Sales still strong, margins still weak

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Feb 27 2012, 00:39 IST

For the Nifty companies, sales growth in Q3FY12 at 26% was at three-year highs, whereas operating margins excluding IT and Tata Motors were almost at Dec-08 levels. Sales beat CS (Credit Suisse) estimates again, but for the first time, profits were higher than expected, albeit marginally (0.4%). In our coverage, IT, Pharma and Autos saw earnings upgrades, while most others saw downgrades, which was the sharpest at Telecom. CS Nifty EPS fell 1.1%.

For the 50 companies comprising Nifty, sales growth at 26% was at a three-year high, reflecting the strong nominal GDP growth. While net margins improved 100 bps (basis points) to 10.9%, they were still at levels seen in March 2009, and the improvement was concentrated in the IT and pharma companies and Tata Motors. The combined operating margin for 45 companies out of the Nifty 50 was merely 9 bps from the December 2008 bottom. Some of the overall sequential improvement in net margin can be attributed to forex losses in Q2—this quarter the change in accounting standards helped reduce such losses. Operating margins would have to improve meaningfully to drive earnings growth.

In our coverage universe, for several quarters running, companies have continued to beat CS sales estimates, and Q3 saw a continuation of the trend. However, for the first time, a large number of sectors beat CS profit estimates, including metal, telecom and construction/infrastructure companies. In total, 44% of companies beat estimates and 27% missed, while 29% were in line (i.e., within ±5%).Higher-than-expected subsidies helped PSU oil

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