Robust demand delivers topline, rising costs curb bottomline

Robust domestic demand has led to the second-fastest sales growth in the last six quarters.

Traditionally toplines have been quieter in April-June.

Net sales for 254 companies (constituting 18% of the market capitalisation of the Bombay Stock Exchange) that have declared their June quarter results so far have shown a 16.6% year on year growth led by strong demand in the auto, metals and capital goods space.

“The results so far have been very good despite the high base of last year — remember, March 2009 was a terrible quarter. The heartening fact is that topline growth is back for capital goods and telecom companies, apart from autos,” said Lalit Thakkar, director of research at Angel Broking.

The sales growth was led by companies like Sesa Goa (138.6% year on year growth), Bajaj Auto (66.4%), TVS Motor (41%) Maruti (26.8%) and Bhel (16.4%) among others.

Analysts believe strong industrial production numbers point to revival in demand.

G Chokkalingam, head of equity research at Barclays Wealth, points out that there have been 8 consecutive quarters of double-digit Index of Industrial Production (IIP) numbers.

“That’s a stronger run than the boom in 2007-08. When IIP ran double-digit for seven consecutive months in fiscal 2008, India’s GDP growth was about 9%. So the current momentum in IIP has impressive implications for overall GDP growth this fiscal,” he said.

Exclude the fourth-quarter results of last fiscal where sales growth was 20.1% on a year on year basis, and the first quarter sales growth looks extremely encouraging.

Robust demand delivers topline, rising cost curbs bottomline
“The last quarter is always the best quarter in a year and the first slightly weaker due to the seasonality factor in specific industries.

Hence, considering this, the results so far are in line with expectations. One needs to look at year-on-year growth rather than sequential (or quarter on quarter) growth.” said D D Sharma, senior vice-president, research, at Anand Rathi Financial Services.

As was expected, earnings growth on a year on year basis has moderated to 21.4% after abnormally high growth during last three quarters of last fiscal.

“Profit growth has been affected by rising prices of raw materials and interest rates,” said Chokkalingam.

However, there are a large number of outliers: 19 companies have shown over 100% earnings jump on account of higher realisations and operational efficiencies.

These include the metal stocks like Gujarat NRE Coke (a 450% jump) , Automotive Axles (443%), JSL (437%), Lumax Industries (217%), Sesa Goa (208%), TVS Motor (123%) and Escorts (108%).

Auto ancillaries and commercial vehicles have done better, while information technology has been a mixed bag. Only TCS surprised on the positive side, while Wipro and Infosys were disappointing, said Sharma.

The midcap IT companies that disappointed include NIIT (net profit fell 90% year on year), Mastek (-93%) and Infotech Enterprises (-33%).

Net profit for auto major Maruti was also down 20%.

How does it look going forward?
The street expects consistency and stability.
“We expect the earnings growth in the range of 17-20% over the next three quarters. The expected earnings per share for Sensex companies this fiscal would be somewhere around Rs 1050,” said Thakkar.