Other income, easier fx rule burnish Q3

If the December quarter data are anything to go by, corporate earnings growth could be near the bottom.

After a dismal September quarter, which saw companies reporting their worst numbers in the last two-and-a-half years, corporate India has seen a slight rebound in net profit growth helped in no small measure by relaxed norms on treatment of foreign exchange losses.

According to DNA Money data, the aggregate net profit for 302 companies (excluding banks and financials) listed on the BSE 500, constituting almost 63% of the Bombay Stock Exchange market capitalisation, has grown by 1.4% in December, after witnessing a de-growth of 18.7% in September. Aggregate operating profits, too, are up 5.1% after seeing a fall of 2.3%.

Experts said the results are in line, given the low expectations.

“Corporates have met the Street, though expectations had been reduced somewhat,” said S Naren, chief investment officer (equity) at ICICI Prudential Asset Management.

Naren thinks the worst may be over for companies.

Nishcal Maheshwari, head of research at Edelweiss Securities, said the December quarter has been hard on profits while sales have been more resilient. “Demand remains strong but companies have lost pricing power. So while the topline has grown quite a bit, the bottomline is a laggard.”

Aggregate sales growth stood at 24.7% in December, well ahead of the 20.8% seen in September. It was led by export sectors such as information technology (29% growth), pharma (23%) and refineries (45%), while domestic sectors such as cement (27.3%) and FMCG (21.7%) benefited from pricing power.

Anand Shah, chief investment officer at BNP Paribas Mutual Fund, said the results have been quite divergent across sectors.

“It’s the ‘funnel effect’ where topline growth continues to benefit from inflation and real growth, while Ebitda or operating profit growth and the bottomline are getting impacted the other way round. Companies also benefited from the relaxation in terms of not booking losses related to foreign exchange fluctuation on their outstanding foreign debt immediately,” he said.

Net profit growth has been strong for sectors such as cement (67% year-on-year increase), FMCG (29%), IT (19.7%)and gas distribution (20.8%), while the worst performers were metals and oil & gas with 29% and 22% decline, respectively.

The bottomline was also aided by higher other income in December — it rose a whopping 79.5%, compared with a decline of 54% in September. Higher treasury income and some forex gains may be the reason for this, experts said.

“The rise in other income may also be due to reluctance of companies to spend on expansion. Companies are conserving cash, deploying it in the market,” Maheshwari said.

The current quarter is also seen as challenging. Any earnings rebound due to better macros and base effect is seen only in the next fiscal.

“The slowdown is quite evident. Demand is clearly tapering, interest rates continue to remain at high levels and the lag effect of higher input costs is likely to get reflected in next quarter too,” said Murali Krishnan, head of institutional broking at Karvy Stock Broking.

Shah concurs. “We are somewhere near the bottom in terms of earnings cycle. The topline in the coming quarters may get stressed due to inflationary pressure affecting demand and also net profit growth. We may see better numbers in the second half of 2012,” he said.

The refrain is fiscal 2013 would be definitely better than the current one.

“The slowdown has been penciled in. Analysts are already working on a 7% GDP growth estimate, which is the bare minimum. There is not much room for further downgrades,” said Sarabjit Kaur Nangra, vice-president, research, at Angel Broking.
The consensus earnings estimate for Sensex in the next fiscal stands at Rs1,289, which translates into a 12.3% growth over current fiscal estimates of around Rs1,100.