March 2008 quarter: Not quality time

We're not mid-way into the March 2008 quarter earnings season yet with several big firms yet to announce their results. But a key takeaway form the available universe is that the quality of earnings has not been up to scratch.

After the shocker from BHEL which saw an increase in gross revenues of just 15 per cent, came some weak numbers from ABB, which posted a sales growth of just 17 per cent. Slower execution appeared be a common theme with Siemens reporting an 86 per cent crash in the operating profit.

India's biggest power producer NTPC's provisional numbers show that its net profit for Q4FY08 will actually fall post adjustments. Wall Street woes for TCS resulted in the tech major turning in only a 3 per cent sequential growth in revenues and a140 basis points fall in the ebit margin.

A weak petrochem market meant Reliance Industries couldn't hold on to margins; they slipped 270 basis points. Consumers aren't buying cars""that was the story of Maruti which saw revenues up just 9 per cent and an operating margin dented by 140 basis points.

Nestle and Hindustan Unilever are able to sell their wares but the others are struggling somewhat. What's more, higher costs have eaten into operating margins for HUL, Dabur and Marico.

Banks may have seen their loan books grow fairly well but profits have been driven in some instances by lower provisioning and in others by treasury gains and also write backs of taxes.

Net interest margins aren't holding up too well, partly because of increases in the cash reserve ratio and because prime lending rates were cut earlier in the year. What's worrying is the slip in asset quality : State Bank of India has reported a higher npls for the farm sector.

The story in metals isn't great either; Hindalco's operating margin was dented by 600 basis points due to flat realisations and higher costs. Reliance Communications saw wireless revenues grow just 5 per cent sequentially and even if drug major Cipla posted a 240 basis points rise in margins, the run rate is well below that achieved in previous quarters.

In the real estate space, market leader DLF's March quarter profit rose just 1.5 per cent sequentially as it yielded 500 basis points in the operating margins; receivables are up.

Broadcaster Zee's operating margins have stayed flat despite the top line growing 33 per cent. while cement firm Ultratech's revenues were up just 9.3 per cent despite better realisations. With earnings up a stunning 48 per cent and operating margins up 220 basis points, the star of the show so far is probably Nestle.

JSW Steel: Hard times

The Rs 12,456 crore JSW Steel's operating profit margins fell an estimated 970 basis points to 23 per cent in the March 2008 quarter because of a sharp increase in the costs of iron ore, coal and imported coke, point out analysts. JSW's standalone( excluding Siscol) net sales rose a reasonably good 25 per cent to Rs 3126 crore.

While realisations improved by an estimated 16 per cent compared with a year back to Rs 36, 000 per tonne, it was not enough to offset the rise in input costs.

Volumes for the steelmaker were up 10 per cent at 0.86 million tonnes. For FY 08, excluding SISCOL, JSW's operating profit margin fell 1050 basis points to 22.3 per cent.

The company is expected to complete its brownfield expansion by September 2008 and that should help raise its capacity from 3.8 million tonnes to 6.8 million tonnes.

However, the street is concerned at the government's steps to control steel prices and regulate exports at a time when the industry is grappling with surging input costs.

The stock ended flat at Rs 880 on Wednesday and has been an under-performer since the start of the calendar year falling 33 per cent compared with a 14.5 per cent fall in the Sensex. The stock trades at 11.7 times estimated FY 09 earnings and should be an under - performer.

Tata Steel, at Rs 825, gets a discounting of six times estimated FY 09 earnings and should move in line with the market.