Companies yet to face full heat of higher rates, input costs

Topline growth of companies in October-December has been the highest in last seven quarters, buoyed by strong demand.

Net revenues for 218 companies (excluding banking and oil marketers) that have declared their December quarter results so far is up 26.6% year on year, primarily led by those in the capital goods, information technology and automobile sectors.

However, operating margins at 19.4% are the lowest in the last six quarters; the good side to this is that there has been no serious
sequential deterioration — margins are down only 20 basis points (bps) on a quarter-on-quarter basis.

“The earnings so far have been relatively good and in line with expectations. Bankshave reported good numbers, as have IT and auto. Headwinds like rising interest rates and higher commodity prices have started increasing towards the latter part of the quarter and hence the full impact of these on margins would not be seen in third-quarter results,” said Abbas Merchant, senior AVP-research at Jaypee Capital Services.

The automobile and ancilliary sectors continue to benefit from higher volume growth — companies in these segments saw a strong 30.6% and 22% year-on-year jump in topline numbers.
 
Similarly, software companies have been beneficiaries of higher discretionary spending and improving outlook in the US — with Infosys (topline growth of 24%), TCS (26%) and HCL Technologies (36%) being the major beneficiaries.

In the capital goods space, L&T and Bhel reported 40% and 25% topline growth, respectively, on account of better execution.
The net profit of companies reporting earnings so far has risen 19.3% year on year with companies in banking, gas distribution, textiles, packaging and automobiles outperforming.

Net profit for 19 banks surged 21.7% as net interest income rocketed 39.4%. Automotive companies reported 23-51% growth in bottomline, while companies like GAIL, Indraprastha and Petronet LNG saw 35-60% growth.

But analysts expect the rising cost of inputs and higher commodity prices to impact earnings growth in the coming quarters.
The sectors which are expected to continue doing well would be global cyclicals such as commodities and IT.

“The stocks in software and energy sectors would be beneficiaries in any case — whether its restocking or sustained recovery in the developed countries,” said Sandeep Nanda, CIO at Bharti AXA Life Insurance.

Reliance Industries reported lower than expected numbers in the December quarter, but analysts expect the coming quarter to be good for the company.

“We may see margin pressures creeping in coming quarters for most of the sectors but rising crude prices would benefit refiners like RIL,” said Merchant.