The Sensex set of companies may have performed in line with analysts’ expectations with consolidated net profits for the 30 firms rising just over 23% year-on-year in the three months to December 2010.
However, excluding energy companies, the rise has been a subdued 15% year-on-year. Indeed, on a whole, India Inc has turned in a rather poor set of numbers for the December 2010 quarter, with competition preventing companies from passing on the sharp increase in input costs resulting in operating profit margins (OPM) being weighed down. For a sample of 3,250 corporates (excluding banks and oil companies), net profits have increased just 14% year-on-year on a top line growth of just under 20% year-on-year.
Thanks to the severe inflation in commodities, expenditure has gone up faster than sales leaving OPM slightly lower at 16 4%. Hindalco?s net profits, for instance, missed estimates due to higher fuel costs, lower-than-expected prices and start-up costs at its Hirakud smelter.
Given that most companies missed estimates, including Hero Honda, Hindustan Unilever, Bharti Airtel and Infosys, the Street has been quick to initiate downgrades. ?Our estimate for the earnings per share (EPS) of the Sensex has come off to Rs 1,035 for 2010-11 from Rs 1,050,? says Bank of America-Merrill Lynch. More importantly, the brokerage has pared its earnings estimates for 2011-12 to Rs 1,265 from Rs 1,300. Although this implies a 22% rise in earnings, BoAML expects this to be pruned to a growth of just 15-16% following further downgrades.
At 18,211, therefore, the Sensex now trades at a price-earnings multiple of 14.4 times estimated 2011-12 earnings, below its historical average of 15 times. However, if earnings are expected to grow just 16% in 2011-12, the market would be trading at just a shade above 15 times.
Results were poor across sectors. At Tata Power, recurring PAT at Rs 401 crore was flat year-on-year thanks to muted sales growth and a 34% year-on-year decline in merchant prices. GMR Infrastructure, which reported an adjusted net loss of Rs 22.3 crore, also suffered due to lower merchant realisations as also higher than expected depreciation and interest costs. Escorts turned in numbers that were below estimates with ebitda margins falling 340 basis points year-on-year ? thanks to higher raw material costs. At Tamil Nadu Newsprint, margins compressed 230 basis points year-on-year on the back of raw material pressures as also lower paper sales and realisations. Firms such as Apollo Tyres, which reported a 36% fall in profits, are unlikely to be able to take price hikes in the near future.
Analysts point out that although some companies have done well in the December quarter, given the macroeconomic headwinds of high inflation and rising interest rates, growth could slow down further. For instance, while Tata Motors? numbers were boosted by strong results from Jaguar and Land Rover, the Indian business is expected to be under pressure given slowing sales of medium and heavy CVs and a weakening car franchise.
Crisil expects the environment for cement producers to remain weak till March 2012 on account of the large build-up in capacity—70 million tonne between 2010-2012– coupled with the rising trend in input costs. Demand, the agency points out grew by just 4-5 % in the nine months to December 2010, way below the 10-11% growth seen in the same time in 2009.