Q2 show: India Inc on growth track but margins remain a worry

On October 12,when IT giant Infosys unveils its second quarter results,it is unlikely to disappoint investors.

Written by Aditya Khilnani | Mumbai | Published:October 10, 2011 12:08 am

On October 12,when IT giant Infosys unveils its second quarter results,it is unlikely to disappoint investors. However,with the earnings season set to kick off,investors who have seen a 19.8 per cent fall in the Sensex over the last 12 months are anxious about the slowdown in the economy,rising inflation and interest rates and their impact on corporate profits.

The perception on the street is that while top line and operating profits of corporate India will register positive growth rates,profitability will come under pressure due to the unabated hike in key policy rates by the Reserve Bank of India.

A crucial determinant during the quarter would be the earnings downgrade cycle,and whether it can intensify on account of significant local and macro headwinds.

“As of now,we expect the broader market earnings to grow at 11 per cent compounded annual growth rate (CAGR) over FY’11-FY’13 estimates. We estimate an 11.4 per cent year-on year (YoY) decline in net profit for our coverage universe for Q2FY12,” said an analyst from ICICI Direct.

The firm expects its coverage universe (ex-Banking,Financial Services and Insurance or BFSI) to post a revenue growth of 21.3 per cent YoY while quarter-on-quarter (QoQ) growth would be modest at 2.1 per cent since Q2 is a cyclically weak quarter for most sectors.

At the same time,earnings before interest,tax,depreciation and amortisation (EBITDA) growth of 7 per cent YoY will not mirror the revenue growth as most companies will face the full blown impact of high input prices and rise in other operating expenditure. This will impact operating margins by 215 basis points to 16.1 per cent in the second quarter (July-Sept) of 2011-12.

Angel Broking,a leading retail stock broking house in India,estimates Q2 to show 18 per cent growth in turnover,nearly two and half times the change in net profit across sectors.

Analysts expect cement (volume and realisation based growth),FMCG (relatively resilient demand coupled with price led growth) and IT (sequential rise in volume growth) to put in a robust showing. On the other hand,sectors like automobiles,capital goods,metals and telecom will report revenue growth but the same will not reflect on their profitability as high capital expenditure,high working capital,high interest rates and one-offs are likely to spoil the show.

Sectors relatively isolated from domestic issues have fared better. IT services,for example,have maintained profit margins given the industry nature being labour rather than capital intensive. The steep depreciation of the rupee against the US dollar in the last month — 11 per cent decline since August 1 — has also boosted the competitiveness of Indian exports,metals in particular,especially as the Chinese yuan appreciated in the same period.

The market expects a mixed performance within the banking sector as private banks (24 per cent YoY estimated net profit growth in Q2) are expected to post a better performance vis-a-vis their PSU peers (6 per cent YoY decline) as pressure on asset quality and subsequent provisioning would be high in the latter.

Power utilities are expected to report another poor quarter because of high fuel costs and lower merchant realisation,especially after the reduction of gas supply from the KG-D6 block. Funding of power projects,shrinking domestic fuel availability and poor efficiency of coal based projects remains a concern. “NTPC is expected to perform strongest in energy given its highly transparent and regulated business model,” says a note from IDBI Capital.

The recent decline in crude oil prices to around $110 per barrel is expected to stimulate supply and increase margins in the auto sector next quarter. Angel Broking expects ONGC,RIL and GAIL to report the highest earnings in oil and gas.

Moreover,the threat of double-digit inflation may result in demand slowing in retail sector.

What to expect this time?

* Cement (volume and realisation based growth),FMCG (relatively resilient demand coupled with price led growth) and IT (sequential rise in volume growth) to put a robust show (positive revenues and net income growth on a YoY basis)

* Sectors like automobile,capital goods/infrastructure,metals and telecom will report revenue growth but the same will not reflect on their profitability as high capex,high working capital,high interest rates and one-offs could spoil the show

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