India Inc's Q3 earnings grow fastest in 3 quarters
NEW DELHI: Corporate earnings for the three months to December grew at the fastest pace in the past three quarters boosted by strong demand as companies worked their way through rising cost, which can dent profit margins going forward.
Aggregate net profit of 450 companies that have declared results till date for the third quarter grew 25% over the year-ago period, an ET study shows. This is the best since the fourth quarter of the fiscal ended March 2010 when companies enjoyed high year-on-year growth due to unusually low business sentiments in the quarter ended March 2009. The benchmark stock indices that had bottomed out in March 2009 went on to more than double over the past two years only to correct by 10% over the past few weeks.
Although analysts say investors have turned more cautious on India due to macro-economic factors, the poor run of stock prices is not in consonance with the earnings outlook. "Given the set of profit numbers that companies have come up with, the stock market should have gone up rather than down," says Rajesh Jain, head of research (retail) at broking firm Religare Securities.
The market is reacting more to reverse flow of foreign institutional investors money to the US besides negative sentiments related to rising interest costs and inflation rather than positive aspect of Indian corporate earnings, he said.
A number of firms beat analysts earnings estimates for the third quarter, including the countrys largest lender SBI , two-wheeler maker Bajaj Auto , engineering and construction firm L&T, cigarette and packaged foods maker ITC , besides IT services firm, TCS.
Others such as energy giant Reliance Industries , IT services firm Infosys, drugmaker Dr Reddys and consumer products firm Hindustan Unil! ever lagged expectations.
Total revenue for the sample (excluding banks and oil & gas firms) in the ET study rose 26% over the year-ago period, the best in at least five quarters. This reflected strong domestic demand for products and services despite overseas markets yet to bounce back strongly after the economic recession hit the West three years ago.
Financial performance of the bigger firms closely tracked by analysts has also been strong.
Half the companies in the 50-stock benchmark index Nifty that have declared results (excluding oil & gas and banks) have also posted healthy year-on-year growth with revenues rising 22%, fastest in at least five quarters. Their net profit has grown 23% ahead of street expectations of 20% rise.
For the bigger sample of 450 firms though, increase in raw material costs for manufacturers and wage bill rise for all firms was higher than sales growth for the third consecutive quarter. Although companies managed to maintain both their operating and net margins at 25% and 13% respectively, there are risks going forward.
Cost of borrowing jumped 32% over the year ago period. With the rise in key policy rates by the Indian central bank early this week, interest cost will only rise in the coming quarters that could hurt earnings going forward.
Another worry for firms is the marginal slowdown in sequential rise in revenue for the quarter ended December as against that in the second quarter. While firms managed to maintain 9% sequential rise in both operating and net profit last quarter, if raw material costs keep rising at a fast clip, companies will feel the heat of slowing sales growth and rising cost of operations that could start eating into profit growth faster than they have till now.
This could play out in ! the stoc kmarkets too. "Given that most recent capital flows in India have been portfolio flows, and unlike 2010, global hot money flows may not be indiscriminately emerging market-oriented, the risk of capital flow volatility is indeed greater," Deutsche Bank analysts said in a report dated January 21.
Aggregate net profit of 450 companies that have declared results till date for the third quarter grew 25% over the year-ago period, an ET study shows. This is the best since the fourth quarter of the fiscal ended March 2010 when companies enjoyed high year-on-year growth due to unusually low business sentiments in the quarter ended March 2009. The benchmark stock indices that had bottomed out in March 2009 went on to more than double over the past two years only to correct by 10% over the past few weeks.
Although analysts say investors have turned more cautious on India due to macro-economic factors, the poor run of stock prices is not in consonance with the earnings outlook. "Given the set of profit numbers that companies have come up with, the stock market should have gone up rather than down," says Rajesh Jain, head of research (retail) at broking firm Religare Securities.
The market is reacting more to reverse flow of foreign institutional investors money to the US besides negative sentiments related to rising interest costs and inflation rather than positive aspect of Indian corporate earnings, he said.
A number of firms beat analysts earnings estimates for the third quarter, including the countrys largest lender SBI , two-wheeler maker Bajaj Auto , engineering and construction firm L&T, cigarette and packaged foods maker ITC , besides IT services firm, TCS.
Others such as energy giant Reliance Industries , IT services firm Infosys, drugmaker Dr Reddys and consumer products firm Hindustan Unil! ever lagged expectations.
Total revenue for the sample (excluding banks and oil & gas firms) in the ET study rose 26% over the year-ago period, the best in at least five quarters. This reflected strong domestic demand for products and services despite overseas markets yet to bounce back strongly after the economic recession hit the West three years ago.
Financial performance of the bigger firms closely tracked by analysts has also been strong.
Half the companies in the 50-stock benchmark index Nifty that have declared results (excluding oil & gas and banks) have also posted healthy year-on-year growth with revenues rising 22%, fastest in at least five quarters. Their net profit has grown 23% ahead of street expectations of 20% rise.
For the bigger sample of 450 firms though, increase in raw material costs for manufacturers and wage bill rise for all firms was higher than sales growth for the third consecutive quarter. Although companies managed to maintain both their operating and net margins at 25% and 13% respectively, there are risks going forward.
Cost of borrowing jumped 32% over the year ago period. With the rise in key policy rates by the Indian central bank early this week, interest cost will only rise in the coming quarters that could hurt earnings going forward.
Another worry for firms is the marginal slowdown in sequential rise in revenue for the quarter ended December as against that in the second quarter. While firms managed to maintain 9% sequential rise in both operating and net profit last quarter, if raw material costs keep rising at a fast clip, companies will feel the heat of slowing sales growth and rising cost of operations that could start eating into profit growth faster than they have till now.
This could play out in ! the stoc kmarkets too. "Given that most recent capital flows in India have been portfolio flows, and unlike 2010, global hot money flows may not be indiscriminately emerging market-oriented, the risk of capital flow volatility is indeed greater," Deutsche Bank analysts said in a report dated January 21.
Comments