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Corporate earnings rebound in sight as operating margins touch 10-qtr high

Monday, 3 February 2014 - 1:42pm IST | Place: Mumbai | Agency: DNA

Corporate earnings for broader India Inc appear to be on a strong rebound with operating margins in the December quarter turning out to be the best in last two-and-a-half years.

An analysis of quarterly numbers announced by 157 manufacturing companies (i.e. excluding banks and financials) belonging to BSE-500 index shows that operating margins have seen 134 basis point improvement on year-on-year basis at 18.03%, highest in the last 10 quarters.

Falling raw material costs, cost-cutting initiatives along with improvement in sales and operating leverage seems to have helped the cause for these 157 BSE-500 companies that constitute nearly 45% of the overall BSE market capitalisation.

Among the sectors, the metals and telecom stocks have reported the strongest gain in operating margins led by lower commodity costs and higher realisations. The IT sector, too, saw an improvement in operating profit margins due to cost management initiatives and higher operating leverage.

In the December quarter, operating profits for these 157 companies grew by strong 26.6% -- the best in at least last six quarters -- as the aggregate growth in sales at 17.2% outpaced the 15.3% rise in total expenditure by a wide margin. This is quite an improvement vis-a-vis earlier quarters when the rise in expenditure was more or less in line with the growth in topline, leading to subdued operating profit growth.

As expected, the sales growth has been led by export-related sectors such as IT and pharma but still the aggregate revenue growth has seen moderation on a sequential basis as the same stood at 21.2% in September quarter.

The net profit growth at 15.8% y-o-y, too, has been the best in last six quarters with interest costs seeing some moderation though they still remain high. Despite the repo rate hike of 25 basis points in October, the corporates have managed to keep their interest costs in check. Interest costs as a percentage of sales for the 157 BSE-500 stocks dropped from a high of 2.76% in June 2013 quarter to 2.52% in the December quarter, helping net profit margins to rise to three quarter high of 9.57%.

However, a consistent and meaningful recovery in profitability is still some time away. The recent rate hike and possibility of monetary policy remaining tight in order to control retail inflation may impact the growth and profitability of leveraged firms in coming quarters.

The RBI last week projected growth for fiscal 2014 to come in at lower than 5% (earlier expected figure) while the fiscal 2015 growth may come in broadly 5% to 6% range.

Going forward, experts see the upcoming elections as trigger for further improvement in the margin cycle. “Looking forward, the big delta is on the external side -- the rupee is no longer overvalued on a real effective basis and global demand seems to be ascending... The worst for margins is over, but a new cycle hinges on the balance between restoration of public savings and a superior capital cycle... which, in turn, will roll out after elections,” Ridham Desai, Sheela Rathi and Utkarsh Khandelwal, analysts at Morgan Stanley, wrote in a note last week.

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