Sensex companies could contribute to the overall earnings growth, 14 others may make negative contributions. The biggest among the second set of 14 companies are likely to be Tata Steel (-61 per cent), DLF (-38 per cent), Sterlite (-16 per cent), Tata Motors (-13 per cent) and ICICI Bank (-9 per cent).
Downgrades in the Sensex earnings per share (EPS) estimates, which commenced with the fourth quarter ended March 2008, have been continuous. According to MOSL, though there is no change in the EPS estimate of Rs 886 for 2009-10, for 2008-09 the estimate is Rs 877, slightly up from the earlier estimate of Rs 840 made in results review for the third quarter ended December 2008.
