India Inc is likely to post better-than-expected growth in net profit in the third quarter ended December 31 due to the low base of last year and a promising show from auto ancillary, construction, steel and sugar industries.
A total of 635 companies have declared their third-quarter results and reported 22 per cent rise in revenue and 47.3 per cent growth in net profit on an average.
Their sales are up 22.7 per cent and net profit is up 66.5 per cent. This excludes banks and finance companies.
While these companies have reported a marginal rise in net profit than in the corresponding quarter of last year, their operating margins have slipped to 14.7 per cent in the reporting quarter from the 17.4 per cent reported in the quarter ended December 2008.
The growth in sales and profit may come down considerably when more results come from sectors such as capital goods, cement, engineering, fast moving consumer goods, fertilisers, steel and telecom.
Fertilisers and pharmaceuticals have reported subdued performance so far, while cement companies have grown their net profit by 20 per cent as against over 50 per cent in the previous three quarters.
Operating margins are expected to improve sharply in the third quarter, with 635 companies recording a healthy rise of 460 basis points (bps) on an average.
The improvement has been due to better commodity prices, stimulus measures, operating leverage and low base.
Of the total sample of 391 companies using raw materials for manufacturing, margins have improved by almost 700 bps, indicating a sharp drop in cost of production. Last year, operating margins of these companies had declined by 661 bps due to a 375-bps increase in cost of raw materials, indicating higher cost of production.
The performance of the 635 companies looks healthy when compared with the same quarter of the previous year. However, in sequential terms, the net profit has been lower by almost 2 per cent despite a 6 per cent growth in net sales.
This means the corporate sector is facing pressure on margins, as raw material prices have started rising. The cost of raw materials has increased by 163 bps over the sequential quarter, resulting in a 91-bps decline in operating margins quarter-on-quarter.
Refineries are expected to post a decline in net profit on account of falling gross refinery margins. Public sector oil marketing companies are expected to report losses due to lower refining margins and no contribution from oil bonds.
Software companies showed a marginal growth in revenues, while their profit rose around 16 per cent on the back of a strong rupee.
The third-quarter performance of Dr Reddy's Labs suggests there will no big surprise from pharma companies.
Auto companies showed an 866-bps increase in margins on the back of a stimulus package in the form of excise duty cuts and easy liquidity. The margins had dipped 541 bps last year due to a rise in cost of raw materials and liquidity crunch, which led to demand recession.
Sugar manufacturers showed a 1,730-bps increase in margins, as sugar prices soared 82 per cent during the quarter. The operating margins of steel companies improved by 1,930 bps against a decline of 1,990 bps a year ago, as steel prices recovered sharply from their lows.
Reliance Industries, which has posted a 93 per cent rise in net sales, pushed the overall sales growth to 22.5 per cent.
If one excludes Reliance from the sample, net sales of the remaining companies come down sharply to 13.2 per cent. The other sales drivers so far are Hindustan Zinc, Maruti Suzuki, Bajaj Auto, Mahindra & Mahindra, Shree Renuka Sugars and Jaiprakash Associates.
The biggies showing single-digit quarterly growth are Bharti Airtel, TCS, Wipro, GAIL and Grasim Industries. Infosys, HCL Technologies, Jindal Saw and Larsen & Toubro reported declines in net sales.
The robust growth in net profit has come from Hindustan Zinc, Bajaj Auto, Maruti Suzuki, Mahindra & Mahindra, Hindustan Zinc, GAIL, Asian Paints, Renuka Sugar, Piramal Healthcare, Exide Industries and Welspun Gujarat. JSW Steel, MRPL, Spice Jet, Jubilant Organosys and Bajaj Hindusthan's turned around, while Kingfisher Airlines, Dr Reddy's Labs, Essar Oil and Mahindra Forgings reported net losses. Infosys, ICICI Bank, NMDC and Larsen & Toubro's net profit fell.
Reliance Industries reported good numbers for the third quarter, higher than the market expectation. Its net sales were higher on account of the higher volumes processed at its refineries. Refining margins were higher at $5.9/bbl compared to analysts' estimate of $5.5/bbl.
JSW Steel turned around during the quarter with a net profit of Rs 430 crore (Rs 4.3 billion) against a net loss of Rs 187 crore (Rs 1.87 billion) in the previous comparable quarter. It would continue to show strong volume growth, said analysts.
However, realisations may remain flat at current levels due to overcapacity, especially in flat products. Blended margins will improve slightly due to the improving product mix, recovery in US operations and the new benefication plant.
Bharat Heavy Electricals Limited, which performed below the market expectation, is likely to face a demand crunch if power reforms slow, says an analyst at Edelweiss.
In the domestic market, BHEL is facing stiff competition from global players, particularly from Chinese equipment manufacturers. With order book growth at record levels, any delay in execution of projects may hamper margins.
Any slowdown in the broad economy will impact Larsen and Toubro.
Any sudden surge in prices of base raw materials such as steel, aluminum and cement could affect the company's margins, despite most contracts having a built-in price escalation clause, feels the analyst.
ONGC reported a 23 per cent rise in sales and profit and its net realisations depend on upstream subsidy sharing.
Dr Reddy's is expected to do better going forward, though its third-quarter performance was affected by mark-to-market (revaluing assets at current prices) losses. The Dr Reddy's and Glaxo alliance is likely to start contributing from the next financial year.
The third-quarter performance of Bharti Airtel was in line with expectations on revenues, with operating margins and net income declining sequentially.
A telecom analyst at Kotak Securities expects deterioration in operating ratios with a further increase in competitive intensity.
Maruti Suzuki beats estimates by posting more than 100 per cent jump in net profit on the back of sustained benefits from reductions in raw material prices and absence of exchange losses.
However, the Kotak analyst sees significant uncertainty in the form of higher commodity costs, impact from stimulus withdrawal and currency movements.
Grasim has reported a single-digit growth in sales, while its net profit rose over 50 per cent on strong performance from the viscose staple fibre business, which reported a 535 per cent growth in operating profits.
The cement business also benefited from improved volumes on expanded capacities, though there was an 8 per cent decline in realisation.
