Early birds catch very little worm

If early birds show the way, corporate India looks set to report single-digit profit growth -- the worst in five quarters -- as rising interest costs and higher raw material prices eat into declining, yet still robust, sales numbers for the quarter ended September 2011.

A Business Standard Research Bureau study shows while the sales of 399 firms to have declared their results so far have grown 26.8 per cent year-on-year, profit has grown five per cent in spite of a 27 per cent rise in income from operations.

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This is the worst since the 4.4 per cent growth recorded in the quarter ended June 2010. The quarter also witnessed contraction of operating and net profit margins.

The operating margin fell by 140 bps to 27 per cent and the net profit margin by 210 bps to 10 per cent.

Higher commodity prices and a hawkish central bank are the key culprits. For manufacturing companies, aggregate raw material cost jumped 38 per cent, while borrowing expenses rose 52 per cent.

The central bank has raised interest rates 12 times since March last year in a bid to tame inflation, and this is reflected in the Q2 results of companies across the board.

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Krishna Sanghvi, VP-equities, Kotak Mahindra Asset Management, said the results were broadly in line with expectations.

"Because of the sharp movement in the rupee during September, companies which have higher dollar loans and a smaller portion of their income in dollars will be in trouble."

The rupee has depreciated over 10 per cent and has been flirting with the 50 mark against the dollar, making things worse for companies which have to make additional provisioning on their dollar loans.

Bajaj Auto, JSW Steel, MRPL, Chennai Petroleum and Arvind Limited are among other companies to have taken hits on their bottom lines on forex losses.

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Events in Europe and the RBI credit policy scheduled to be released on Tuesday will determine the performance of companies in the coming quarters.

The market is factoring a 25 bps hike in the credit policy, feel analysts. Sailav Kaji of Padmakshi Financial said the Q2 numbers were not that bad.

"Companies clocking seven-eight per cent in a challenging environment is not bad. Since inflation numbers are high and rates are expected to remain high, this will continue for the next two quarters. Things may get better in the last quarter."

The future looks tense.

For example, capital goods companies have started feeling the heat of a slowdown, with sectoral bellwethers like Larsen & Toubro revising their guidance on new order inflows.

The grim forecast eclipsed L&T's 15 per cent jump in net profit (adjusted for last year's stake sale of Satyam).

With projects getting deferred, delayed and renegotiations of existing contracts affecting plans, there has been a 21 per cent year-on-year drop in order inflows to Rs 16,096 crore (Rs 160.96 billion) in the September 2011 quarter in the engineering and construction division, which generates 85 per cent of L&T's revenue.

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What's worse is that the company feels if the current conditions prevail, the order inflow growth could be a mere 5 per cent for FY12, far lower than its guidance of 15 per cent growth at the start of the fiscal.

"If inflationary pressures continue, the ability to maintain margins will be difficult.

"The margin drop will persist,'' L&T's chief financial officer Shankar Raman said, estimating a 75-125 basis point (0.75-1.25 per cent) fall in margins in the engineering and construction sector.

Sanghvi added the whole story was not out yet.

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"Apart from the IT and banking space, a lot of companies are yet to declare numbers."

Some of the major public sector firms, including oil marketing companies and frontline companies in the cement and metals space, are also yet to report their Q2 results.

The previous year's aggregate net profit excludes exceptional income of Rs 16,209 crore (Rs 162.09 billion) earned by Piramal Healthcare on the sale of its domestic formulation business to Abbott Healthcare.

If this extraordinary item is included, the analysed companies will show a fall of 27 per cent in profits instead of growth.

Almost half the 399 companies reported fall in profits.

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As many as 144 firms have recorded a fall in their net profit, 32 companies went into the red and 24 firms reported higher net losses as compared to the previous year quarter.

Among the sectors, capital goods, steel, realty, auto ancillaries, breweries, cables, telecom, agro chemicals and petrochemicals reported a decline in net profit, while paper and construction turned into the red.

Cairn India, Bajaj Holdings, JSW Steel, Idea Cellular, Crompton Greaves, United Phosphorus, Exide Industries and Sintex Industries reported a more than 40 per cent drop in their bottom line.

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However, there are some stand-out sectors such as banks, information technology, automobiles, non-ferrous metals and pharmaceuticals which reported an average 23 per cent growth in net profit. 

If one excludes these sectors from the sample, the net profit growth will decline to nine per cent.

Grasim Industries, HDFC Bank, Axis Bank, Hindustan Zinc, UltraTech Cement and Petronet LNG are the trend busters, having reported growth of over 25 per cent in net profit.

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Events in Europe and the RBI credit policy scheduled to be released on Tuesday will determine the performance of companies in the coming quarters.

The market is factoring a 25 bps hike in the credit policy, feel analysts. Sailav Kaji of Padmakshi Financial said the Q2 numbers were not that bad.

"Companies clocking seven-eight per cent in a challenging environment is not bad. Since inflation numbers are high and rates are expected to remain high, this will continue for the next two quarters. Things may get better in the last quarter."