Sales growth likely to be the best in last six quarters; rupee weakness expected to boost profits of export-oriented sectors.
The third quarter (Q3, October-December) earnings for Sensex companies will be announced this week, and they are likely to be in double digits for the second consecutive quarter. Sales growth is likely to be the best in the last six quarters.
With the weaker rupee aiding the performance of export-oriented sectors like pharma, IT and metals, and revenue growth improving across most of the sectors, companies whose stocks constitute the Sensex are expected to report 11-13% growth, believe experts.
Sensex companies had reported a robust 14.3% on-year growth in Q2, after seeing a de-growth of over 2% each the previous two quarters.
The 14.25% depreciation in the value of the rupee against the dollar is likely to boost the profit after tax (PAT) growth of the export-oriented sectors in Q3.
Strong sales numbers from Tata Motors, and better performance from companies like Bharti Airtel and Tata Steel on the back of improving realisations and higher operating profits, too, would aid the profit growth of Sensex companies.
On the revenue front, the topline for Sensex companies is expected to show 15-18% on-year jump. Ratings agency Crisil estimates that revenues of broader Corporate India (excluding financials and oil marketing companies) will likely grow by 7-9%.
Though top IT companies are likely to witness a seasonally weak quarter, the rupee weakness is likely to help the top 4 IT firms to report an average on-year revenue growth of over 26%. Pharma firms, too, are set to report higher sales growth.
“Apart from IT, pharmaceuticals and textiles, domestic consumption-linked sectors will see moderate improvement in revenue growth, as rural demand picks up, thanks to a better monsoon. Also, while growth in investment-linked sectors will remain weak, unlike in the last many quarters, it is not expected to deteriorate further,” wrote Mukesh Agarwal, president, Crisil Research, in a note.
The operating margins for Sensex companies are likely to see a contraction and may come in at around 16.5-17% on account of fall in operating margins in the cyclical sectors.
“The persistence of headwinds in the cyclical sectors is expected to weigh on their margin performance during 3QFY2014 as well. As a result, we expect margin deterioration for both the Sensex as well as our coverage companies. For the Sensex companies, we expect a margin contraction of 92-bps on-year and 46-bps on-quarter,” wrote Angel Broking analysts in a Q3 preview report.
Profit margin is also likely to remain low on persistently high cost of funds and mark-to-market forex losses.
Going ahead, experts see earnings improving drastically next fiscal as they feel that the worst is behind them. “The recovery in growth is likely to be back-ended with fiscal drag / election uncertainty likely to be overhang till mid of calendar year 2014. Earnings growth for domestic companies, however, should improve materially from close to 0% in FY14 to around 15% in FY15 – reversing the falling trend in corporate earnings. Overall, we expect FY15 to see mid-teens earnings growth – the best in four years,” wrote Mahesh Nandurkar, Abhinav Sinha and Rohit Kadam, analysts at CLSA.
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