Indian firms are being squeezed by rising input costs and cooling demand, resulting in a slowdown in earnings and revenue growth compared to recent quarters.
An ETIG analysis of 600 companies that have announced results for the quarter ended March 31, 2012, shows that net profit, excluding firms in banking & financial services and oil & gas sectors, slid 2.5% from a year ago while revenue growth slipped to 14%, relatively slower than the previous quarters.
Net profit fell for the third consecutive quarter, though the decline was not as marked compared to the 12% fall in the December 2011 quarter and 38% in the quarter prior to that. Revenue growth hasn’t dipped below 15% in the past couple of years.
In the quarter ended September 30, 2011, revenue growth had grown in single digits.
The earnings scorecard for the quarter ended March 2012 was weighed down by the poor showing of industry heavyweights such as Reliance Industries, Bharti Airtel, Sterlite Industries and Sesa Goa, all of which reported a fall in profits and mounting pressure on margins.
Barring some sectors, the ETIG analysis shows, companies are unable to pass on rising expenses to end-users, a fact reflected in the continuing erosion in their operating margins before depreciation. Operating profitability shrank for the eighth consecutive quarter in March compared to a year ago.
Though it was 200 basis points higher than in the December 2011 quarter, at 19% it was still lower than the over-22% registered two years ago when the economy was recovering from the 2008-09 slowdown.
A major reason for the margin contraction is the rise in the price of raw materials, which means a faster increase in cost compared with the rate of growth of sales. Raw material cost, as a percentage of sales, rose to 32.4% in the March 2012 quarter from over 29% two years ago.
According to Sankaran Naren, chief investment officer, ICICI Prudential Asset Management, a noticeable change is that some of the larger companies are finding it tough to grow in a meaningful way. “That not many corporates are doing sizeable investment is one of the key reasons for the subdued growth,” he says, adding the problem is more to do with the slowdown in the economy than at the level of individual companies.
The latest data on industrial production, which showed an unexpected contraction of 3.5% in March, sluggish export growth, a weakening rupee and slowdown in capital flows point to further pressure on top line growth in the next few quarters.
The sharp 21% drop in capital goods output and slack demand, including for consumer durables and non-durables, are worrying firms and analysts alike. In a report on the factory output data, Goldman Sachs said capital goods fell back into negative zone due to a weak investment climate, and also due to a strong adverse base effect.
Credit rating agency Crisil has also highlighted the slowdown in sales of commercial vehicles and slowing exports, which are considered leading indicators of industrial demand. Companies in the capital goods, real estate, textiles, telecom and power sectors continued to report lower net profits in the March 2012 quarter from a year ago. However, firms in a few sectors such as IT, pharmaceuticals, tyres, media and entertainment were able to clock higher profits.
Anand Shah, chief investment officer, BNP Paribas Mutual Fund, said while retail-centric sectors have done well, the ‘big-ticket’ sectors such as capital goods, infrastructure and real estate have underperformed.
According to Krishna Sanghvi, head (equities), Kotak Asset Management, corporate results have been in line with expectations. “Guidances have not been positive while margin pressures are visible across industries,” he said.
Another concern is that inflationary pressure may persist despite a softening of commodity prices globally. Economists feel factors such as changes in domestic duty rates and a weakening of the rupee will keep prices firm in the near term. Nomura Research, in its latest update onIndia’s inflation, notes that higher raw material costs and the 2% increase in excise duty would add to inflationary pressure.
Among the companies that have reported robust profit growth so far are pharma major Ranbaxy (helped by better sales of its flagship drug Lipitor), Glenmark Pharmaceuticals, watch and jewellery major Titan Industries, tyremaker MRF, mid-tier IT players Hexaware and KPIT Cummins, and Asian Paints.